Inside Missfresh’s hunt for investor cash ahead of collapse

Executives at collapsing Chinese grocery delivery group Missfresh made a series of lofty promises to unwitting investors last year as they scrambled to raise cash and stay afloat ahead of a Nasdaq debut.

The start-up, which pioneered speedy grocery delivery in China, altogether raised $1.8bn from investors including tech-focused funds run by Tiger Global and Goldman Sachs. Missfresh was valued at $3bn at its IPO one year ago, before crumbling this summer.

Its problematic and highly unprofitable business model left executives continually fundraising, including with deals struck right before its IPO that have now become the focus of investor lawsuits. 

This account of Missfresh’s desperate fundraising ahead of its collapse is based on court filings, investor presentations and interviews with several people involved.

They reveal the dangers of investors too readily believing the hype of a company supposedly at the vanguard of the Chinese tech start-up scene in the hopes of making quick returns.

Missfresh hauled in $365mn last year from the local government of Qingdao, a coastal city that was promised a new headquarters and supply chain park, and an investment fund set up by Carl Chang, a southern California real estate mogul and chair of a branch of the San Francisco Federal Reserve Bank, who alleges he was misled by Missfresh and their banker JPMorgan.

In the frenetic era before Chinese president Xi Jinping cracked down on the country’s internet groups, Missfresh chief Xu Zheng was always able to find another backer.

But as the era of easy money came to an end, the start-up admitted to overstating revenues and ran out of cash after one final lifeline — $30mn from a coal mining group for a third of the company — fell through in July. 

Most of Missfresh’s workforce has now been dismissed, with many still owed two months’ wages. Unpaid creditors have flocked to the company’s offices around the country to protest, and its herd of delivery riders has begun to stuff competitors’ goods into the hot pink Missfresh delivery boxes strapped to the back of their scooters.

“I drive for Meituan and Ele.me now,” said one 35-year-old rider as he put two hot lunch deliveries into his pink Missfresh box. “They owe everyone a lot of money.”

Missfresh spokesperson Chen Yanqing said the company is working on a debt restructuring plan for its main grocery delivery business.

Just over a year ago, with the company’s future still appearing bright, Xu was again hunting for funding to float Missfresh until a planned New York share sale in the summer. The start-up had $132mn of cash in its accounts at the end of December 2020 but was burning through about $90mn a quarter. 

“Missfresh was desperate,” said one Beijing-based investor, who was approached for funding.

During eight years of fundraising, Xu had either tapped or been spurned by most of China’s traditional tech investment funds. “We passed several times,” said a venture capitalist in the Chinese capital. “The unit economics didn’t make sense.”

So in the run-up to the IPO, Missfresh’s team turned to the local government of Qingdao and Chang in Orange County.

Chang’s company Kairos Investment Management pitched the deal far and wide. Its “strategic relationship” with Missfresh meant investors would be getting in at a “compelling discount” for “one of the most anticipated Chinese IPOs of 2021”, according to a Kairos investor presentation seen by the Financial Times. 

“We have shares at $5.27 a share of $3.5B valuation,” Chang texted one investor on May 31 2021. “JP Morgan mentioned on our exclusive call last week they believe conservatively the value [is] around $12B,” he said. 

On the call, a JPMorgan banker had explained how they arrived at the $12bn valuation. Missfresh’s delivery segment deserved a similar valuation multiple as Amazon, the banker said, while comparing other parts of the business to Alibaba and Shopify.

“We are using pretty conservative [multiples],” the banker said, according to information provided to the FT about the conference call.

Xu added in bravado: Missfresh’s target market was worth Rmb2.8 trillion ($407.5bn) and it was the market leader. “We are running at a slight loss and cash flow is positive,” he claimed. “We always place the greatest focus on high-quality growth.”

Less than a month later, on June 25, Wall Street’s largest bank led Missfresh’s Nasdaq listing, but at a valuation of only $3bn, meaning Chang’s fund was underwater before trading had even begun. 

“This investment lost money the minute they bought into the pre-IPO due to bad math,” said one person close to the situation. “Then it was a death spiral.”

Missfresh’s stock collapsed 26 per cent on its first day of trading. By early November, Chang’s fund was down 75 per cent and he emailed his investors with a new plan to “rectify the injustice we feel has been perpetrated on us and our investors”. 

Kairos had entered into a put agreement with Xu, allowing the fund to sell its shares back in about two years’ time for a 20 per cent gain, Chang explained. The dealings are part of a lawsuit filed by Connecticut-based investment fund Solaia Capital, which alleges Chang fraudulently deceived the firm into investing $500,000.

The put arrangement, worth about one-quarter of Missfresh’s cash at the time, was not publicly disclosed in filings to the Securities and Exchange Commission. Instead, Xu told Wall Street analysts a few days later that Missfresh was running ahead of schedule on an internal plan to turn cash flow positive. A few months later the company began delaying or missing payments to suppliers. 

The defendants, including Kairos and Chang, have rejected the fraud allegation in a court filing. Chang declined to comment to the FT, but in court filings Kairos’s attorneys said the group had equally been taken in by Missfresh’s and JPMorgan’s assurances that “the minimum floor for the value of the company at IPO was $5 billion”. In January, they called Solaia’s suit “premature”, noting the put agreement “guaranteed a positive return on the investment”.

By the end of June, Missfresh owed suppliers Rmb2bn ($300mn) and had only Rmb200mn in cash on hand, most of which was frozen by Chinese courts over unpaid bills, according to a former employee who had access to the company’s books. The company shut its speedy grocery delivery business late last month.

JPMorgan declined to comment. Missfresh said the IPO process and all of its investor communications were compliant with regulations.

The company’s near disintegration has left the city of Qingdao with an investment loss approaching $290mn and a new state-backed development project lacking a marquee tenant.

The investment has also made Qingdao partially responsible for Missfresh’s failings in the eyes of unpaid suppliers like Zhang Le, whose company is still owed Rmb1.8mn for providing beef jerky and dried seaweed snacks to the digital supermarket. “They are a shareholder so they should bear some responsibility,” Zhang said. 

In recent weeks she joined a group of more than 40 creditors, collectively owed tens of millions of dollars, protesting for payment at Missfresh’s offices across China. They haven’t yet decided when to take their megaphones and banners to Qingdao city hall.