A man from the slums of Jakarta is at the centre of a big stink. Gibran Huzaifah, the founder of eFishery, was born into poor family in 1988. He was blessed with a knack for invention. He was adept at fixing and tinkering with gadgets. As a beneficiary of Indonesia’s free education, he enrolled in the Bandung Institute of Technology (ITB), a top engineering university.
Huzaifah discovered a new fish feed technique while studying engineering. He put it to effect by running a catfish farm. The farm was able to reduce the cost of feed by 28%.
The young man had a strong conviction that his technique could improve farm productivity. He convinced venture capital (VC) investors to support eFishery. It was a runaway success for a decade.
Gibran had a business plan that ticked the boxes of investors. eFishery claimed to boost agricultural yields. It had a unique production technique. Gibran, though an agricultural operator, spoke like a tech entrepreneur. He claimed to have recurring revenue in the same way as a software company.
The company became a unicorn by 2023. It raised US$200 million in series D funding led by UAE-based G24 Global Expansion Fund. Its investor list was prestigious. The other investors were Northstar, Temasek and SoftBank.
But behind the curtain, the magic was less about innovation. It was more about creative accounting.
See also: SoftBank, Temasek among eFishery investors facing near wipeout
An investigation commissioned by its board alleges that eFishery maintained two sets of financial books. There was one for a public version for investors. The other set was for internal use.
The public books painted a rosy picture. The revenues were inflated by up to fivefold and profits conjured out of thin air. In 9MFY2024, eFishery reported $752 million in revenue and $16 million in profit to investors. It was actually just $157 million in revenue and a $35.4 million loss.
eFishery allegedly engaged in “round-tripping,” where funds were shuffled between nominee companies to fabricate transactions. Capital expenditures were overstated to justify dwindling cash reserves. It was like feeding fish with imaginary feed and claiming record growth.
The main product was the so-called smart feeder. This was a gadget that improved fishing yields. The company claimed that it had 400,000 smart feeders. The investigation alleges that the correct figure was only 24,000.
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Gibran and other key executives have been suspended. The board has installed a temporary management team. Liquidation could be on the cards.
The scandal wasn’t about cooking the books. It was about inflating valuations. Investors were sold on metrics like gross merchandise value (GMV), which is more appropriate for a tech company like Grab or Uber. The investors treated eFishery as a tech start-up rather than what it truly was — a fish feed supplier.
The outcome was an extravagant valuation that had no connection to fundamentals. Even with its fabricated revenue, eFishery was trading at an EV/Sales ratio of two times. Agri-processors such as Japfa and Charoen Pokphand Indonesia trade at less than a quarter of that valuation.
Investors should have used valuation metrics that were relevant to the agri-processing industry. These include feed conversion ratios, a metric that measures the degree of protein generated from a unit of feed. Other relevant metrics are P/FCF and EV/Ebitda.
The investors touted eFishery as an innovative player that would help farmers. Actually, the fish farmers were not benefiting from the products.
There may be plenty more fish in the sea. Other catastrophes may be lurking under the sea. The surge in VC capital may have caused other companies to claim tech valuations.
Gibran’s fall from grace serves as a warning. Investors need to be wary of companies adopting an identity. Accounting manipulation is a perennial concern. But inappropriate valuation is even worse. One should not fish in the wrong lake.
Nirgunan Tiruchelvam is head of consumer and internet at Aletheia Capital and author of Investing in the Covid Era. He does not hold any position in the stocks mentioned in this column. This column does not constitute investment advice of any kind
