High-tech startup funded by Texas government bankrupt

Oct 23, 2012, 2:41 PM EDT
Getty/Ronald Martinez

AUSTIN, Texas (AP) — A fourth Texas high-tech startup that received taxpayer money through Gov. Rick Perry's signature economic development fund has filed for bankruptcy, pushing the total losses in the $194 million portfolio beyond what the state says the fund has earned.

The collapse of bioenergy producer Terrabon Inc., which was awarded $2.75 million in 2010 and was backed by large Perry political donors, raises the question of whether the state's Emerging Technology Fund that began in 2006 is now worth less than what taxpayers have put into it.

The state's venture capital-like fund has raised concerns about accountability and transparency, including a critical report from the state auditor's office last year. Perry's political opponents have also hammered him over ties between campaign contributors and fund recipients.

Terrabon's bankruptcy, which was filed in a Houston federal court in September, is the tech fund's biggest bust to date and brings the total amount of failed investments to $5.25 million. In the fund's 2012 annual report released in January, Perry's office estimated that the portfolio's 133 investments were worth $4.5 million more than what the state had handed out.

Lucy Nashed, a Perry spokeswoman, said the difference doesn't mean the tech fund is in the red. She called the numbers in the latest report outdated and said the fund may have since increased in value. She said a more recent estimate is not yet available.

She also pointed to $592 million from private investors that the startups have attracted, which she said indicates the state is placing good bets.

"Nobody expected that there wouldn't be some companies that didn't make it. This type of fund will always have companies like that," Nashed said. "But I think the amount of money that we're bringing in from outside funding and the increase in the state's investment value is significant."

The Associated Press learned of the loss and the tech fund reaching what could be a tipping point in profitability by independently analyzing bankruptcy filings and state records.

Terrabon is the second tech fund recipient to file for bankruptcy this year. In May, Austin-based NanoTailor Inc. folded two years after receiving $250,000, which was one of the fund's smallest risks.

Terrabon was among the fund's biggest investments and flashed a higher profile, in no small part thanks to Perry.

He twice held public events with Terrabon executives trumpeting the company's potential to develop renewable fuels from waste and help steer the nation toward energy independence. The first was for the groundbreaking of the company's $2.6 million facility near the Texas A&M University campus. The second event happened two years later at a Terrabon-designed water treatment plant in Laredo that used technology hailed as the first of its kind.

"If everything here at Terrabon goes as planned, I believe you'll be making a difference that will be felt all around the world," Perry said at the 2008 groundbreaking ceremony.

That research facility is now being liquidated as part of a fire sale along with office furniture and lab equipment, according to the company's Chapter 7 bankruptcy filings. The Laredo plant, meanwhile, ceased operation a year after going online after city officials said the unit was only able to purify less than half of the 50,000 gallons of water a day the project originally promised.

Mark Hotlzapple, the chief inventor behind Terrabon's technologies, told The Associated Press that the startup was abruptly forced to fold after Houston-based Waste Management Inc. stopped pouring money into it this summer during a cost-cutting restructuring in which the trash and recycling company also eliminated about 700 jobs.

Waste Management was the company's biggest shareholder, with 18 percent in preferred stock, according to court records. Terrabon also had three other stakeholders that owned 10 percent or more of its equity interests: the state, the company's co-founder, David Carrabba, and Valerie Sarofim, a Houston socialite formerly married to the son of billionaire investor Fayez Sarofim.

Holtzapple, a chemical engineering professor at Texas A&M, said Terrabon had been making significant strides but didn't have enough cash on hand to survive the financial blow when Waste Management cut the cord.

Terrabon filed for bankruptcy listing about $372,000 in assets and nearly $21 million in debt.

"Terrabon's bankruptcy had nothing to do with their technology or management," Holtzapple said. "They are simply a victim of larger forces acting on them."

Critics have questioned why the state invested any money in Terrabon. It's among a handful of tech fund recipients with ties to campaign donors of Perry, who has repeatedly denied that politics influence the funding process. The final say on whether a company receives a taxpayer investment is made by Perry, the lieutenant governor and the House speaker.

One of Terrabon's backers is Texas A&M regent Phil Adams, who was appointed to that job by Perry and who has contributed more than $300,000 to the governor's campaign. On his state financial disclosure form filed in 2010, Adams stated that he received between $10,000 and $24,000 in interest, dividends or other income sources from Terrabon.

Carrabba has given at least $30,000 to Perry. He and Adams have insisted that their financial support for Perry was in no way related to the state's investment in Terrabon.

Terrabon's award was more than the combined amount given to the tech fund's three other companies that went on to declare bankruptcy. Thrombovision Inc. was awarded $1.5 million before shuttering in 2010, the same year that StarVision Technologies ($750,000) also folded.

Holtzapple said Terrabon's work could soon be revived by outside investors trying to purchase the company's assets but declined to name them.

Holtzapple described the company's steep debt-to-asset ratio as not unusual for a startup. He said he believed a "herd mentality" in the investor community no longer made biofuel companies like Terrabon so sought-after.

"We keep jumping form one hot thing to another. It's not done in any reasoned way that I can figure out," he said. "Terrabon just got caught up in all of it."


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