Fourth tech bankruptcy adds to losses

By Paul J. Weber

Associated Press

AUSTIN — A fourth Texas high-tech startup that received taxpayer dollars through Gov. Rick Perry’s signature economic development fund has filed for bankruptcy in the $194 million portfolio’s biggest bust yet.

The collapse of bioenergy producer Terrabon Inc., which was awarded $2.75 million in 2010 and was backed by large Perry political donors, raises questions about whether the state’s Emerging Technology Fund launched in 2006 could now be worth less than what taxpayers have put into it.

Terrabon is the fund’s second bankruptcy in the past four months, losses that severely cut into state estimates that the fund has so far delivered a $4.5 million return on investment.

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, brings the total losses of four 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.

When first asked by The Associated Press about the fund’s four bankruptcies apparently wiping out the gains entirely, Perry spokeswoman Lucy Nashed said the annual report was outdated and argued the fund’s value could have increased. She later amended her comment, saying the January report factored in the first two companies to go under in 2010, in what was a combined $2.25 million loss.

But the fund’s current financial health remains unclear. Nashed said new figures are not expected until January, and further defended the fund by pointing to $592 million that the startups have collected from private investors.

“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.

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 2008 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 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 ceased operation a year after going online. 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 Holtzapple, 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.

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.”