AUSTIN, Texas -- 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, is the tech fund's biggest of to date and 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four bankruptcies apparently wiping out the gains entirely, Perry spokeswoman Lucy Nashed said the annual report was outdated and argued the fund's value could have increased.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.
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."
<strong>Years on Fortune 500:</strong> 58 <strong>Peak Fortune 500 rank:</strong> 18 (1989, 1990, 1992) <strong>Peak revenue:</strong> $20.6 billion (1992) <strong>Status:</strong> In bankruptcy Eastman Kodak developed the digital camera in 1975 but did not invest in the technology for fear it would undercut sales of its film business — Kodak’s executives did not foresee the eventual decline of film. Only when film’s popularity began to wane in the mid-1990s in favor of digital photography did the company push into the digital market. But competitors such as Fuji and Sony entered the market faster and Kodak was never able to fully capitalize on the product it actually invented. By 2001, the company was in second-place to Sony in the digital camera market, but it lost $60 on every camera sold. By 2010, it ranked sixth in the digital camera space, which itself began to dwindle with the advent of smartphones and tablets. Eastman Kodak shares peaked in 1997 at more than $94 per share, proof that it often takes a number of years for poor decisions to destroy huge corporations. By 2011, the stock had dropped to 65 cents per share, and the company filed for bankruptcy in December of that year. Kodak, always one the Fortune 500 companies, might not even make the 2013 list. <a href="http://247wallst.com/2012/10/17/the-worst-business-decisions-of-all-time/#ixzz29mHnlGZj">Read more at 24/7 Wall St.</a>
<strong>Years on Fortune 500:</strong> 28 <strong>Peak Fortune 500 rank:</strong> 15 (1968) <strong>Peak revenue:</strong> $8.0 billion (1980, 1981) <strong>Status:</strong> Bought out Consumer electronics manufacturer RCA was highly regarded through most of its history as particularly innovative — the company was the first to sell electronic televisions to a wide market. Yet, from the mid 1960s and into the 1970s, the company began to diversify beyond the scope of its traditional business. Its expansion was so rapid and so far flung that the company has become unmanageable. It bought a motley collection of companies, including publisher Random House in 1965, car rental company Hertz in 1967 and frozen food maker Banquet in 1970. The company even tried to make a push into IBM’s territory with mainframe computers. While it diversified, the company scaled back research and development spending on its core product lines. When these acquisitions proved unsuccessful, RCA announced that it would return to focus on its traditional products, which mostly consisted of color televisions. By then, however, the company had to compete with Asian manufacturers that made cheaper consumer electronics goods. The company was eventually sold to General Electric Co. (NYSE: GE) in 1986. <a href="http://247wallst.com/2012/10/17/the-worst-business-decisions-of-all-time/#ixzz29mHnlGZj">Read more at 24/7 Wall St.</a>
6. American Motors
<strong>Years on Fortune 500:</strong> 33 <strong>Peak Fortune 500 rank:</strong> 38 (1961) <strong>Peak revenue:</strong> $4.2 billion (1984) <strong>Status:</strong> Bought out By the time car manufacturer American Motors was absorbed by Chrysler in 1987, the company had been on a decline for more than 20 years. American first began to report losses in the mid 1960s. At the time, it failed in its efforts to compete with General Motors and Ford Motor Co. by expanding into large cars that could generate better profits per vehicle. Despite the losses, it was able to stay afloat through the next decade after it bought the Jeep brand in 1970 from Kaiser. But a weak economy hurt Jeep sales and began to restrict the company’s cash flow in the late 1970s. Additionally, overseas automakers began to pose a major threat. Japanese auto companies, which began to heavily market small cars in America, manufactured them in Japan where auto worker wages were much lower than in the United States. All American car companies, including American Motors, had long-standing labor agreements in place that dictated relatively higher salaries in the 1980s. American Motors lost money in all but one of the years between 1980 and 1986. <a href="http://247wallst.com/2012/10/17/the-worst-business-decisions-of-all-time/#ixzz29mHnlGZj">Read more at 24/7 Wall St.</a>
<strong>Years on Fortune 500:</strong> 11 <strong>Peak Fortune 500 rank:</strong> 15 (1995) <strong>Peak revenue:</strong> $37.0 billion (2000) <strong>Status:</strong> Merged Kmart’s big mistake in the mid-to-late 1990s was to try to compete with Walmart on price. Walmart had a supply chain system known as “just-in-time” inventory, which allowed the retailer to restock shelves efficiently. Kmart failed to implement a similar system, which meant consumers became frustrated when stores ran out of goods. Between June 1998 and June 2000, Walmart’s stock price rose 82% as Kmart’s fell 63%. While new management at the turn of the decade worked to improve efficiency, the company filed for bankruptcy in 2002 and shut hundreds of stores. Kmart merged with Sears Roebuck in 2005. <a href="http://247wallst.com/2012/10/17/the-worst-business-decisions-of-all-time/#ixzz29mHnlGZj">Read more at 24/7 Wall St.</a>
4. Digital Equipment Corp.
<strong>Years on Fortune 500:</strong> 25 <strong>Peak Fortune 500 rank:</strong> 27 (1990, 1993) <strong>Peak revenue:</strong> $14.6 billion (1996) <strong>Status:</strong> Bought out The fortunes of Digital Equipment Corp., maker of commercial electronics known as minicomputers, began to decline in the 1990s. DEC was successful because its products were priced below mainframes, which were made primarily by International Business Machines Corp. DEC controlled the minicomputer market from the mid-1960s until the early 1990s but failed to enter the workstation and personal computer markets quickly. When DEC finally decided to get into PCs, it tried to use its own operating platform, VMS, without success. Meanwhile, companies such as Hewlett-Packard Co. and Sun Microsystems were able to gain market share in workstations by using UNIX operating system, which allowed for many more software applications than VMS. Meanwhile, computers from Hewlett-Packard and IBM, which were based on the Intel Corp. blueprint and Microsoft Corp. OS, began to dominate the PC market in the late 1980s. Between 1991 and 1996, DEC lost money every year except for one, including more than $2 billion in 1992 and 1994. After joining the Fortune 500 in 1974, the company peaked in 1993 at 27th. In just six years, it fell to 118th place before Compaq bought it out in 1998. <a href="http://247wallst.com/2012/10/17/the-worst-business-decisions-of-all-time/#ixzz29mHnlGZj">Read more at 24/7 Wall St.</a>
<strong>Years on Fortune 500:</strong> 34 <strong>Peak Fortune 500 rank:</strong> 24 (1956) <strong>Peak revenue:</strong> $5.3 billion (1979) <strong>Status:</strong> Bought out Firestone began manufacturing radial tires in 1972 to lengthen the life of the products. The company used a new technique to get its tires to market ahead of competitors. That year, after Firestone’s tire was in production, company documents reported that the rubber came off the wire when the tire was in use. Despite these problems, the company continued to manufacture the tires throughout the 1970s to satisfy demand from customers like General Motors. But following pressure from the government and consumer advocacy groups that were concerned about the safety of the tires, the company recalled approximately 10 million tires in 1978. Initially, Firestone blamed tire failure on substandard maintenance by the consumer. However, an investigation by the National Highway and Traffic Administration in 1980 found that Firestone was actually aware of the defective products, citing to the 1972 documents.This lead to lawsuits and negative publicity that hurt earnings and sales. Although the stock bounced back from its low of $6.25 in April 1980, shares were still below their 1969 peak of $33.25 when Bridgestone successfully bid for the company in 1988. <a href="http://247wallst.com/2012/10/17/the-worst-business-decisions-of-all-time/#ixzz29mHnlGZj">Read more at 24/7 Wall St.</a>
2. Lehman Bros.
<strong>Years on Fortune 500:</strong> 14 <strong>Peak Fortune 500 rank:</strong> 37 (2008) <strong>Peak revenue:</strong> $59.0 billion (2007) <strong>Status:</strong> Went bankrupt During the final few years of the housing bubble, Lehman Brothers increased the amount it borrowed to buy more mortgage-backed securities and real estate. By 2007, the company’s leverage ratio was at least 31-to-1, meaning it borrowed $31 for every $1 in equity. This brought Lehman Brothers huge profits in the boom era but became a serious problem once the housing bubble burst. The firm was unable to unload those assets onto the market once home and commercial real estate prices began falling, leading to unsustainable losses. While other investment banks, including Goldman Sachs Group Inc. and Morgan Stanley, were heavily leveraged as well, they were able to survive by becoming bank holding companies eligible to receive the necessary emergency funds from the government to continue operations. Those aid programs however, became available too late for Lehman, which went bankrupt in 2008. A federal-bankruptcy-court-sponsored report later found that Lehman and its accounting firm partner, Ernst & Young, used misleading accounting tactics to conceal the extent of Lehman’s overleveraging, which the authors claimed was as high as 44-to-1. Both Lehman executives and Ernst & Young denied these claims. Between 1999 and 2007 Lehman’s revenue grew from less than $19 billion to more than $59 billion. During that time, the company’s rank on the Fortune 500 rose from 88th to 37th. <a href="http://247wallst.com/2012/10/17/the-worst-business-decisions-of-all-time/#ixzz29mHnlGZj">Read more at 24/7 Wall St.</a>
<strong>Years on Fortune 500:</strong> 56 <strong>Peak Fortune 500 rank:</strong> 23 (1994) <strong>Peak revenue:</strong> $43.7 billion (2006) <strong>Status:</strong> Split, Mobility unit sold The success of the thin and stylish Razr cellphone drove Motorola’s 22 percent market share in mobile phones in 2006. However, the company failed to launch a new generation of smartphones leveraging the Razr brand, and by 2007 the company was selling the traditional cellphone at a discount. By the time the company released a new line of Razr phones in 2010, Motorola had to compete with products such as the iPhone and BlackBerry. While sales in 2006 were more than $43 billion, they were only $22 billion by 2010. Between October 2006 and March 2009, the company’s shares fell more than 90 percent from over $107 to less than $13. Motorola Mobility, now owned by Google Inc., had 11.2 percent market share of mobile phones in Aug. 2012, according to comScore. Apple Inc.’s iPhone, released in 2007, had a 17.1 percent market share. <a href="http://247wallst.com/2012/10/17/the-worst-business-decisions-of-all-time/#ixzz29mHnlGZj">Read more at 24/7 Wall St.</a>