Another start-up business in South Africa is in liquidation, unsurprising when 70% to 80% of start-ups fail.
The main reason for this failure rate is an inability to access funding, but in the case of Adept Airmotive, a high-tech aircraft engine designer and manufacturer, the company’s directors blame a government agency tasked with developing innovative businesses and the strings attached to the money for the firm’s troubles.
Its executives are pointing fingers at the Technology Innovation Agency (TIA), the department of science and technology’s agency meant to push innovation in South Africa, for making the company a casualty of the chaos that has afflicted the agency since its inception.
The agency, established in 2008, receives in the region of R400-million a year to facilitate innovation in the country. Technological innovation and spin-off technology companies are seen as a way to bolster economic growth and job creation.
The TIA was envisioned as a way to close the gap between innovation and marketable product, but has been fraught with controversy. Earlier this year, the agency’s former chief executive, Simphiwe Duma, and the chief financial officer, Barbara Kortjass, were fired for gross misconduct, and interim chief executive Dr Rivka Kfir was appointed last month.
According to Richard Schultz, a director at Adept, the TIA was a “handicap”.
“In retrospect, the internal problems with TIA – operational issues on their side – impacted so heavily on our operations, I would not have gone that route [if I had known],” he said, referring to the delayed funding disbursements – details of which had been sent to department of science and technology officials and former minister Derek Hanekom, as well as the TIA’s new board. Most of the board was replaced last year.
The Mail & Guardian has seen this document, which shows that the TIA agreed to provide Adept with R24-million for the development and early stage commercialisation of its general aviation engine.
Although the first quarter payment was on time, the subsequent four payments were delayed, often by months, until they stopped entirely.
Schultz said that these funding delays impeded the company in meeting its objectives, among them the commercialisation of an aviation engine able to run on biofuels.
Kfir, who had been in the position for less than a week when she responded to these questions, said: “TIA’s mandate is to provide support for the development of technological innovations. The project funding was stopped when it became clear that the key, critical milestones and deliverables were not being met … Adept continually failed to meet key, critical milestones and deliverables as agreed to in the funding agreements.”
Adept executives said that there had been no correspondence from the agency to indicate that the agency was unhappy with the company’s progress, until it cancelled the funding.
“Tanglewood Private Equity [Adept’s largest shareholder and second biggest creditor after the TIA] then made an offer to fund Adept from November to April 2014, thus allowing Adept to catch up with their milestones, on condition that TIA agreed to resume the funding thereafter,” said Andre Schoeman, a director at Tanglewood Private Equity. “This too was turned down by TIA.”
In December last year, Tanglewood approached the courts to put the company into liquidation, saying the company was factually insolvent and would soon be commercially insolvent.
Yet, the TIA will not allow the business to be sold as a going concern. Kfir said the agency “could not agree to the sale of the business as a going concern since the offers … required the cancellation of all existing obligations towards TIA as associated with the use of public funds.”
Consequently, the agency is pushing for an auction of the physical assets, which it argues would be the only fair way to deal with Adept’s creditors.
Schultz said this would ensure that public money was wasted, because the TIA would stand no chance of recouping its investment in Adept. “If the company folds, every single cent of investment is down the tubes. If we continue the project, and keep it going, we could [soon] be earning hundreds of millions for this country,” he said.
Whether the company would realise these returns is questionable, but the liquidators, Stowell & Co, told the M&G: “As the nature of the business is specialised, it is difficult to sell the assets by way of normal public auction and expect a maximum return for the sale of the assets.
“Essentially, the company is on the one hand a research entity and on the other hand in the process of manufacturing general aviation engines … The biggest asset of the company is in fact the employees, with their specialised skill in the development of engines.”
Jean Simpson, representing Stowell, said “the sale of the company as a going concern … may seem to be the most beneficial manner in realising the assets and preserving the research project”.
The agency said: “The comparison between public auction (based on forced sale values) to the sale of the business as a going concern were similar in value, and thus it is possible that an open market value could yield a greater value for the use of public funds.”
In its financials for the year ended 2013, Adept had assets worth R3.8-million.
The M&G has seen emails confirming the existence of prospective investors, some of whom include the existing executives.
Schoeman wrote in a letter, which is in the possession of the M&G, that “this will yield a lower value for the Adept business than allowing the executives of Adept to buy the business … An auction will also, with certainty, ensure the demise of the Adept project and the loss of all jobs. This stance by TIA is so illogical that I can only surmise that TIA is determined to see the failure of the project …
“An offer by a potential new investor to take over the funding of the Adept project, which would have resulted in TIA’s loan account being repaid, was rejected by TIA,” Schoeman said.
Kfir said that the agency would abide by the court’s decision, “ensuring that the liquidation is administered equitably and for the benefit of all creditors of Adept”.
Should the company fold, the line of unemployed technology specialists will be added to in a country that is desperate for innovation.