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Ian Lessem, the CEO of SA venture capital (VC) company HAVAIC, which is suing startup Stellenbosch based Custostech for $4.45-million, says his VC is “still open to working together with the founders”.
“We believe the founders and Custos have enormous potential to be internationally successful. Our preference is to restore the breakdown and work with the business to its full potential.
“I am and have always been willing to explore ways of resolving this impasse outside the courts, and on several occasions have communicated this to Custos,” said Lessem (pictured above) in a statement released yesterday.
The VC alleges that the startup reneged on a R3.5-million investment agreement. This, while the startup revealed to Ventureburn last week that it had been forced to lay off most of its staff (see this story and this one).
HAVAIC is working with a crisis communications company which assisted in the release of the VC’s statement
It has emerged that HAVAIC is working with Neeran Naidoo, the CEO at Hewers, crisis communications and reputation risk management consultants.
In the statement forwarded to Ventureburn yesterday from Naidoo, Lessem argued it was not the VC’s intention to harm the startup, while saying a shareholder dynamic “seemingly interfered” in a successful working commercial relationship.
Reads the statement:
HAVAIC is a five-year old homegrown venture capital firm that invests in young technology enabled African businesses which have the ability to scale both locally and internationally.
HAVAIC, who work with and invest in innovative tech businesses with disruptive growth potential that solve real word problems, is run by experienced and technically sophisticated managers. This tried and tested business model has worked successfully to support 12 businesses, with HAVAIC’s advisory capabilities, together with its strategic and operational support, catalysing this success.
“Custos was an excellent fit for our business. I liked the product, the innovation, and its international potential. My confidence and admiration for the founders Gert-Jan van Rooyen and Fred Lutz had grown since we first met in early 2019,” said Ian Lessem, the Managing Partner at HAVAIC.
Custos was supported by Innovus, a facility at Stellenbosch University that helps with commercialising the universities’ innovations. Innovus has a minority investment in Custos.
Since Custos was in the early stages of commercialising their technology, they entered into an agreement with HAVAIC whereby HAVAIC would provide bridge funding by way of a convertible note and assist them in an advisory capacity to help raise further funding by way of a Series A fundraise.
As Custos is built on sophisticated technology, had no working financial model at the time as well as limited investor material, HAVAIC undertook extensive technical and financial due diligence, built them a financial model and prepared additional investor material, all whilst procuring local and international funding from their investors to invest into Custos’s convertible note.
The agreement between Custos and HAVAIC was for HAVAIC to invest by way of a convertible note, at no cost to Custos, and then later, in an advisory capacity, to raise further funding using the investor material HAVAIC had prepared for Custos as well as HAVAIC’s extensive international investor experience and network. This was to be completed at full risk to HAVAIC and would only be settled out of future capital raised, thus not placing unnecessary financial stress on Custos, all while allowing management to focus on the business.
“When Custos first approached me, they had a funding and technical gap, and asked if HAVAIC could help. I was in a fortunate position to offer both our advisory and investing experience to them, and I was incredibly excited to work with Custos and be a part of their amazing journey,” said Lessem.
In mid-April, post agreeing all the commercial terms and HAVAIC successfully working alongside Custos’s management in completing its due diligence, obtaining their Investment Committee approval, securing the funding and finalising of the investor material, as well as finalising all investment agreements, HAVAIC received confirmation of approval via the Custos founders by the Custos Board for a USD250 000 investment in the business by HAVAIC.
Custos management further requested HAVAIC to invest as soon as possible as they were running out of money and were worried they could not make pay roll. As HAVAIC did not want this to occur, and being satisfied that they had an agreement to invest into Custos called for the funds from their investors. Once they had called for the funding and had it in their bank account, a shareholder now retroactively started raising concerns in an attempt to renegotiate the advisory fees which had clearly been agreed upon previously as early as February 2019.
HAVAIC were taken aback by this attempt to back track on what had clearly been agreed, communicating that they had acted and delivered on everything that Custos had asked. At this stage, to HAVAIC’s utter surprise, Custos decided to put a stop to the investments that HAVAIC had already secured.
“I was shocked. I could not believe that a party who we had worked so hard for and built good will for in the local and international investor community would do this,” said Lessem.
HAVAIC met and spoke with Custos and Innovus on many occasions in May 2019 in an attempt to resolve the issue. As it was communicated by Custos to HAVAIC that their previously agreed advisory fee was the sole basis for Custos reneging on the agreement, and because they still believed in the management of Custos and the investment, in the spirit of moving forward, HAVAIC agreed to remove the advisory fee from the agreement and move forward with the investment.
“It is an unfortunate turn of events. Despite several failed attempts to resolve the matter amicably Custos made it clear that they had no intention to honour their commitments. Investors considered this a very serious breach. After extensive deliberation and engagement with our investors and stakeholders we acted in order to protect their rights, just as we would do for any of our portfolio companies.”
“This does not bode well for investment in South African start-ups. It is a tough investment environment and we worked exceptionally hard to secure the investment, which includes foreign investors who expressed concerns around investing in the South African ecosystem if this type of conduct is condoned.”
“It was certainly not our intention to harm Custos and we were surprised and concerned to learn at such a late stage that Custos and its employees were under financial pressure. We remain saddened that a shareholder dynamic seemingly interfered in a successful working commercial relationship, and have always been and are still open to working together with the founders to make Custos a success. We believe the founders and Custos have enormous potential to be internationally successful. Our preference is to restore the breakdown and work with the business to its full potential. I am and have always been willing to explore ways of resolving this impasse outside the courts, and on several occasions have communicated this to Custos,” said Lessem.
Read more: Savca pledges to act over HAVAIC-Custostech matter when case has concluded
Read more: HAVAIC acted with integrity with us, say founders from VC’s portfolio companies
Read more: SA venture capitalists shocked over Havaic’s bid to sue Custostech for $4.5m
Read more: SA’s Custostech lays off staff after VC sues startup for $4.5m over failed investment bid
Featured image: HAVAIC CEO Ian Lessem (Supplied)