South African blockchain startup Custos Media Technologies has been sued for US$4.45 million in the Western Cape High Court by local VC firm HAVAÍC, which claims the startup backtracked on an investment agreement.
The startup has raised almost US$1.5 million in total in funding from the likes of South Africa’s Technology Innovation Agency (TIA), Digital Currency Group and Innovus, and was in the process of raising a Series A round when it entered into discussions with HAVAÍC last year.
HAVAÍC, an active investor in African tech startups having backed the likes of Tanda, AURA and Sortd in the last nine months alone, claims Custos agreed in writing to take on ZAR3.5 million (US$186,000) investment from the VC firm as part of the round.
“HAVAÍC signed a termsheet with Custos Media Technologies to conclude an investment by HAVAIC and its investors in Custos by way of a convertible loan. All the terms of the investment were agreed and confirmation given by Custos that the terms were approved by their board,” the firm’s managing partner Ian Lessem told Disrupt Africa.
“Subsequently, Custos reneged on this agreement and decided not to proceed with HAVAÍC’s investment. Despite several attempts to resolve this matter amicably, having consulted with our investors, and in order to protect their rights, HAVAÍC instituted legal proceedings against Custos for the damages suffered by HAVAÍC and its investors as a result of their repudiation of the agreement.”
Custos chief executive officer (CEO) G-J van Rooyen, however, denies this story, saying the startup did not sign any agreement with HAVAÍC and ultimately was within its rights to decide not to accept its offer of investment.
Van Rooyen said the legal case, which was filed last August and is yet to be heard, had hit the startup hard. Other investors have decided to pull out of its Series A round as a result, and Custos has run out of funding. This has forced it to lay off the majority of its team – it is operating with only a skeleton team – and its survival is in doubt.
“Unfortunately, it’s dragged the company down quite badly, and we’re clinging to dear life to continue servicing our current clients,” van Rooyen said.
It will be for the court to decide whether Custos reneged on any agreement with HAVAÍC, but such cases are hardly good news for the South African tech startup ecosystem. Lessem, however, defended his company’s pursuance of the case.
“As a VC we have an important role to play in creating an environment where investors trust and believe in investing in VC as an asset class. VCs and their investors need to trust and believe in the entrepreneurs they invest in. A breakdown of this trust is not in the interest of managers looking to invest, grow and support the ecosystem,” he said.
“While our decision to institute legal proceedings against Custos was not taken lightly, we see this repudiation of an agreement as very serious, as such, and after numerous attempts to settle this matter amicably, we proceeded with this action in order to ensure that the trust investors have in us and other managers is not eroded.”