[Update: After speaking to a source close to the situation at Terralliance, some of the information in this post merits correction. The company turned to layoffs only after spending the money received from Kleiner and Goldman, not before. Additionally, chief executive Erlend Olson was not fired, rather he resigned of his own accord. Lastly, there is no evidence that Temasek pulled its investment due to the results of Terralliance’s audit. The source suggests that the deal fell through due to the high price of oil at the time. The source also explained the purchase of the Russian jets, asserting that they are a necessary tool in the company’s line of work.]
Oil and gas exploration company Terralliance has its big-name investors — including Kleiner Perkins Caufield & Byers and Goldman Sachs — scratching their heads, wondering where all their money went. It’s rare that a company lays off more than half of its employees, yet goes on to spend $250 million in a year on arguable frills like arcane satellite data, gas leases in Mozambique, and the kicker — Russian jets costing $20 million.
But somehow Terralliance keeps pulling in capital, landing $150 million in debt financing from Passport Capital immediately following its splurge. It’s been in violation of the loan since last fall, so hopefully the firm learned its lesson. Basically, the oil company bet all its chips on a $1 billion round from Temasek Holdings in Singapore. But when the firm wasn’t pleased with the results of its audit of Terralliance (begun in December 2007), it pulled out, leaving the company unable to pay the piper, according to inside sources who spoke to VentureWire.
The company, which uses satellite data to locate potential drilling sites, appears to be the prodigal son in all aspects of its operation. Not only is it grabbing up and running through capital like nobody’s business, it’s also offloading assets to stay afloat. It slashed its 125-employee staff back to 45 — firing its own founder, Erlend Olson — and has closed a host of international offices, presumably to tighten its belt. Now running very short on cash, the company is a firecracker burning at both ends.
Not helping matters is that the company claims greater accuracy in its mapping technology than it has achieved. For a while it touted its ability to pinpoint oil and gas deposits at 93 percent, but actual results never approached this figure. Losing financial credibility is pretty fatal for a company like this — but failing to deliver on product promises could very well be the nail in the coffin.
Following its inception in 2003, Newport Beach, Calif.-based Terralliance raised $11 million and $35.3 million rounds of funding in quick succession from Kleiner and Goldman, among others. In 2006, it hit paydirt with a $250 million round from Dubai-based Ithmar Capital and DAG Ventures in addition to its existing backers. All told, investors have sunk $450 million into the company — a very expensive allowance for what seems to be a very spoiled child.