February 12, 2007

FilmLoop Betrayed By Investors?

Michael Arrington

167 comments »

When I added FilmLoop to the TechCrunch DeadPool last month based on rumors of mass layoffs, it was clear there was more to the story. The thirty person company had raised $11.5 million in capital and by any calculation should have still had at least $3 - $5 million left in the bank. They were trailing Slide, RockYou and Photobucket in their market, but had just launched a completely new platform that was getting good reviews. FilmLoop wasn’t dominating the market, but they were not on the ropes, either.

More of the story has leaked, from multiple sources close to the company. Here’s a rough timeline of what appears to have happened:

January 2005: FilmLoop raises $5.5 million from Garage Technology Ventures (Guy Kawasaki) and Globespan Capital Partners.
May 2006: FilmLoop raises $7 million from troubled venture firm ComVentures. Roland Van de Meer joins the board of directors.
October 2006: FilmLoop 2.0 launches. Company and investors are optimistic about FilmLoop
November 2006: ComVentures, under pressure from its own limited partners to clean up its portfolio and discard any unprofitable startups, meets with FilmLoop to tell them they must find a buyer by end of year. The FilmLoop founders made it clear that they thought they had a good chance at success and did not want to sell. However, ComVentures’ ownership percentage, plus certain rights they have (called “drag along rights”), can force the other investors and the company founders to sell.
December 2006: ComVentures proposes Fabrik, another one of their portfolio companies, as the acquiror. FilmLoop was unable to find any other acquiror in the last two weeks of the year. Fabrik acquires FilmLoop for little more than the cash ($3 million) that FilmLoop has remaining in its bank account. Due to liquidation preference rights, the founders and all employees walk away with exactly nothing.

In effect ComVentures forced a fire sale of FilmLoop and Fabrik, another company ComVentures invested in, happened to be the only viable acquiror in that limited timeframe. FilmLoop’s desktop and other software will play a part in a future Fabrik consumer storage product. SimpleTech, also acquired by Fabrik and announced today, will provide another piece of the product.

It’s clear that ComVentures had a significant interest in forcing a sale to Fabrik on such a short timetable, during the holidays, when competitive bids would be impossible to find. It’s also clear that this sale was not in the best interests of anyone except themselves. One day, the founders and employees of FilmLoop had a viable company with $3 million in the bank. The next day they had no stock, no job, and no company. At the very least, ComVentures should have abstained from voting on the acquisition.

Founders are under incredible pressure not to rock the boat when venture capitalists pull stunts like this. Engaging in litigation means other VCs will be very hesitant to invest in them in the future. For reputation purposes, founders tend to simply take their beating and walk away, hoping to start all over again with another venture and, hopefully, non-ethically challenged investors. For founders looking for funding - take heed of the FilmLoop story. Only do business with VCs that have a track record of holding up their end of the implicit bargain - to stay with you during tough times as well as good. VCs don’t have any obligation to put good money after bad, but to liquidate a viable startup simply to help out another portfolio company is evil stuff. And make sure you read those drag along and liquidation preference clauses carefully before signing.

I have an email in to ComVentures for comment on this story.

Update: I haven’t heard back directly from ComVentures, although Baris Karadogan, a partner with the firm, has left a comment below.

Update: VentureBeat is tracking this story as well, and has comments from ComVentures.

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February 13th, 2007 at 3:27 am

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February 13th, 2007 at 5:56 am

Sramana Mitra on Strategy » Blog Archive » The FilmLoop-Comventures Saga

February 13th, 2007 at 10:49 am

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Side effects may include: » Blog Archive » “Me-too-point-oh” Investing: FilmLoop and ComVentures

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Comments

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anentrepreneur

February 12th, 2007 at 10:37 pm

There should be a public blacklist to ensure that these unethical VCs will never have a chance to invest in another startup again.
Eric Xu

February 12th, 2007 at 10:44 pm

Wow, that is absolutely evil. Thanks for the warning, Michael.
bdeseattle

February 12th, 2007 at 10:46 pm

Damn. That’s harsh! Just goes to show you that even though we’re riding bubble2.0, the same old vc games we saw in the dotcom era are being played out here again and again. As an original Garage.com bootcamp graduate, I feel sorry for Guy.

Is this a sign of more doom and gloom for 2.0 startups and the impending vc bloodbath to liquidate/liberate the dwindling dollars oozing out of the 2.0 bubble? I don’t necessarily think it’s that bad, nor do I think the bubble is going to burst, but seeing trends like this might throw a monkey wrench in our plans for bringing 2.0 to the masses. my 0.02.
Hornswaggled

February 12th, 2007 at 10:52 pm

Thats an amazing story. Hopefully this VC firm will get a bad name from this. Good luck to the guys and better luck next time.

Its amazing at how quickly everything unfolded.
Sal Shepherd

February 12th, 2007 at 10:56 pm

it’s a two way street. Sometimes investors take advantage of founders and sometimes founders take advantage of investors.
The lesson is, no matter which side of the table you are, have your guards up at all times.
Steven Ickman

February 12th, 2007 at 10:57 pm

So what did Garage Technology Ventures get out of this?

On the surface this looks really shady. It sounds like a very evil way to buy a company for cheap. Let’s hold on to the company for 6 months so things look legit and then force them to hand over what we really wanted which is the tech…
Yohay

February 12th, 2007 at 11:07 pm

Very evil stuff.
I agree with anentrepreneur. There should be a blacklist of unethical VCs.
savvix

February 12th, 2007 at 11:08 pm

Look if they had only 3M left in the bank, it meant they blew threw 10M. So even if ComVentures “liquidated” the co for 3, they would’ve lost a big percentage of their investment.

I hardly count that as evil. I’m sure if ComVentures could smell potential success they would’ve preferred to avoid the loss.

As for the founders. I’m sure they were paid an adequate salary. Salary provided, basically by ComVentures and the other investors.

At the end of the day, it was a sad outcome, but I wouldn’t necessarily equate this to being hosed by the VC.
mark

February 12th, 2007 at 11:11 pm

any entrepreneur who’s been around the valley long enough has heard horror stories like this, and chances are you’ve dealt with vc’s who have no values. michael, thanks for taking this story out. someone should start a wall of shame where we can post these kinds of stories. it’s a valuable service to other entrepreneurs.
giddy

February 12th, 2007 at 11:19 pm

yikes, savvix, what a horrific post. if i am to read your post correctly, any company who burns through early round cash means they “blew” the cash? totally wrong. and to make matters worse, you DON’T see this as a brutal VC hosing? totally wrong AGAIN.

i hope i don’t end up at any company you are somehow affiliated with or worse yet, invested in…..or, maybe you are employed by comventures?
Baris Karadogan

February 12th, 2007 at 11:20 pm

I am one of the partners at Comventures, and a regular reader of TechCrunch.

I wish all of our investments end up being massive successes, but the fact remains that 9 out of 10 of all VC investments fail.

I also wish that the author and the commenters realized that, more often than not, the desire to write something sensational is just that.
David Cowan

February 12th, 2007 at 11:20 pm

Michael,

I’m sure you’re faithfully reporting what it is you heard, but the story doesn’t hang together. I have no inside information on Filmloop, and I’ll probably be called evil just for saying so, but I suspect that somewhere here the facts got distorted.

Drag along rights do NOT entitle the VC to force a sale of the company. Control of a class of preferred stock does NOT entitle the VC to force a sale of the company. I cannot think of any term I’ve ever seen in a venture capital investment that would explain how a VC could have forced this sale.

The likely explanation is that ComVentures simply expressed their refusal to sustain the company’s high burn rate with further investment. Is that evil? Of course not–investors are not obliged to keep investing in businesses that they judge not to be working, nor should they for anyone’s sake. As I have explained here on my blog [http://whohastimeforthis.blogspot.com/2006/01/control-roulette-bet-on-red-or-black.html] this effectively gives the VC control, but only when the VC really doesn’t want it!
visible.mobi

February 12th, 2007 at 11:21 pm

Scary !
giddy

February 12th, 2007 at 11:25 pm

baris, so i take it you are clearly not denying this? accusing michael of sensationalism — whoops, not outright accusing him, just making a broad generalization that “more often than not” such stories are sensationalist — without rebutting the facts / claims just makes you guys look worse…… you should stop while you are behind
paul king

February 12th, 2007 at 11:30 pm

My goodness. I went to their website, and I’ll be honest, they all come across as great guys who CARE about the entrepreneur and IDEAS and they seem friendly and APPROACHABLE… so much so, I’ve had to stop myself from contacting them and pitching - - because this story, well, it isn’t unbelievable, it’s unbelievable! What happened is wrong on so many levels - the niceness and approachability now seems more like used car salesmen than professionals… though I’d sincerely hope that weren’t the case.
paul king

February 12th, 2007 at 11:33 pm

Hey look, Baris, who’s Blog I was reading when I wrote my comment here (I didn’t know you’d/he’d posted). I’d love to talk to you Baris! Without question your blogs first post piqued my interest as I can do better than that! But still, the fact remains, this post here on TC puts your firms dealings into very bad light.
yongfook

February 12th, 2007 at 11:35 pm

what a horror story. at the very least, thousands of other startups can now learn from this one example…

good luck to the FilmLoop team in their future endeavors.
Ash Srivastava

February 12th, 2007 at 11:43 pm

Scary..funding does not mean anything is guaranteed
ming666

February 12th, 2007 at 11:48 pm

any comments from Garage or Kawasaki? it looks like they got screwed here as well. i do think that you should create a feature like the deadpool for unethical vc(s).
bdeseattle

February 12th, 2007 at 11:48 pm

F5-pause-F5. oh boy. here we go. I sense another vc-tc smackdown here in the comments stream. just wait till the fanboy vcs wake up in the valley tomorrow morning and start spamming Mike again. Way to go TC. Nothing like a little late night stirring of the vc hornets nest!
Michael Arrington

February 12th, 2007 at 11:52 pm

Baris, I have emailed Roland for a comment, but this story comes from multiple and different types of sources.
Tom Fragala

February 12th, 2007 at 11:55 pm

Dave C and Savvis:

1. If the VC’s control the board, or can get backing from other directors, they can simply threaten the founders with being fired–and back it up.

2. The VC’s preferred stock would have liquidation preferences in the case of sale. That means simply they get paid out FIRST, before Common stock (founders, employees). So if they company was sold for $3 million those holding the latest Pref stock would get SOMETHING back while everyone else is left holding the bag.

3. And regarding drag along rights, Dave Cowan in the comments here says “Drag along rights do NOT entitle the VC to force a sale of the company. I cannot think of any term I’ve ever seen in a venture capital investment that would explain how a VC could have forced this sale.”

However, read that Brad Feld has to say about it on his blog (http://www.feld.com/blog/archives/000283.html): “I’ve heard founders and early shareholders say a variety of things with regard to a drag-along, but the most INANE is “it’s not fair – I want to be able to vote my stock however I want to.” If you are faced with a drag-along, your ownership position will determine whether or not this is a relevant issue for you. An M&A transaction does not require unanimous consent of shareholders (these rules vary by jurisdiction, although the two most common situations are either majority of each class (California) or majority of all shares on an as converted basis (Delaware))… “
Theo Tonca

February 12th, 2007 at 11:58 pm

Very unfortunate. Whenever someone tells me a VC horror story i usually think that it couldn’t have been that bad and that they must be adding a lot of fluff in between. Perhaps i should think again.
Michael Arrington

February 13th, 2007 at 12:01 am

David Cowan - Certainly two large preferred holders could force a sale with drag along rights combined with the use of conversion rights to control the Common vote, should a vote of the common be required. Right?
SutroStyle

February 13th, 2007 at 12:07 am

This is not scary actually. Filmloop was clearly a dead company, with not even remote possibility to earn money to cover its bandwidth, and the userbase was way too small to reach a “critical mass” (I do not know what it means, but hopefully it’s a good thing for non-money making companies since people love to talk about it).

So ComVentures did the most rational thing. The reason that they are “bad” VCs is not because they “betrayed” Filmloop (there is no charity here, it’s dog eats dog game), but because they made such a dumb investment in Slide’s clone. Never invest into “cloners”, they will all fail because they have no imagination.
Simon

February 13th, 2007 at 12:17 am

SutroStyle needs to get some numbers to back up his claims. We have no idea what FilmLoop’s user metrics and growth were. There’s more to this story that needs to be told.
Raj Anand

February 13th, 2007 at 12:17 am

I think there are 2 sides to it. But reading and meeting a few VCs in London I see their take on it.

Firstly as they always say the last source of funding should be a VC. VC’s or as they are popularly known as Vulture Capitalist, would obviously want 1 of their 10 companies to be successful and to reduce their losses. But what ComVentures did – Didn’t sound right to me! Although saying that I’m not surprised as there are many stories out there when VCs behave irrationally when approaching close to their funding cycle.

I think as Entrepreneurs in the Web industry, VC money should be taken with a pinch of salt. I hope we don’t have to get into the VC domain soon! Angel Funding all the way
Austin Tayshus

February 13th, 2007 at 12:28 am

Investors are heartless. This is their job. It’s not their money, it belongs to pension funds and other institutional investors, which ultimately belongs to you Joe Public.

Question: would you prefer a guaranteed pension or the 2 year excitement of a potentially successful start-up? Would all the other people who have their pensions in the same funds say the same?

Technology start-ups do not have an automatic right to live just because they have something cool. If Filmloop took money from the wrong investors, then this is a management mistake. Sounds like they also messed up with their legal agreements.

Question: Would it have been better if Filmloop sold to (for example) Microsoft, who then closed them down?

I’m not a VC, I am an exec at a software startup.
VCs are not bad and startups are not good.
Sorry it hurts and I hope the management team jump onto exciting new initiatives soon.
SutroStyle

February 13th, 2007 at 12:29 am

@Simon

I can only judge by their Alexa, a web site with Alexa rank like this can earn probably about $600-700/mo on ads.
Given the fact that they streamed images into widgets, $700/mo would probably cover widget bandwidth for about 50,000-100,000 active users.
I think widgets were their main (and thus, necessary) distribution mechanism, since otherwise their product is non-viral.

$500/mo is fine, as long as you do not raise ten (10) million dollars.
savvix

February 13th, 2007 at 12:30 am

@giddy.

Have you ever been in a VC backed company or talked to a founder of one? At the end of the day its all about “portfolio management”. EVERY single VC even the top tier ones will not hesitate to flush the startup down the hole if they felt they would not be able to get their money back.

If you can give me one example of a VC who “did the right thing” (ie. allowed their money to burn up in the slim chance that a struggling startup would turn around), let me know.

As much as we’d love to think of VC’s as caring “mentors”. The reality is… as long as you execute according to plan (or maybe miss one or two targets), everything’s peachy and kumbaya. Once they smell blood, its sayonara….

Don’t get me wrong, VC’s may stick with a struggling company, but they’d need a real reason to… and founder’s pity isn’t one of them.
David Cowan

February 13th, 2007 at 12:32 am

MIchael and Tom,

Theoretically I guess you’re right but the story still has some oddities that make it unlikely: (i) it would take all the preferred, not just ComVentures, (ii) converting the preferred to common as a means of controlling the class would mean that the preferences go away, so all the common shareholders would get a share of proceeds; (iii) ComVentures wouldn’t ignore legal counsel on avoiding a conflict of interest; and (iv) buyers won’t buy a tech startup unless the team participates in the sale of the asset.
Chris

February 13th, 2007 at 12:32 am

Good thing I read this here. We are think in the process of developing a short list of VCs to pitch to … I definitely know one firm we will not be seeing now!
Simon

February 13th, 2007 at 12:40 am

@SutroStyle

Look at the links from the TC article. 400,000 users in May 2006. TC’s article on FilmLoop 2.0 indicates 1 million users in October 2006. Alexa is great for web sites, but FilmLoop requires a download; I don’t think Alexa tracks that.
paul king

February 13th, 2007 at 12:40 am

I don’t think the ‘outrage’ (probably an overuse of the word) is because of what the VC did - and maybe not even how they did it - - it’s because mostly TC is made up of founders and wannabes (I’ll label myself the latter) and to me (us?) it’s unconscionable that the founders received squat - - a salary for a couple years maybe, but no real payday for all their efforts. If it happened to them, it can happen to us - and if that’s what you get, why not keep your day job? (I know, I know, like born founders can…)
chrisco

February 13th, 2007 at 12:44 am

Should have a clause in the deal saying liquidation preference rights do not apply in related-party transactions, with the definition of “related party” covering various situations / conflicts of interest, etc. There’s no problem with liquidating when necessary… it’s HOW you liquidate and how it APPEARS. Even if this firesale was legit it had “conflict of interest” written all over it and ComVenture should have known that and should have gone above and beyond to demonstrate, for their own credibility’s sake if nothing else, that they did everything possible to ensure proper market expose, marketing, valuing, etc. That’s a lesson to be learned for all VCs reading this

I see the ComVenture guys already running damage control in the comments above (comment #11). No facts in their comment disputing TechCrunch’s story or timeline or adding additional info, just a suggestion that this story is about TechCrunch sensationalizing a totally legitimate and conflict-free situation. Right… And George Bush is doing a heckuva job, too. I’d say it’s TechCrunch doing its job and reporting on newsworthy items. And this is certainly newsworthy. It might even be case study worthy (are you listening Harvard). The damage has been done and I wonder if the short term gain is going to be worth the long-term credibility issues. I doubt it. Cheers!

-Chris Comella, Founder
BuzzPal - The World Is Your Party
http://www.buzzpal.com

PS: What entrepreneurs might need / like is a site where they can view VC feedback, ratings, etc. Kid of like a directory with profiles, reviews, ratings, etc. Maybe use a domain name like http://www.vcFeedback.com, http://www.RateYourVC.com, http://www.RateMyVC.com, etc.
Erik

February 13th, 2007 at 12:50 am

The thing we’re not seeing here is whether or not FilmLoop was hitting their milestones.

Sure they had 3 million in the bank. But when they signed up an $11 million round there were certain intermediate milestones (users, revenue), where were they vis a vis those milestones. Were they on plan? I bet not.

If FilmLoop blew through $8 million, and only had 5% of the userbase they projected (for instance) then the management team clearly isn’t executing. Why should the shareholders watch the last $3 million circle the drain?
yongfook

February 13th, 2007 at 12:56 am

http://www.hotornot.vc ?
SutroStyle

February 13th, 2007 at 1:00 am

@Simon

That’s exactly what I was talking about: Alexa tracks their pageviews, which happens to be the same thing that advertisers pay for. Given their Alexa, their ad revenue would cover bandwidth for probably less than 50,000 active users with widgets and downloads. Since they have more than 400,000 users as you just wrote, how can they possibly money?
If they had 15,000,000 users, then I guess VCs coula call it “critical mass”. But what about 400,000?
caveat entrepreneur

February 13th, 2007 at 1:03 am

1) VCs aim to maximize the value of their share. All the talk about fiduciary duties is just that, talk. If the startup becomes more valuable as a whole, great. Otherwise, they have no compunction about enriching themselves at the expense of the founders and employees. This is true even when the startup is moderately successful.

2) Founders synthesize proteins or write code for a living. VCs structure and negotiate deals for a living. Never let a VC lull you into thinking that they are “on your side”, either before or after closing a round of funding. And beware of “industry standard” terms in your term sheet.
unix.only

February 13th, 2007 at 1:04 am

SutroStyle ,

By no means FilmLoop was Slide clone. At least because they have started about the same time (early 2005). That was also acknowledged by Max Levchin (the founder of slide): http://bambi.blogs.com/bambi_f.....n_256k.wmv

You could do a simple web search (Google is _very_ usefull) before writing about the things you do not know.
Tom Fragala

February 13th, 2007 at 1:04 am

David,

(i) it would take all the preferred, not just ComVentures,

Well not all, possibly however your point I assume is that it would take more than one entity to pull it off. So they had to get other major investors ot buy in, depending on ComVentures % stake, which I don’t know.

(ii) converting the preferred to common as a means of controlling the class would mean that the preferences go away, so all the common shareholders would get a share of proceeds

I don’t think that’s how liquidation preferences work in many cases. if the Pref holders had a multiple (like 2X or 3X) liquidation preference, then legally they get 2X or 3X their capital back first, as a class, BEFORE common participates. otherwise it isn’t a PREFERENCE if all classes share equally is it?

(iii) ComVentures wouldn’t ignore legal counsel on avoiding a conflict of interest;

Well, it probably it isn’t a conflict of interest–after all if you have the votes and the rights to do it, then you can sell the darn company.

(iv) buyers won’t buy a tech startup unless the team participates in the sale of the asset.

Well, the whole point of THIS sale was to get the cash for the other company’s coffers, in exchange for stock in the buyer. So this doesn’t apply. Although in general, sure, I agree. Otherwise you’d be buying a team that was bitter and unmotivated.
Simon

February 13th, 2007 at 1:09 am

@SutroStyle

I don’t think Alexa rankings are the be all end all of advertiser spending budgets. FilmLoop seemed to have several high profile advertisers and partners. Someone more knowledgeable than either of us ought to educate with more info.
Neil

February 13th, 2007 at 1:19 am

You say
“VCs don’t have any obligation to put good money after bad, but to liquidate a viable startup simply to help out another portfolio company is evil stuff”

Filmloop obviously wasn’t viable. End of story. If you are workign on a start up and and dont have a “viable” business model, be prepared to get out of business when the wind changes.
Michael Arrington

February 13th, 2007 at 1:23 am

David, as far as I can tell not one employee has actually been hired by Fabrik. Also, I’m not sure that a vote by class would be mandatory, so they wouldn’t actually have to control the common. Either way, these are all details that are very unlikely to become public knowledge.
unix.only

February 13th, 2007 at 1:31 am

Simon,
You say:
“Filmloop obviously wasn’t viable. ”
Can you prove that or this is just your opinion?
Richard Forster

February 13th, 2007 at 1:31 am

Unfortunately, whilst this is a sad end to start up, it is a very common one.

I have been involved with the financing of VC backed companies in both Biotech and Internet and can tell you that if the lead investors feel that for whatever reason a company is not performing they will look for an exit strategy.

Whilst its always a great shame that the founders and employees don’t usually get anything when this occurs its really not that different to when a privately funded firm goes bust. It’s part of the risk you take when you get involved with a start up I’m afraid.

I don’t know the guys at Comventures but I wouldn’t say from their behaviour that they should be ‘blacklisted’ or avoided. Not unless you intend avoid all VC’s !

It is the sort of story that is useful to budding entrepreneurs, you need to be aware of the pitfalls and try to get the best terms you can when raising money. Although when raising a second or third round that is easier said than done if you are running out of cash !
Tom Fragala

February 13th, 2007 at 1:32 am

David,

Mike A set me straight in an out-of-band email. I thought that the “conversion” could take place by voting Pref stock as if it was converted to Common and they could double dip and get the liquidation pref too. But Mike says, as you do, that they would lose the liquidation preference if they wanted to control the vote and force a sale–a strict conversion to Common would precede the liquidation event. So you have a point there.
TheChris

February 13th, 2007 at 1:47 am

In response to who is using FilmLoop.

I happen to be a motorsports fan and NASCAR just redesigned there site to include FilmLoop. However, NASCAR doesn’t operate the site, Turner Sports does.

Regardless, the NASCAR demographic has some nice advertising qualities.

http://www.nascar.com/series/cup/
Simon

February 13th, 2007 at 1:55 am

@unix.only, I think you mean Neil, not me.
magnusdopus

February 13th, 2007 at 2:06 am

While the VCs actions sound evil, upon review of the FilmLoop site, nice call ComVentures. Honestly, does anyone see a $100 million dollar future for this site. Anything close to approximating YouTube? Because those are the returns VCs are looking for.
Buda

February 13th, 2007 at 2:11 am

#46 made a good point, the lesson here is to seek out the VC with the best term, may or mayb not be the one with most money.
chrisco

February 13th, 2007 at 2:17 am

People’s comments are still missing the point, at least for me. It’s not so much WHAT ComVentures did but HOW THEY DID IT. See my comments in #35 above.
unix.only

February 13th, 2007 at 2:26 am

Simon,
Of course I meant Neil.
Sorry about that.
...some Drifter

February 13th, 2007 at 2:51 am

the concept was a poor decision - in retrospect, is that slideshow site really something?
if it is, it’s getting eatin up by other site alternatives - there can only be so many players that can turn to green

the controlling parties decided to scrap the project, they did - i support the vcs’ decision. (even though i’m pro-entrepreneur/founder 110%)

as for the exact legalese of what is, what not - that’s not my arena to comment in
Hasan Jafri

February 13th, 2007 at 3:00 am

Thanks Mike, this is an instructive tale. Look hard at who you do business with. VC’s may be the lender of last resort but at the end of the day everyone, including VC’s, have an obligation to at least nominally use their brains. Some of them clearly don’t do that.
Richard Forster

February 13th, 2007 at 3:23 am

Chrisco - sorry but I don’t think I am missing the point. VC’s have a duty to their shareholders to get the best from their investment and if they thought that was the best way of salvaging something and it was legal to do then they will do it.

Whether or not you or anyone else likes how they go about their business is really neither here nor there. VC financing can be cut throat stuff. That’s just the way it is.

As far as damage control is concern I think you will find that Comventures will not have to particularly worry about a few people boycotting them. There are more than enough money hungry start up’s out there.
Tijs

February 13th, 2007 at 3:35 am

“I agree with anentrepreneur. There should be a blacklist of unethical VCs.”

badvc.com is still available
Sujay Jayaram

February 13th, 2007 at 3:48 am

Thanks for relating this story - how interesting! Even though there will most certainly be two sides to this story, it just makes me glad that weddingpath.com has only gone as far as bank funding - having to deal with far sharper business people than us would be a whole source of stress in it’s own right.

On a separate note, I am amazed at the amounts of money companies get get through with so very little ‘tangible’ to show for it
Alex Grogan

February 13th, 2007 at 4:05 am

To blow through $8 million dollars, and have nothing to show for it, then complain that you didn’t get anything after the sale - what a baby.

I’m sure they had a good time /while/ they were spending that VC money.
Alex Grogan

February 13th, 2007 at 4:21 am

Furthermore….

“As Vice President of Strategic Development at Adobe (Nasdaq: ADBE), Mr. Mashima was responsible for directing corporate strategy, mergers and acquisitions and alliances.

Mr. Lee is the former CEO and co-founder of eCircles.com, a pioneering community website that grew to 3 million users before being sold.”

So, it seems to me that Mr. Mashima and Mr. Lee were intent on nothing more than a ‘buyout’ of FilmLoop, rather than trying to grow a sustainable business.

I feel no pain for them if the buyout didn’t turn out like they had hoped.
Gloria White

February 13th, 2007 at 4:22 am

I still distinctly remember the email I got from Guy introducing this new little product called Filmloop. He personally endorsed the product and asked us to try it out. I downloaded the product and tried it out and well, was left wondering about what’s special. Perhaps I missed out on something that others saw. But nevertheless, this approach isn’t the greatest- ditching people who make you rich.
But then money is the master and we are all its slaves!
chrisco

February 13th, 2007 at 4:55 am

Richard Forster: Clearly VCs have duties to their limited partners. And clearly they have duties to companies on whose board they sit. Therein lies the conflict. On one end of the spectrum they maximize LP economics by selling the company as fast as possible and as cheap as possible to a related-party / portfolio company. On the end of the spectrum, they conduct a diligent sales process and seek to maximize value for the shareholders of the company on whose board they sit. Somewhere in the middle of the spectrum may be the optimal outcome. Maybe ComVentures did indeed land somewhere in the middle of that spectrum, but we don’t know. What we do know and what this story brings home is that how you do something and how it appears is important, especially when there is a possible conflict of interest involved.

Regarding their being enough “money hungry startups” out there that it doesn’t matter what ComVentures does is like saying that ethics don’t matter for any company or government because there are enough customers and dumb voters out there that it doesn’t matter if a few of them get pissed off and leave. It might not matter to some people, including many that are in power positions now, but it matters a great deal to others. We each choose our ethics and actions. We chose how to handle conflict-of-interest situations. All I am saying is that we’re looking at a conflict-of-interest situation that could have been handled better. Cheers!
Hasan Jafri

February 13th, 2007 at 5:15 am

@ Chrisco: You’re right on the money (no pun intended). It clearly did
matter what ComVentures did, which is why we’re here talking about it.

@ Chrico: You over-egg the pudding by at least half a dozen eggs. Sure, there are “money hungry start-ups” out there. But there also are return-hungry VC’s who’ll bend over to lend. That’s the beauty of this market: Choice. Don’t ever let some schmoe tell you there’s a shortage of investors in new technology.
Hasan Jafri

February 13th, 2007 at 5:16 am

Ewe….I meant Richard Forster over-egged the pudding. Dang
Neil

February 13th, 2007 at 5:17 am

Hi unix only,

not viable, what i mean is that to generate enough revenue to pay off a 12 million (or whatever sum it was) loan/investment needs film loop to dominate its market space. Perhaps they planned on moving to a different model and it failed?
What I do know, is that I wouldn’t pump big money into an ad only revenue model. Look at this site, making lots from advertising? Sure. Cost 12 million to set up? No. The price of money is the opportunity elsewhere, which Filmloop found out.
Ross Rader

February 13th, 2007 at 5:23 am

Some quick math would show that getting out of the market was probably the right move. They could have done another round of financing, but with the burn rate they had, they probably didn’t have enough runway to actually get a round closed in time before their doors did. $3m might have got them through to the end of this month or possibly next - hard enough to do for the best of companies, almost impossible for the rest, especially with a hard end-date hanging over the balance sheet.

David Cowan had this completely put to bed 50 or so comments ago

-ross
Erik

February 13th, 2007 at 5:55 am

One question.

If FilmLoop missed their rev/growth projections should the headline be:

“Investors betrayed by FilmLoop”?

Just wondering…
Aaron Cohen

February 13th, 2007 at 6:15 am

Everybody:

Lots of discussions about the legal issues, but how about what were the comventures thinking about when they invested in filmloop? At the time flickr was on the cover of magazines, photobucket was huge and rockyou and slide were moving along. I certainly applaud the early stage investment in widgets (sequoia in Rockyou, insight in photobucket), but 5mm followed by a 7mm…. That’s a lot of money.

Filmloop got momentary, great PR (before they even launched!) and I bet if you looked under the hood you’d see their PR firm made a fortune. This me-too investing is the Valley at its silliest.
scott

February 13th, 2007 at 6:49 am

I didnt see filmloop dominating anyway. And VC’s can do what they want. If the company isnt successful, they got their pointless capital from the VC’s in the first place.
sms

February 13th, 2007 at 6:54 am

May be you overlooked something.

CV might have found things were not as they were told at the time of the investment, poor DD? may be, VC’s do make a mistake too.

That’s a very likely explanation for the firm souring on their investment a mere 6 months after putting the money.

No good VC will stay in a deal when they know it’s bad, the comment about LP’s pushing them is just naive.
Adam Jusko

February 13th, 2007 at 6:54 am

That’s a good point, Aaron. I’m sure the FilmLoop founders were, no pun intended, thrown for a loop when six months after getting ComVentures money they were told to sell the company. What did ComVentures see in May that they no longer saw in November?

Of course I’ve bought a few stocks that I quickly realized were bad decisions. I didn’t put $7 million into them, but I suppose in relative terms it’s the same thing.

Even if you can point a finger at Comventures, though, the FilmLoop crew obviously knew the game and the possibilities.
David Galbraith

February 13th, 2007 at 7:05 am

Sorry, I’m a startup guy, but I’m with the VC’s on this one.

1. If you sign a deal with drag along rights, you should know what you are in for, if you don’t know, then that doesn’t exactly inspire business confidence.

2. At Filmloop’s burn rate, a fire sale is the best outcome, if the last bubble is anything to go by. Their product perhaps still gets used in some form and some people may even get jobs to maintain the code rather than pimping it for a few bucks on rentacoder. Recylced code from the last bubble, developed at VC expense and sold for next to nothing, is the fast-depleting natural resource that has fueled many Web 2.0 applications.

3. Company rollups, particularly within an investor portfolio, do not indicate shady VC activity, its one of the reasons why Sequoia is so successful.

4. Many people work their nuts off, bootstrapping a company to the point where its viable or even profitable. If you choose to raise money and perhaps take a full-time salary before then, there are downsides.

5. Of the companies from the last bubble that raised $10M plus, few are still in existence. Several of those that took very little investment and ran lean, such as Blogger, or del.icio.us this time around, were able to ride things out precicely because they still had control up to the point where their product was successful.
Tobias Batton

February 13th, 2007 at 7:17 am

Can’t imagine what you need all of that capital for to make a few slide shows. I feel bad for them, but they were asking for it.
David Touve

February 13th, 2007 at 7:39 am

I don’t know about the rest of you, but I am partial to the photo of the ComVentures partner standing alongside his Ferrari. For as we know, for some people in the VC market, that’s what its all about. For the rest, this story - true or untrue- leaves an unfortunate stain upon an industry that is supposed to play a important and risk-filled role in the investment and support of innovative ideas and the people behind these ideas.
Tom

February 13th, 2007 at 7:41 am

Vulture capitalists!!

Awwwk awwwwk…. *flap flap flap*
andrew

February 13th, 2007 at 7:59 am

Par for the Comventures course - further cements my vision of the organization. As a service provider to VCs and considered expert in a few things I was asked to come in and present to them on a certain technology. I was provided a sandwhich for lunch but as they asked me questions while they ate I could not. Not only did they belittle what I had to say but at the end of my brief talk they got up turned their backs and walked out of the room. About 20 feet down the hall one comes back and says, oh by the way you can stay to finish your sandwhich and tell the admin your done on your way out.

I have met with more than 50 VCs for little chats like that and never once have I ever been treated as rudely by a couple of “Partners” who didn’t even look 30. I have have helped a number of companies get funding but ComVentures has never seen a one of them.
Marty Hahnfeld

February 13th, 2007 at 8:20 am

Pretty amazing the lack of reality in the views on this. A couple of thoughts:

What ComVen likely saw is a portfolio consuming alot of cash and likely missing targets, also a company which sounds like it was #3 or 4 in its market. They likely believed that the opportunity for the company to raise further money was low (including an almost certain disposition that ComVen was not interested in participating in an upcoming round) — this is the kiss of death.

It is equally as likely that Garage didn’t have a big appetite to sustain the investment as lead. Without your existing investors taking their pro-rata you are dead, nobody is going to invest.

So, what do you do? Two options — shut it down totally, or give the shareholders some sort of chance by combining it with another company which may have adjacent technology or some chance to benefit from the technology.

I am not sure what all the hoopla is about. VC’s have frequently combined poor performing portfolio companies into relatively better performing portfolio companies as an alternative to throwing it totally on the scrap heap.

This is not some evil move by ComVen… if you want to raise money, sustain your startup, and attract more VC dollars — then lead your market and be ahead of your financial models… not behind them.
entrepreballa

February 13th, 2007 at 8:21 am

I think the lesson here is:

1. always bootstrap when possible

2. Seek angels first

3. Seek VC as a last resort.

4. Never let em see you sweat
Richard Forster

February 13th, 2007 at 8:22 am

spot on Marty…
Samer Bazzi

February 13th, 2007 at 8:32 am

wow, that is a rough case. The founders should simply take this as a learning experience and never look back. I am sure they have learned a lot.
ben

February 13th, 2007 at 8:58 am

You either have the mojo or you don’t, annoying but true in this world.

Top tier VCs can crap all over 2nd tier founders.

I have also seen top tier founders crap all over 2nd tier VCs and angels.

It often boils down to reputation, the party that feels they have the most reputation to loose will often back down.
Fabian Schonholz

February 13th, 2007 at 8:59 am

What I think is worse is what happened to me where I spent 6 years sweating blood and building a solid technology and then when the company got sold, I was only allowed to cash in a few of my options. Which in itself it is not such a big deal, but there were no protections either. Needless to say exodus ensued.

But, looking at this posting and my own experience with objectivity, these are not evil deeds, it is business and the rub is in the negotiation. As a founder you are the employee of the board and as an executive, you are the employee of your supervisor - most likely the CEO. You just need to put yourself in a strong position to be able to stir the company the way you would like and you need to negotiate a positive outcome for you regardless of the overall outcome.

I know … easier said than done.
manfmnantucket

February 13th, 2007 at 9:00 am

Speaking as someone who has been through several twists and turns regarding equity deals, I wish I hadn’t had to learn the hard way about these things. Instead of a blacklist of VCs, I wish there were some resource listing rules-of-thumb for the layman in negotiating these equity or option deals. My observation has been that VCs count on a certain amount of ignorance in the founding populace.

Particularly so when so many new companies are now being created by younger folks who have little experience with startup finance… it would be great if there were a list out there with advice on what rights to request.
- anti-dilution
- preferred shares vs regular
- accelerated vesting
etc etc

Or maybe TechCrunch could post a summary with resources as a service to the startup community?
Orton

February 13th, 2007 at 9:02 am

“Filmloop got momentary, great PR (before they even launched!) and I bet if you looked under the hood you’d see their PR firm made a fortune. This me-too investing is the Valley at its silliest.”

Aaron, if you feel that way about silly “me-too investing”, I presume you’re embarrassed by the antics of your new company’s PR team on another TechCrunch post:

http://www.techcrunch.com/2007.....ent-936897

“Publicly Traded GoFish.com: The Next YouTube” - wow!
sms

February 13th, 2007 at 9:05 am

@enterpreballa

I would offer a different view:

1. Don’t try to boot strap a good idea - you will waste time
2. Don’t chase after angels - Most are AFC; haven’t got their wings
3. Let them see you sweat every day - You’re better off working than moping
sms

February 13th, 2007 at 9:08 am

I mean ASC .. Angel Second Class … sorry about it
LonelyBloggers

February 13th, 2007 at 9:22 am

I’m not sure why everyone is so suprised with this story, happens all the time - There’s probably a very good reason for why it’s happened.. Show me a return on my investment or go home….
K

February 13th, 2007 at 9:41 am

Dear Baris:

Surely 7 of those 9 that fail do so because their investors fail to support them in the long term, having less foresight than a desire for quick payoff.

Regardless, short-term low performance is a shitty excuse for dumping the entire staff into the gutter and grabbing their accomplishments for your other pockets. It’s in no one’s best interest to start a company and accept VC money if they are going to end up with jack shit as a reward for their work in the end.
ted

February 13th, 2007 at 9:48 am

Dude they were putting slideshows on MySpace. They had no flippin’ way of making money! They’re lucky they got out of it and moved on to something else.
Pius

February 13th, 2007 at 9:57 am

Assuming the facts are correct, this just goes to show the folly of signing ridiculous contract terms just to get VC funding. It seems like many of these founders think that these investors are entitled to obviously one-sided term sheets just because the investors call themselves “venture capitalists.” Think before you sign people! A bad deal is a bad deal, period.
Don MacAskill

February 13th, 2007 at 9:59 am

Sad story, but something doesn’t add up here.

On the surface, $3M seems like a low valuation. Which begs the question - who exactly was looking for suitors? Surely, someone else could have been found with $3M in their pockets.

We’re certainly not looking to acquire anyone, but at $3M with a shipping product and a relatively hot market related to our own, it’d be stupid of us to not at least take a look. And we never knew they were for sale.

Someone blew it and didn’t look hard enough for other bidders.

Don
bobbyd

February 13th, 2007 at 10:25 am

Wow, I had this experience back in the bubble too, and simply stated it all boils down to control in the board room. VCs are like passengers in a car, some can be good, an extra set of eyes, some reading the map and helping with the plan and the trip, some watching out for obstacles and suggesting detours, etc. Partners can also be described the same…

While others can be asshats trying to grab the steering wheel from the back seat and blocking the mirrors all the way as they steer you into the ditch!

My tag of the day, “control” Don’t give up control folks ever! If your great you don’t have to, hell even if your like me and not great you still don’t have to, you can and will find a way!!!

Note: I have met and worked with the exact opposite type VC’s and not all are evil. They do however love to partner you with the Keiretsu
Amy Wilsch

February 13th, 2007 at 10:27 am

@ Gloria, I got that email too about ‘viral marketing’. Nor did I really look much at the site. I think that was more for some agreement Guy (of whom I’m a big fan) had with Andy Sernovitzof WOMMA’s book he mailed out (with Seth Godin’s foreward) in which I believe Guy had an endorsement on it or something. I thought that was kind of cool he did that for 1 company, but also kind of weird since it was a one time only thing. So I assume it was book-deal/PR/gimmick driven only(they mailed out the book with popcorn) .
Fabio Seixas

February 13th, 2007 at 10:48 am

bootstrap is better!
Koperniko

February 13th, 2007 at 10:55 am

In response to David Cowan and Baris Karadogan commentaries, it is sad that intelligent people like them could not understand that the last thing that somebody wants in his business is to have a partner who pulls the plug off at the first sign of problems. That is not a fair human relationship required for a business, where every kind of pitfalls might happen and every kind of loyalty is required, a business to be really successfull does not depend only in money but guts also. I support the black list for unfair VCs and partners, I dont want to be involved with a guy who shows that he is not really commited with the success of my business. And based on the facts reported, ComVentures use his position to make an unfair contract with the founders in a one-sided win relation and giving to FilmLoop no options but to sell to another company of their own portfolio, with no chances to find a new way out. Thats the kind of partner that I dont need for me!!!