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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There should be a public blacklist to ensure that these unethical VCs will never have a chance to invest in another startup again.
Wow, that is absolutely evil. Thanks for the warning, Michael.
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.
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.
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.
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…
Very evil stuff.
I agree with anentrepreneur. There should be a blacklist of unethical VCs.
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.
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.
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?
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.
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!
Scary !
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
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.
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.
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.
Scary..funding does not mean anything is guaranteed
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).
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!
Baris, I have emailed Roland for a comment, but this story comes from multiple and different types of sources.
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))… “
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.
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?
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.
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.
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
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.
@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.
@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.
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.
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!
@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.
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…)
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.
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?
http://www.hotornot.vc ?
@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?
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.
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.
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.
@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.
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.
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.
Simon,
You say:
“Filmloop obviously wasn’t viable. ”
Can you prove that or this is just your opinion?
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 !
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.
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/
@unix.only, I think you mean Neil, not me.
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.