#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.

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.

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

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

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.

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.

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

badvc.com is still available

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

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.

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.

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!

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!

@ 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.

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

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.

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

One question.

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

“Investors betrayed by FilmLoop”?

Just wondering…

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.

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.

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.

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.

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.

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.

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.

Vulture capitalists!!

Awwwk awwwwk…. *flap flap flap*

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.

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.

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

spot on Marty…

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.

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.

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.

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?

“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!

@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

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

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….

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.

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.

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.

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

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

@ 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) .

bootstrap is better!

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!!!

“This me-too investing is the Valley at its silliest.”

I believe the correct phrase is “me-too-point-oh” investing.

Mr. Van der Meer did the same thing to a company by the name of RangeStar which was much further along that FilmLoop. In fact, the company was scheduled for an IPO (late ’90’s) when ComVentures decided to pull the plug. Certainly wasn’t surprised and have advised all my clients (start-ups) to stay away from ComVentures since then.

Confucius say … “He who has a partner, has a master”

Quite a common scenario, the fact is the preferred has control; since the preferred is the source of funding, it can simply fire any employees (founders) who don’t like the salvage plan. Dissenters can be handled with short-term consulting gigs or a partial share buyback, that is, the core elements of the team. Hopefully, the team learns something and will be more thrifty the second time around. (Clearly, however sometimes investors set an ambitious climb rate requiring heavy burn). It’s also true that companies need much less capital to get airborne so maybe you can skip VC’s altogether, particularly if you are technically inclined, and self-fund or via friends. With the particular case mentioned, it seems a little crowded and not very defensible.

Two pieces of advice: If you do get a cash offer to acquire some founder’s shares, then consider selling. Avoid hiring: use a web of advisors and mentors to stress-test what you are doing. The people-related burn rate eats through capital like nothing else.

Anyway you slice this, it looks pretty poor on ComVentures and even possibly Globespan. Let’s not forget that there is another venture firm involved at a pretty significant stake. Knowing that Garage is capped at $500k (not sure how much they put into FilmLoop), I don’t they had much control of the situation and were likely on the other side of the table.

A few other factors to consider I guess: 1) Who was the partner from Globespan that lead the investment?, 2) Which partner at Globespan currently sits on the board?

Again, no matter where you put the emphasis, this reflects poorly on at least one VC firm and likely two as far as I am concerned….

— Long live widgets!