We first wrote about Capazoo in December 2007 where we noted that it paid users to participate, but only if they paid a membership fee then referred other users in a classic pyramid scheme structure.

According to local media reports, Capazoo fired its entire development team (60 people) late last week with the one remaining sysadmin to keep the site itself running. Capazoo’s head office has a for rent sign in the window.

Besides a terrible business plan, a family dispute hasn’t helped, with brothers Michel Verville and Luc Verville fighting in court for control of the company. And just to keep the soap opera going, there are also accusations that the brothers embezzled money from the company; one figure being mentioned suggests $2 million is missing. Capazoo’s $25 million was initially listed as only being “private funding” but more recently National Lampoon became an investor.

Update: this from a source familiar with the company:

The big issue was fraud amongst the founders who were taking 10% commissions on all funds raised.

They did the first round ($8 million) at $72 million pre-money from a bunch of athletes and non-sophisticated angels at $100k-$200k chunks. Most of them didn’t know that management was taking 10% commission themselves (despite owning all the common) for all funds raised.

They then raised another $5-10 million (conflicting rumors) at a $132 million pre, while still taking commissions. The two brothers took almost $2 million out of the company before reaching more then 10K users and ballooned the staff to 130 staff before starting to do layoffs.

Capazoo joins the TechCrunch Deadpool.

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We first wrote about Capazoo December 10, when we explained the model which Capazoo claims in its media release is a “ground-breaking business model empowering its members and partners to generate real revenues based on their content and site participation.” To quote for the earlier post:

Where Capazoo differs is its offer to compensate its users for the time spent on the site and the activities they undertake. Members can tip other members using “Zoops,” Capzoo’s points program that can be redeemed for cash. Members also receive Zoops for inviting friends and posting content. It sounds good, but there is a catch: to redeem Zoops users must join one of Capazoo’s two premium membership programs which cost $24.95 or $34.95 per year. Users can also buy additional Zoops to give to others at the rate of $10 for 10,000 Zoops.

Under the deal National Lampoon will provide online video content and “branded marketing opportunities” to Capazoo.

There has to be some irony in a company known for comedy investing in a social networking site with a Web 1.0 multi-level marketing scheme as its business model. As I said in the previous post “a model that only pays out when you pay up won’t find millions of fans. With $25 million in the bank the site certainly won’t be heading to the Deadpool anytime soon but it will struggle to succeed;” given Capazoo has just taken on a new investor maybe it’s already struggling?

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Capazoo comes with the usual variety of social networking functions, including blogging, photo and video uploads, profile pages etc etc. Where Capazoo differs is its offer to compensate its users for the time spent on the site and the activities they undertake. Members can tip other members using “Zoops,” Capzoo’s points program that can be redeemed for cash. Members also receive Zoops for inviting friends and posting content. It sounds good, but there is a catch: to redeem Zoops users must join one of Capazoo’s two premium membership programs which cost $24.95 or $34.95 per year. Users can also buy additional Zoops to give to others at the rate of $10 for 10,000 Zoops.

Capazoo currently has “over 100 employees” and has taken $25 million in private funding to date.

As we bid AGLOCO to the deadpool earlier today, it’s natural that another variation on a Web 1.0 theme that’s got a multi-level marketing referral scheme rings alarm bells. Capazoo is trying to be at least slightly different through content deals and original content, but in an age where social networking sites are free, a model that only pays out when you pay up won’t find millions of fans. With $25 million in the bank the site certainly won’t be heading to the Deadpool anytime soon but it will struggle to succeed; who knows, it might work, but I wouldn’t bet on it.

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