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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Palo Alto-based FilmLoop has reportedly layed off most of its staff of 30 employees after attempts to sell the company failed. This comes just eight months after they raised $7 million in venture capital from ComVentures. Co-founder Prescott Lee and a handful of core technical staff remain.

FilmLoop’s service allows users to create photo slide shows and view them via a desktop application or on websites. Competition is crushing - Slide, RockYou and Photobucket, among others, all offer competing services, and FilmLoop is dead last in user adoption.

Insiders are saying that FilmLoop made crucial early mistakes v. its competitors. While Slide and RockYou focused first on giving users the ability to easily embed slide shows into MySpace and other social networks, FilmLoop only added this functionality recently. They missed the social networking opportunity, and by the time they had products to compete with the others, it was too late.

The company is said to have “a couple of million dollars” still left in the bank and is going to continue to keep the service live. It’s unclear though that this market niche can support this many players, particularly since heavyweight Photobucket has started to focus on this as well. A final nail in the coffin - there is next to zero revenue being generated by these products, which are offered to customers for free.

Based on this news we have tentatively added FilmLoop to the TechCrunch DeadPool. Our previous coverage of FilmLoop is here.

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When photo slide show sharing service FilmLoop launched one year ago, Michael Arrington said it was going to be a winner. One year later the company will launch a new version this month that lets users add text, picture-in-picture and graphic “tattoos”. Filmloop began as a desktop application only, but last month added the ability to embed image slide shows in web pages and and launch a full page view in any browser with a click. The fact that the company faces competition from Slide, RockYou, BubbleShare and probably others could be a sign that this is a thriving market for slide show sharing. With the release of FilmLoop 2.0 impending, it could be a good time to look at some good news and some bad news about the company.

First, a slide show to demonstrate my personal use of the product.

The Good News

• Filmloop has powerful backing, it’s received more that $7 million in funding from investors like CommVentures and Guy Kawasaki’s Garage.com.
• The fact that multiple users are able to add photos to a shared slide show is an important differentiator.
• It’s easy to link each photo to an action when clicked, so the service is loved by many eBay sellers for example.
• The company reports that 42 million photos have been uploaded to its servers by more than 1 million registered users.
• It’s a very good thing that a desktop client is no longer required for viewing the slide shows.
• The company has distribution partnerships with NASCAR and Photobucket - you couldn’t ask for better partners than that.
• There’s a healthy list of global brand advertisers.
• The Windows desktop slide show builder has basic features that are relatively easy to work with.
• Sliding pictures are intuitively pleasing.

Consider the above before you roll your eyes at the thought of a photo slide show service getting big VC bucks. If YouTube is the poster child for a growing “clip culture,” that culture plus the ubiquity of camera phones and online self publishing all combine to make a slide show service a relatively serious media infrastructure play. Hard as that might have been to believe just a few short years ago.

The Bad News

The desktop client for Version 2.0 caused me a fair amount of pain to use. I wasn’t able to resize or change the color of the text on my captions or delete frames from a saved slide show and it took me some time to figure out how to edit a project I’d already saved. There are little things that bothered me, like that the slide show builder didn’t remember my prefered layout each time I left the display page to make changes to the contents. Hopefully by the time it launches the navigation and functionality can be improved, but the preview I saw of Scrapblog at DEMO was much more powerful and usable, if not as simple. They are different products but I feel like Scrapblog is a more appealing way to tweak and share photos.

It’s not clear why there’s a desktop presence at all, other than to push photos to the desktops of family and customers (for branding use). The company said when it launched that it would offer a Mac version in 2005 and that hasn’t happened.

There’s a catch 22 at work when the new version seeks to enable both embedding into web pages and the addition of relatively small graphic details. As you can see from my example above, the small items added to the basic photos are frustratingly unclear at a certain size. Click on that slide show for a full screen view and they look much better, but I think FilmLoop may be flirting with one of the basic boundaries of the medium. In order to be useful a widget has to be small, but it’s a real challenge to integrate a full frame photo and any number of small elements in such a small space. After working with it for awhile I feel like this is less of a problem than I did at first, but I do want to keep a limit on the space I give any widget on a website.

I think this is a strong company even though the market is crowded with photo slide show services. There’s more good news here than bad by a long shot. Many of the changes in Version 2.0 are much needed, but I hope that the graphics and text adding features come out of the gate at launch stronger than they are today.

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FilmLoop (profile) has a 6 minute video of the founders demo’ing their product on the DEMO website.

It looks pretty slick. And a lot like Slide.

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Company: FilmLoop
Launched: Private Alpha
Location: Palo Alto

FilmLoop is a winner. You can quote me on that. There are obvious similarities with Slide, but FilmLoop is different.

As noted by Dave Winer this morning (he told me yesterday something cool was launching today), FilmLoop took another step clser to launching, replacing a nondescript “sign up here” page with a full description and demo of their soon to be released product.

Full details can be seen in their brochure here.

Introducing FilmLoop, a visual communications network that uses client-server architecture to provide direct, real-time, and bi-directional updates to the user’s PC desktop. Strings of images called “loops” move across the desktop screen to tell stories, showcase products, communicate ideas, and build brands. For businesses, FilmLoop is a direct real-time connection to consumers’ desktops. For individuals, it’s a new way to instantly express oneself and share images with friends, family, and colleagues, as well as continually monitor activities such as online auctions and dating postings.

Creating and viewing loops requires a client download. Creation looks to be simple - drag and drop pictures and images into your “loop” (I’m assuming they’ll have an API for this as well). You can send your loop to people (I’m thinking it’s an excellent way to share photos among family members). Public loops can also be searched for and subscribed to from the site.

And multiple people can add pictures to a loop. And “With a simple click, frames can open to a zoom view, link to video, audio, flash, or directly to “click to buy” or “bid” page on any website. Open to a zoom view, link to video, audio, flash, or directly to “click to buy” or “bid” page on any website.” Obviously there is a business angle here as well.

FilmLoop will launch for windows only, with a mac version to be released this year.

Founders

Kyle Mashima
Prescott Lee

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