CEO Scott Cahill confirmed the shutdown yesterday in an email to investors, saying that Hercules had “foreclosed on its collateral and has sold the company’s intellectual property to a third party”:

From: “Cahill, Scott”
Date: Wed, 3 Jun 2009 16:42:29 -0400
To:
Subject: Final Kadoink Update
Dear Angel Investor:

This is the final update on Kadoink. On Friday, May 30th, Kadoink completed the sale of its assets. As the attached letter indicates, the company contacted over 600 parties to determine interest in an acquisition of the company’s assets. Of those, 22 expressed interest. Following a due diligence period, the Company received 6 bids for the acquisition of the Company’s intellectual property. Unfortunately, the highest offer was insufficient to pay the company’s secured lender in full. The company’s secured lender, Hercules Technology II, L.P. and Hercules Technology Growth Capital, Inc. has foreclosed on its collateral and has sold the company’s intellectual property to a third party. While the details of the transaction between Hercules and the buyer are subject to a confidentiality provision, the company can assure investors that the purchaser is not an insider and the transaction was arms-length.

The Company’s inability to pay its secured creditor in full means that that the Company, with certainty, is unable to make any payments on the general unsecured claims against it. Additionally, investors will receive no return on their investment. The company will be dissolved under state law. Please consult with your tax advisor regarding how you, or your organization, should handle losses arising from the closure of the company.

On a final note, I regret that we were unable to return at least some portion of your investment to you. While we were optimistic at the start of the process that this might be achievable and we were ultimately satisfied with the size of the top bidders given what we learned over time regarding sales such as ours, it is disappointing nonetheless.

I wish you all the best in your future endeavors and investments.

Best Regards,

Scott

Venture debt looks extremely attractive when things are going well for a startup. The dilution to shareholders is minimal, usually just some warrants attached to the debt. It can make a lot of sense to raise debt when building out infrastructure, particularly since the debt can be secured against hardware being purchased.

But the terms of the debt are key, particularly under what circumstances the creditor can come in and shut down the company. Many creditors look for triggers in the financial statements that give them the right to seize assets. That’s likely what happened with Kadoink, and it’s a sad way to end a company that may still have a shot at doing something interesting. Smart entrepreneurs only accept debt agreements that require nothing but payments to be made on time. As long as those payments come in, the creditor has to stay away. Terms are usually less attractive, but in the end it may save you from the deadpool.

Crunch Network: CrunchBoard because it’s time for you to find a new Job2.0

The company has announced just $5 million in funding from Sutter Hill Ventures, but they may have burned through substantially more than that. There was rumored to be a previous angel round of nearly $2 million, and the founders took $3 million or so off the table in 2008. Sutter Hill may also have bridged the company an additional $2 million Along with the venture debt, the company may have raised as much as $14 million in capital. At this point, all equity holders other than the cashed-out founders are wiped out.

The startup provided text messaging based marketing services on behalf of brands, similar to competitor Mozes. We’ve added it to the deadpool.

Crunch Network: CrunchGear drool over the sexiest new gadgets and hardware.

If it seems like everybody is starting their own virtual world, it is because they are. A report put out today by Virtual Worlds Management tracks $161 million put into 14 virtual-world investments during the second quarter of 2008. In the first quarter there was even more activity, with $184 million put into 23 virtual worlds and supporting technology companies. That brings the total this year alone to $345 million across 37 deals. Some notable deals (you can see the full lists by clicking on the last two links above):

Second Quarter 2008

Grockit——————-MMO Learning Game——-$8 million——-Integral Capital and Benchmark

Nurien Software——–3D social networking——-$15 million——-Northern Light, Globespan, NEA

PrimeSense————-Gestural Interface———-$20.4 million—–Led by Canaan Partners

Realtime Worlds———-MMOG Developer———$50 million——–Maverick Capital, NEA

Stanford Parallel —-Parallel Processing————–$6 million——-Sun Microsystems, AMD, Nvidia, IBM,
Processing Lab for Virtual Worlds HP, and Intel

Turbine———————-MMOG——————-$40 million————–Time Warner and GGV Capital

First Quarter 2008

9You———–Virtual World/Casual Games——$100 million——–Temasek Holdings

Dizzywood —————Youth World————— $1 million——-Shelby Bonnie, Charles River Ventures

EveryScape————— Mirror World————–$7 million——–Dace, Draper Fisher Jurvetson

Fix8 ———————- Avatar Content————$2 million ——–SK Telecom

Gizmoz ——————- Avatar Creation ———- $6.5 million——-DoCoMo Capital, ngi group

iOpener ——————–Mixed Reality ————-$6 million———Triangle Venture Capital

Sparkplay Media——Casual MMO with Games—–$4.25 million—–Redpoint, Prism Ventureworks

Unisfair ——————–Virtual Events Platform—–$10 million——-Norwest, Sequoia Capital

Crunch Network: MobileCrunch Mobile Gadgets and Applications, Delivered Daily.