FilmLoop Betrayed By Investors?

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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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