Logia Group
eSnips

eSnips: A Story of Hearthache (For Its Founders, Investors & Employees)

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Prologue:

Three years ago when Web 2.0 began proliferating, Israeli startups used eSnips as the poster child for their case that a successful social network could be founded in Israel.  Based on the criteria in those days, eSnips was in fact delivering: It was able to convince top tier VCs to buy into an advertising-based business model, it leveraged user-generated content (the main activity is sharing personal media), used free storage as a hook, traffic was rising steadily, and it became a press darling domestically and internationally. As we say in Israel, “It was all honey”.

Now fast forward to Q4 2008. A shell of its previous self, eSnips is now a startup train wreck: Founders divorced and dismissed, threatened by litigation courtesy of a record label and, with no possibility for further funding, the company was unloaded for approximately $750,000 to the Logia Group.

In the past three months I have spoken to a number of sources close to the company and have managed to reconstruct the circumstances that brought the company from its zenith, to its nadir.

The fall of eSnips is a story of heartache that is intertwined, unfortunately, with the destruction of a marriage.  All startup co-founders feel like married couples from time to time, but when they actually are married it can add to the level of stress and the complexity of running the business.   As I relate the events that led to the company’s current situation below, I’ll do my best to stick to the business issues at hand.  But the line between what is business and what is personal can sometimes get messy, especially with startups.

Episode I: Heartbreak Hotel

One of the worst kept, but most respected secrets in the Israeli startup scene was the marriage that fell apart between eSnip’s CEO Yael Elish and her CTO husband Alon. When Yael left the company, the local press didn’t publicize the real story. We also covered the drama, noting the explanation given for her departure was “personal reasons”.

The trouble at eSnips began around October 2007 when Yael began to spend more and more time out of the office. Employees perceived this as having to do with activities related to a second round of financing. By December it became evident that this had more to do with a deterioration in the couple’s relationship. (I have tried to contact her for comment and will update the post if she responds).

The meltdown had the greatest impact on Alon, who as one source close to the company put it “was clearly unable to work after the mid-December announcement [with media coverage alluding to the personal crisis] and some days came in, others not.” An awkward situation ensued and confusion among employees grew in regards to the company’s future. This had a clear and immediate effect on the company’s day-to-day operation. As the same source put it “All work just stopped.” Technologically no one picked up the slack and no new development took place. eSnips entered a maintenance “steady state”.

Between October and December the company re-ignited its fundraising activities to correspond with the release of its “Social DNA” feature. I happened to have attended the release party and clearly remember a very odd vibe on the part of the employees. In retrospect, I can best describe it as the collective anticipation of watching a house of cards about to fall upon itself.

As word began leaking out, VCs interested in participating in the Series B funding backed off as it became clear that Yael would be walking away. In mid-December 5 to 7 employees were let go and Yael notified the remaining employees that she was leaving eSnips. The company then embarked on an unsuccessful hunt for an external CEO, interviewing candidates from both the US and Israel.

In mid-January 2008 another group of employees were let go, leaving eSnips with a couple of engineers and a content manager in place. It was around February that Dr. Nahum Sharfman, the company’s Chairman (formerly one of the founders of Shopping.com), stepped in as CEO, cutting loose both Yael and Alon (who were still full time employees). The goal was now to cut losses and sell the company.

Episode II: Disco Inferno

In a fascinating—and until now unknown—twist in the eSnips story, the personal drama may have eclipsed a major business threat. Record label EMI may in fact have played a considerable role in the company’s demise.

While eSnips was taking measures to police content uploaded by users, certain copyrighted material ended up online. In mid-October 2007 EMI called the company on it. This could not have come as a real surprise because eSnips knew for well over a year that users were sharing a great amount of copyrighted music with each other through the service. It was right around this time that it began cracking down on the behavior by using Audible Magic’s music fingerprinting technology. As a consequence, doing so eventually had a negative impact on the site’s traffic. EMI though remained steadfast in vocalizing its discontent.

This is where things get a bit murky… I was unable to ascertain whether EMI actually sued or was just aggressively threatening the company. I was however able to learn that somewhere in the area of a quarter to a third of the final purchase price of the company was paid to EMI. This to me indicates that EMI’s role in eSnip’s implosion was not a minor one.

Episode III: A New Hope

It took nearly nine months for the investors to unload eSnips to the Logia Group which took it over on November 1. According to the individuals I spoke with, the purchase price did not exceed $750K. Now subtract a quarter to one third piped to EMI to settle its beef with the company. This leaves the investors recouping around $500K of the $5.5M poured into eSnips.

The Logia Group’s purchase of eSnips came out of left field as it is a collection of companies that mostly have to do with mobile content (see image below). If for no other stakeholder, the purchase could at least spell some new hope for eSnip’s users.  ComScore estimates the site still attracts 5.7 million unique visitors a month worldwide (as of November, 2008), down from a peak of 9.1 million last March.

I spoke to Itai Aaronsohn who will head the new eSnips about what Logia has in store for it. He communicated to me that eSnip’s basic functionality will not change. It will remain a free service with media sharing as its foundation, but will see new mobile and content layers added—both of which are Logia’s expertise.

In the short term users should expect an enrichment in the video and music departments, as well as the addition of casual games. Premium content and possibly original production will be added down the line. Users should also expect the addition of a mobile experience where access to personal media will be provided from handsets.

Epilogue:

Clearly, all was far from honey at eSnips.

There were fundamental flaws in the role that UGC, copyrighted material and advertising revenue held in the company’s overall strategy.

Then of course there was the personal drama. Some investors are principally against investing in husband-and-wife teams. eSnips sure strengthens the case. However, one can always use contrary examples such as Caterina Fake and Stewart Butterfield of Flickr, Ben and Mena Trott of SixApart, or Ruth Parasol and Russ DeLeon of PartyGaming. It doesn’t always have to go awry.

One thing cannot be argued though… Many of eSnips’ users are loyal and have stuck around through the company’s rollercoaster ride. For a great while they received the short end of the stick with no new features and little attention. Logia promises this will change, and that is as much of a silver lining as one could hope for in an otherwise sad story.

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