“Why do you need money from me when you have every great investor on earth?” That’s the question that caused Backplane to buckle under the weight of its own early buzz. Lady Gaga’s social network builder startup has run out of money, gone out of business and sold its assets to a group of previous and new investors who will try to restart it. That’s according to multiple sources, the legal firms that handled the sale and its former CEO.
Backplane’s legacy will serve as a warning of the dangers of fundraising at too high of valuations with exploitative terms in party rounds where no investor takes responsibility. The company is also emblematic of the trouble caused when lavish lifestyles drive up burn rates and bleed companies dry. Five years and $18.9 million later, the two issues combined to destroy the startup.
Founded in 2011, Backplane raised a Series A of $12.1 million in 2012 from the top venture capitalists in Silicon Valley. Sequoia, Google Ventures, Founders Fund, SV Angel, Greylock, Menlo Ventures, Formation 8 and Eric Schmidt’s TomorrowVentures all poured money in at around a $40 million valuation. That was despite basically just being a fan site for Lady Gaga with hopes of launching social networks for brands. It eventually raised $5 million more.
But after three years of jet-set founders running two fancy offices, the company had failed to make progress on product and I reported multiple sources saying the startup was crashing. Backplane tried to pivot into Place.xyz, cutting its burn rate $160,000 per month, bringing on new CEO Scott Harrison and restructuring as a self-serve social network maker mobile app. It grew to 15,000 communities and planned to build apps for Burning Man and LSU.
Liquidation preferences vaporized Backplane
The problem was that Harrison says the big-name VC money came with tough liquidation preferences that would give those investors returns first if Backplane had a successful exit.
When the cash recently ran out, the firms wouldn’t put more in, and their reluctance and the bad deal terms scared away new investors. Harrison tells me my article on the company’s previous stumbles also hurt its fundraising abilities. A Chinese backer was supposed to spearhead a $2.5 million round to keep the startup alive, but they dropped out last-minute.
Backplane went belly up.
A source says Backplane defaulted on loan obligations to lenders, and Sherwood Partners confirms it worked with the company to sell its assets through Dorsey & Whitney LLP. The law firm confirms to me that the business shut down and all the assets were recently sold to investors with plans for “restarting the concept” of Backplane.
A source provided this notice of the sale of all of Backplane’s assets, including patents, software, code, office equipment, trademarks, URLs and other intellectual property.
Time to sober up
Harrison explains, “Essentially, a number of the Series A investors have started a [new company] to continue the business. They are investing to get the business started and a couple of new investors have come on board to provide additional seed funding. The goal is to restart with a clean cap structure, great product, strong partnerships, great team and lean business.”
This restructuring could let the VCs save face, and potentially get a second shot at earning off the money they already sank. But now, without the baggage of the original funding structure, Backplane/Place is more attractive to investors.
Harrison notes, “The system continues to operate and efforts are under way to continue business operation and release a number of new apps. Partners like Gaga and others will become paying clients and not simply strategic partnerships.” Place is still in the app stores and some of the communities are quite active, yet it’s unclear who will run the company.
The Backplane tale shows how much can change in startup land in just four years. During Backplane’s heyday, VCs were willing to throw big sums and valuations at unproven companies. Few winced as lean teams ballooned in plush offices, and founders flew to conferences and events instead of building products.
If the implosions of Backplane, Clinkle and Famous are the brutal hangover from those frothy times, hopefully they’ll teach the industry to sober up. But as with every drunk, “Never again” often quickly turns to “Another round!”
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