Filmloop's demise, the reputation of VCs, and how you can help

UpdatedThe details of Silicon Valley photo-sharing company Filmloop‘s quick, and strange demise continue to dribble out — and the story carries lessons for the first-time entrepreneur.

Yesterday, we’d referred to an apparent move by venture capital firm ComVentures to take remaining cash and assets from Filmloop, and give them to another of its companies, Fabrik.

We’ve contacted ComVentures for comment, but haven’t heard back (Update: We’ve since heard back; see below). Representatives at Fabrik declined comment yesterday.

Mike, at Techcrunch, has done a good job piecing together the story. The take away: It is a reminder about how quickly things can turn south. Filmloop raised $7 million from ComVentures in May of last year. Nine months later, with $3 million reportedly still in the bank, investors shut it down. We don’t know the full story yet. A couple of venture capitalists have responded to Techcrunch’s story, and their comments suggest this was a case of simple failure by Filmloop. Yet big questions remain. VCs have a lot of discretion about when and how to shut down companies. If they have enough ownership to make these decisions, it is legally their right to do so. However, VC reputations in Silicon Valley can be fragile. Moreover, putting pressure on a company to sell by a certain date, as reportedly happened at Filmloop, can create all kinds of distorted decision-making.

ComVentures, for its part, is reportedly not doing that well. We wrote about the string of departures at the firm.

And is there a pattern developing, of strong support and then cutting and running? Note the example of Firefly Mobile, the company where ComVentues Roland Van Der Meer was on the board of (he was also on the board of Filmloop). In July last year, he is bullish on Firefly, after helping pump in at least $26 million in late 2005. He promised “exciting” news. Then, strangely, three months later, in Oct, Firefly is restarted, and ComVentures has pulled out. And there was Nishan Systems, where certain actions by ComVentures, and Van Der Meer again caused an entrepreneur to lash out and fight back. We reported on that story at length (and the complaint is worth reading; see link above). The entrepreneur reached a settlement, and it marked the beginning of a string of such efforts by other entrepreneurs in Silicon Valley to fight back against investors — something that has been rare until recently. We don’t want to unfairly criticize individual investors, and don’t have all the facts yet. Moreover, they may be facing their own pressure from their own investors, which may be the case at ComVentures.

[Update: We just heard back from Roland Van Der Meer, who has very different side of the story to each of the cases above. First, in FilmLoop's case, another investor first suggested the sale (Van Der Meer didn't say who it was), and ComVentures didn't have a controlling stake. After pursuing three different business strategies, and still failing to get customers, FilmLook's future looked dire. So the decision to sell was made, and the management team participated in that process. They found no buyers. Second, in the Firefly case, Van Der Meer says that company burned through lots of cash, and ComVentures decided it couldn't continue supporting it at that rate. The best thing to do was to get the company restarted, and funded again by other investors, which happened -- so it was favorable outcome, not a bad one, he said. His comment to PaidContent, dated July 2006, pledging "exciting" news, which we linked to above, was made after ComVentures had stepped out, and referred to the company's pending restart, he said. Finally, in the Nishan case, Van Der Meer, who had never returned multiple requests for comments during our reporting of that story, finally gave his side of the story. The details are complex, but he says the firm had carved out 15 percent of the Nishan sales price for common shareholders, which translates into $12 to $13 million. The entrepreneur had wanted $10 million of that, which was too much. He was thrown out of court several times, before there was a settlement that gave $3 million to the entrepeneur, Aamer Latif. Thanks to Roland for being candid with his version of events. We plan to sit down with him further to discuss other issues, regarding the firm's performance, and will update as necessary.]

VentureBeat will try to be a resource going forward on the reputation of firms, and the sorts of pressures they are facing. We have already started this with our VentureBeat People, where we have opened up a comments section for the Midas List of investors. See “Midas List” tab at top of VentureBeat homepage, or see here. We’ll be opening up comments on other investors shortly (we’ll let you know when). This is where you guys can help. If you’ve got any insights on a particular investor, please let us know by adding a comment. Note that Michael Rolnick, of ComVentures, is the Midas List’s #98 investor — so at least Rolnick must be doing something right. Please keep your comments fact-based. They can be critical, but please keep things constructive and civil, so others can learn.

Update II: Alex Haislip of PE Week has followed up on this with a lengthy piece based on interviews with both sides. It suggests FilmLoop’s team had a gun to their head to sell very quickly. Globespan had a greater percentage ownership than ComVentures (which we’ve confirmed), though Filmloop co-founder Prescott Lee says ComVentures led the push — in part because Globespan’s partner responsible for the investment was no longer involved. Here are the notable parts from Haislip on the forced sale:

…Lee says Roland Van der Meer, the ComVentures partner responsible for the deal, met with him at the beginning of November to discuss the redesign. Van der Meer said positive things about it, Lee recalls. Then, at the end of the month, Van der Meer came back to Lee and called for the company to be shut down, Lee says. “He did a complete right turn where he said he wanted to sell the company by the end of the year,” Lee says of Van der Meer. The founders were not pleased with this turn of events. “We thought it was kind of ridiculous to try to sell the company in the month of December,” he says.

Lee immediately cut costs, reducing his staff from 30 full time employees and contractors down to 10. The company could have run for another year, even before the layoff, based on its burn rate at the time and the cash it had on hand at the time, Lee says…Van der Meer was adamant about getting the deal done before the end of the year, Lee says. The rush precluded some potential acquirers from doing the deal and led to a poor valuation of the company, Lee says. “There were a number of interested parties who said they wouldn’t close before the end of the year,” Lee says.