All right, technically, I have not been there or done that, but I have seen it, in fact, we all did.
Tech Crunch’s Michael Arrington - who along with Rafat Ali of Paid Content - cleary does not sleep, eat and seems to be on every imaginable story, ever, writes about the “evil” actions of a VC, Comventures, pertaining to one of their portfolio companies. For all of that, and the follow up posts, click here.
I certainly do not know people on either side (VC, company 1, company 2) but I would say this:
- Once you raise money from active (or even to some extent passive) VCs, you lose control in the sense that yes, they can fire the founders and shut you down.
- I am not 100% clear on filmloop’s business model, but 2006 might have been the giddy year of all things Web 2.0, but very few consumer companies need $12.5M in financing in the initial year of their business. The fact that this happened over two rounds and now was shut down/folded into another portfoltio company suggests that Comventures was throwing good money after bad.
- While a lot of people are crying foul and calling Comventures “conventures” I think that is missing the point: $12.5M is a lot of money for a company that probably has no path to revenues let alone profits.
- I wish everyone well and would love to see the forced out executives at filmloop bounce back quickly, but let’s just brace ourselves for many more of these stories because VCs really put a lot of money in stinkers last years. A stinker is relative, some people might say my company is a stinker, that’s fine and dandy, but the point is until you have some traction, some semblance of a business model, and some leverage in talks, don’t raise a mammoth round because you will lose control.
In other words, we’re seeing a smaller repeat of the fallout that took place in 2000, 01, 02, 03, when some VCs and public investors threw in the towel with companies that had no reason to be around.
Most of these Web 2.0 companies are in fact features or applications, and many of these face well entrenched competitors. Say you are #1, 2 or even 3 in a market, you might have a chance to last - if you did not raise $5-10M! If you did, you need to be #1, or at the very least #2, but if there are a handful of competitors and what you have to offer is a “mere” application, then guess what, this will happen.
I see companies with a business model and traction rise to the surface, and me-too, hype companies seeing the rug pulled out from beneath them. I am NOT referring to filmloop, I am commenting on the overall market.
In 2000, we saw this at my old company: one day we got to work and our #1 competitor, Boston-based, Highland Capital-backed TheMan.com shut down, after raising $17M. We became the #1 player by default. We worked hard, don’t get me wrong, but the insatiable greed and ill-advised investment of others helped us.
That is what we are seeing today. Last year people thought we were crazy for not being too Web 2.0 enough. This year I think they realize the method to the madness.
For what it’s worth, filmloop’s founders have learned a valuable lesson and we wish them the best. In fact, they are more than welcome to drop us a line if they are considering all of their options as we are growing and looking to expand.
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