A lot of you have been writing in to ask my take on the FilmLoop situation, in which one of its VC backers – ComVentures — allegedly engineered a company liquidation by having it get acquired by another one of the VC firm’s portfolio companies. Questions about self-dealing, ethics, actual facts, etc. Oh, and TechCrunch’s Mike Arrington called the move “evil.”
I won’t go nearly as far as Arrington, but will say that what happened here simply was not right. A venture capital firm’s primary obligation is to its limited partners, and some sources have suggested that ComVentures was under LP pressure to “clean up” its portfolio. Fine. But VCs also have a secondary obligation to their entrepreneurs – when you give your money, you’re also pledging support (not just financial). The FilmLoop situation was not one in which the company’s only two choices were new VC funding or instant demise. Instead, company co-founder Prescott Lee told my colleague Alex Haislip that it had already made layoffs and had enough cash on hand to operate through year-end. In other words, it could have survived at least a bit longer.
So what should ComVentures have done, when its primary obligation to LPs came into conflict with its secondary obligation to entrepreneurs. The answer is that it should have worked harder to resolve the conflict. Here’s what I mean: FilmLoop met with around a dozen potential acquirors, but Lee claims that many could not meet the year-end deadline insisted on by ComVentures (which he feels controlled the board in spirit, albeit not in seat number). The result was just two offers – from ComVentures portfolio company Fabrik and a lower one from company management – at an artificially low valuation (due, again, to the time constraint).
If this account is accurate – and there is admittedly some he said/he said here – the reality is that ComVentures shirked its support for the FilmLoop founders. They deserved a bit more time to find a buyer, particularly considering how hard it is to get anything done near the end of December.
Anyway, be sure to read Alex’s piece…