Company make Flikr knock-off.
Company valued at $3 million.
Company raise $11.5 million in venture capital.
Company go boom when venture capitalists want out six months later.

A great debate about the situation can be found here. Some facts not included in the original blog article:

• FilmLoop had been trying for 1.5 years to come up with a viable revenue model for their product. This is longer than the six month timeline given by TechCrunch.
• FilmLoop’s monthly revenues were $20k, while their burn rate was $600k per month and founders refused to take cuts in salary.
• ComVentures was a minority investor, and abstained from the original vote to sell FilmLoop.

The most important thing to remember when arguing about what when wrong with respect to the FilmLoop-ComVentures deal is that venture capital financing is a two-way street. Arguing that ComVenture had implicit obligations that were disregarded, or that the fledgling startup “deserved” a big payday because it had gumption, or even that ComVentures got the better deal while FilmLoop got the worse, are all based on overly optimistic and romantic notions of the startup dream.

First of all, all negotiations between ComVentures and FilmLoop were explicit; documented and ratified by all parties involved. There are no implicit bargains made when $7 million is on the table. A deal with a venture capitalist is not a marriage – they are not with you ‘for richer or for poorer.’ Many comments about the case indicate that FilmLoop was struggling to keep budgets under control, to bring in new users, and to meet product milestones. At this point, it is in everyone’s interest (with the exception, it seems, of the founders) to scrub the deck, sell the boat, and jump ship.

Secondly, many are quick to call the end result “evil” because the venture capitalists are “big, powerful bankers” and the founders are “small, weak dreamers.” We see these passionate reactions because of an over-optimistic attitude about the startup dream. The expectation that every startup that gets venture capital is en route to a jackpot payoff is ridiculous. At least FilmLoop went as far as it did, and success is not simply a matter of choosing a nice investor who will stick with you despite your faults.

Thirdly, FilmLoop is a small company imitating other offerings. Small startup websites like this are a dime a dozen, and their proprietary technology is nominal. Basically, ComVentures paid for six months of development and testing of FilmLoop’s product (if you will go so far as to call it that – many call it a feature) before selling it to another company in its portfolio. This is the “best worst” situation for ComVenture and probably for FilmLoop as well, because as one commenter mentions, FilmLoop was a clone operation with a small user base and relatively high costs (spending $8MM in a few months seems rather pricey for a photo slideshow widget).

Finally, TechCrunch makes it look like ComVentures used a legal loophole to sell the company. The truth is, as a major investor, ComVentures bore much of the risk and therefore cast many of the votes. Furthermore, we know that ComVentures had the rights to do what they did because they did it. If ComVentures had drag along rights or other controlling options, FilmLoop would have already agreed to them upon signing their term sheet. VCs have a duty to their shareholders, and ComVentures was obeying that duty.