Crime Scene

There was a crime committed last night, and the victim was the Los Angeles startup ecosystem. At the 10th Annual Venture Awards Dinner hosted by the Los Angeles Venture Association (LAVA) Viddy was nominated for and then awarded the prize for “Best Software Funding” of 2012.

For those paying attention, this deal was not something to be celebrated. The fact that LAVA, an organization comprised more of service providers than prominent venture capitalists or successful entrepreneurs, thought otherwise is a disgrace and shows just how out of touch the group really is. I’m told that the crowd in attendance reacted with a shock at the announcement, and that Viddy President JJ Aguhob appeared embarrassed when accepting the award.

Viddy stormed out of the gates early in 2012, riding a wave of Facebook Open Graph traffic to more than 30 million monthly active users. With no business model in sight, but with the ink barely dry on Facebook’s $1 billion acquisition of Instagram, the young startup closed a frothy $30 million funding round at a $370 million valuation. The round was led by NEA – an out of town investor whose biggest consumer win in recent memory was Groupon – and included a cadre of Hollywood celebrities hoping to ride the next hot company.

While on the surface this looked like a huge win for the company and the up-and-coming ecosystem, it was really a death sentence in disguise.

Shortly after the deal closed, Viddy and others in its category saw traffic plummet, partly due to changes in the way Facebook drove traffic to the services, and partly because “Instagram for Videos” proved less sticky than “Instagram for photos.”

The problem with raising funding at such an inflated valuation is that it sets an impossibly high bar for success. By virtue of the $370 million valuation, Viddy obligated itself to achieve an exit valuation in the neighborhood of three quarters of a billion dollars or more. At the same time, the company attracted an enormous amount of unnecessary scrutiny and set enormous expectations, despite the fact that it had no path to monetization.

Worse yet, we later uncovered that the bet-the-company July financing came at the expense of a nine-figure acquisition offer by Twitter. Shortly thereafter, Twitter acquired Vine, a pre-launch Viddy competitor that has since been eating its lunch. This decision, combined with loss of traction and internal strife led to the recent ouster of founding CEO Brett O’Brien.

Sadly, the splashy headlines around Viddy’s financing, and LAVA’s insistance on rewarding them, steal the spotlight from the more diligent LA-based companies. Among the obvious worthy candidates overlooked are textPlus, Maker Studios, SteelHouse, ZEFR (fka Movieclips), SHIFT (fka Graph Effect), and others. (Several of the aforementioned companies were winners in other categories.) If LAVA thinks the market should be known for Viddy, that’s not a good sign. It’s not surprising that one leading VC told us on the condition of anonymity that they actively avoid the association. You’d never see even the most out of touch organization in the Valley honoring, say, Color or Airtime for the rounds they raised. It speaks to a lack of sophistication and is something that needs to be called to attention.

The rapid unraveling of Viddy and other much-hyped companies has been a weight hanging around the neck of the ascendent LA startup ecosystem. That the powers that be at LAVA either didn’t know any of this, or decided to ignore these facts in celebrating this transaction, is an embarrassment. There has been far too much blood, sweat, and tears spilled by local entrepreneurs and investors alike for this to happen.