Dissapointment

When you raise the party round to end all party rounds – adding to your cap table investors like Jay-Z, Will Smith, Shakira, Rob Dyrdek, and Gerard Pique – people stand up and take notice. And when that $30 million round is completed at a $370 million valuation the attention is usually some combination of shock, skepticism, and jealousy.

That was the “hello world” moment for Viddy, the once ascendent “Instagram for Video” app, which at the time of this April 2012 Series B round was the No. 1 free iOS app, and which had doubled its users from 5 million to 10 million in a period of two weeks. Perhaps tellingly, the round closed just weeks after Facebook acquired Instagram for $1.1 billion.

Fast-forward 21 months, and the Venice company, which is now called Supernova, was acquired yesterday by Fullscreen, a Los Angeles-based YouTube multi-channel network. The deal was first reported by ReCode, who estimated the value as being “in the $15 million range,” a figure that a PandoDaily source with direct knowledge of the transaction calls “a fair estimate.” This source added that the payout was a combination of cash and stock that gave Viddy’s Seed and Series A investors – Battery Ventures, Qualcomm Ventures, Bessemer Venture Partners, and Greycroft Partners – a (small) return on their investment as well as some potential additional upside in Fullscreen. The celebrity investors, and their Series B stablemates New Enterprise Associates, Khosla Ventures, and Goldman Sachs were less fortunate from a ROI perspective and were lucky to get anything back.

In between raising its Series B and pulling the ripcord, Supernova turned down a potential nine-figure acquisition by Twitter, as we reported last year – they could have been Vine. The company also lost two two co-founders, as founding CEO Brett O’Brien was removed from the company by the board and Chris Ovitz left by choice to join mobile gaming powerhouse Scopely. The company recapitalized, returning to investors $18 million of the $30 million raised in its final round and resetting the company’s valuation at a more “reasonable” level. Still, with more than $18 million in total funding across the company’s three venture rounds, yesterday’s exit makes Supernova a cautionary tale.

Over the last 12 months, Supernova has continued to support its Viddy platform while introducing two new mobile experiences. Clique is a semi-anonymous group photo messaging platform that borrows its inspiration from Snapchat, but which adds some usability improvements and overall is a unique social messaging experience. Epic, on the other hand, is slow-motion video platform that makes capturing and sharing these dramatic short clips possible for all iOS users, not just those with the iPhone 5S. Both are well designed and received positive initial feedback, but neither has taken off in the way founders and venture investors covet seeing – the way Viddy once did.

Despite all the negativity surrounding Viddy, no one ever accused the company of making bad mobile products. In fact, it’s long been recognized for having one of the better mobile and video development teams in LA, and it’s little surprise they were attractive to Fullscreen. Fullscreen CEO George Strompolos noted as much, telling ReCode that he views the acquisition as one of more than talent and that he plans to utilize Supernova existing video encoding and storage technology. The company will keep the Viddy, Clique, and Epic platforms alive for the time being, he adds, while also building out new mobile experiences for the Fullscreen community.

Both Supernova and Fullscreen share a DNA of building creator communities and delivering tools that aid in this creation. The big difference is that Fullscreen grew conservatively, operating profitably for an extended period of time before raising a $30 million mega-round from the Chernin Group and Comcast.

The most obvious lesson to come out of Viddy may be to raise capital prudently. More valuable, however, is to recognize Viddy as a clear example of the risks of relying on another company’s platform as your primary user acquisition channel. Viddy’s meteoric rise to its one-time-high of more than 30 million monthly active users was fueled almost entirely by Facebook. And when the social network tweaked its News Feed algorithms and pulled the plug on this free traffic bonanza, it took down Viddy along with dozens of other companies. Sure it was out of Viddy’s control, but it was also part of a larger pattern of behavior within Facebook that should have had all platform partners on red alert. It’s fine to gobble up all the free traffic and virality that you can grab, but it’s another thing to take on a $370 million valuation and turn down marquee acquirers based on that alone.

The 12 remaining Supernova employees will join the far larger Fullscreen team, working out of the company’s Culver City office. In a town where hiring top technical talent is highly competitive, this deal could be easily prove to be a win for the acquirer. But neither company is guaranteed a positive outcome. Fullscreen is still fighting to prove that there’s a sustainable business model for MCNs, something that has been hotly debated over the last year. And the company faces its own form of platform risk, thanks to its heavy dependence on YouTube for audience acquisition and content monetization.

Viddy was pronounced dead long ago by most users and tech industry observers. Give the remaining team, led by CEO and co-founder JJ Aguhob, credit for sticking it out and making something out of a dire situation. It’s hard enough to capture lightning in a bottle once, something Viddy arguably did for a few months in the Spring of 2012. But to do so twice, the second time with all the world’s eyes on you, is a tall order.

Aguhob was quite poetic when he explained the choice of Supernova as the company’s new brand. “It’s an appropriate metaphor for the arc the company has taken to date,” he told me in the fall. “We were once burning among the brightest stars in the galaxy and then experienced an interstellar explosion.” The bit he didn’t get right, at least yet, is that that explosion would result in many new stars (new hit products).

Fullscreen is betting that that phase is still to come.

[Image via wallpoper]

  1. Fullscreen
    Fullscreen is the world's leading platform built to empower YouTube channels and networks.
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    At Fullscreen, we believe the future of video is on the web and connected devices. We built our company to help new channels and networks thrive in a digital world that looks very different than TV. Fullscreen is dedicated to empowering the content creators, networks and brands who share our passion for online video.

    1. Comcast Ventures
      Past Investor
    2. Timothy Mohn
      Employee