The past couple of days have had lots of chatter about the demise of startup company FilmLoop.  You may not have heard of FilmLoop, and frankly it doesn't matter (they created Web-based slideshow software.)  Their story does matter, and is a cautionary tale of what happens when your investors turn sour on you.

The Short Version

Both TechCrunch and VentureBeat have created some timelines about FilmLoop and what happened.  I would highly encourage you to read both the posts and the comment threads thereafter - they are highly educational.

The short version is that they took on multiple rounds of funding, burned through most of their cash, and ended up in a fire sale to another company within about 24 months.

What Matters is why this Happened

FilmLoop was not a victim here.  They did not get closed down because "evil investors" did bad things to the company, although the stories you read may appear that way.  FilmLoop failed because they did not deliver on a promise they implicitly made to investors - creating value.

You are either Creating Value or Losing it

When you take money from an investor, you owe them a return... a big one.

Statistically speaking, you're probably not going to make good on that promise.  If 1 in 20 investments are a big hit, the chances are yours is going to be a failure.  Most investors realize this, although they have to treat each deal like that one is going to be a hit.

If an investor has to manage 20 companies, or even 5, they need to cut their losses on the "losers" and focus on the winners in order to get ahead.  If they don't, they run the risk of losing all of the money they have raised from the investors in their fund.

If you're not creating more value for investors, they have no real option but to cut you loose, which means folding the company, or in this case, selling it to another portfolio company at fire sale prices.

Reality Bites

Most people associate finding an investor with a road to success.  Incidentally this myth is perpetuated not by other entrepreneurs, but investors who like to champion the companies they have successfully invested in while ignoring the legions of companies they have abandoned.

Yet if you're going to take on any investor, whether it's a family friend or a leading venture capital firm, you need to realize that you have made a promise that must be kept - or else.