Rabu, 15 Oktober 2008

Digital Railroad Likely Being Liquidated

In a move that was more of a “when will it happen?” than a “will it happen?”, Digital Railroad announced today a slew of seismic changes that illustrates that the wheels of the train that went round and round are slipping off their axles. Last August, we wrote about the DRR experience - (Digital Railroad - All Aboard?, 8/20/07), and began our summary with the sentence "Digital railroad of course, must serve itself (and it's investors)", and we've been following very closely what's been happening with them. So, what now?

DRR’s investors’ final action was to move CEO Charles Mauzy from the position of CEO to just another employee (no doubt with a decent retainer pay structure) to facilitate DRR’s liquidation strategies. Mauzy just changed his Facebook profile, writing "Charles left his job as CEO at Digital Railroad." - see here. Maris Berzins, changed his Facebook profile moments ago to read "Maris left his job as President at Digital Railroad. ", followed moments later by "Maris is looking for new opportunities. " The board has now retained Diablo Management, a firm known for liquidations, to shop the entire company, as is, around, or to sell off the company in parts.
(Continued after the Jump)

Investor Mike Brooks, a general partner at venture capital firm Venrock Associates is no doubt looking at his exit strategy. Brooks previously was with Morgan Stanley & Co., where he was a managing director responsible for the firm's investment banking activities. Hmmm, perhaps he brought Morgan Stanley’s failing high-risk investment strategies to Digital Railroad?

Also assessing his exit strategy is board member Ken Gullicksen. Gullicksen is a general partner at Morgenthaler Ventures, based in Menlo Park California. His eyeballing the closest exit door no doubt comes as good news to the boards imeem, Danal, Nominum, and Voltage Security, where he also serves as a board member. More time for them - but is that a good thing?

The late-comer to the party, with series B overseas funding, was Steven Schlenker, the chief investment officer ofDN Capital Limited, where he is responsible for overseeing the company’s compliance and financial responsibilities, looking after DN Capital’s early stage investment strategy. This failed investment no doubt serves as a bit of a stumble for Schlenker, and his upstart VC firm.

One thing is for certain - This is a huge blow to Evan Nisselson, founder of Digital Railroad, and his father Peter Nisselson, whom was the principle financier during the formative stages of Digital Railroad’s inception. The elder Nisselson is the Chairman of Star Struck Ltd (OTC: SRSK), which is a publicly traded company, and he has been investing in small companies like DRR since 1982, frequently as an officer. The younger Nisselson got his start with the highly regarded SABA Press Photos back in 1993 through 1995, under the tutelage of Marcel Saba, before SABA was aquired to Corbis back in March of 2000 (AllBusiness: Corbis Acquires Saba Press Photos, InternationalPhotography Agency, 3/2/00). Prior to that, Saba headed up Picture Group, and currently runs well-regarded Redux Pictures. Last November (Stepping Down, or Stepping Up? DRR's Nisselson Makes A Change, 11/21/07) we wrote about Evan's promotion to Chairman of the Board. It is rumored that Even has been serving on the board and as Digital Railroad’s public face since last January’s bloodbath of terminations, with over half of the staff being let go, without pay, as an effort to stem the flow of red leaking from the spreadsheets over the last year. DRR was Evan's Brainchild, and while well intended, has gone awry in recent years.

With the board likely out of the way, and Diablo running the show, let’s take a look at what Diablo’s roadmap looks like. Diablo, headed up by Richard Couch, who founded the company as a liquidation specialist, has likely been tasked with a few things - get back as much of the investor’s $15M that they have sunk into the operations of DRR, is no doubt priority #1. Priority #2, which will likely come in short order, is to slash – and I mean slash – the burn rate. Looking back at the $15M that DRR received last December 31st, which was followed by the laying off of over half of the company (Digital Railroad Makes Major Layoffs, 1/10/08), the remaining half will be likely halved again, to a skeleton crew charged with managing servers, resolving member technical issues, and collecting whatever sales that the Digital Railroad Marketplace (The Marketplace is now Open, 4/11/07) has generated. What isn’t known is whether or not those sales will be distributed to the member photographers who’s images generated the sales. With the restructing last December, and the additional funds that were probably internally deemed “bridge funding”, Mauzy was likely charged with reducing the burn rate as well as continuing the growth of the Marketplace and the number of members paying a monthly fee. This would explain the challenges faced by several trade organizations that DRR has committed to sponsorships with, in securing full payments for the balance of those deals.

A reasoned look at their burn rate and $15M means that that funding is likely near depleted, so it’s reasonable to expect a very short period of time for the final resolution of DRR – no less than 30 days, and a maximum of 90, but I expect they will surely want everything either closed down or transferred to a new owner by December 31st at the latest. There is a glimmer of hope that Mauzy and Diablo will be able to find someone interested in picking up the company at a fire-sale price and retain it's normal operations, but that looks unlikely.

What would be the value of DRR’s underlying programming code (sans DRR interface) that could be repurposed? Would the sale of that core coding strip DRR of it’s core operations? At this point, that would gut DRR of it’s core, and is a highly unlikely sale – likely only in the waning days of a void of buyers. It can be reasonably assumed that the investors will never see their original $15m, but are hoping for between $5m and $10m. In this market, that’s also not likely. Capital is scarce, and getting back 50% of an investment in high tech these days just isn’t going to happen, and there’s a big “maybe” next to $5m, or a 25% salvage of the original investment.

What’s next? Well, there remains one platform in the field now (assuming DRR doesn’t remain as a platform and run by a new buyer) – PhotoShelter, who recently shuttered their image licensing operation – The PhotoShelter Collection (see PhotoShelter Collection To Shut Down October 10th, 9/11/08). If I were a Digital Railroad subscriber (and I am - Digital Railroad, PLUS, and A Stock Sale, 6/17/08), I would be making darn sure I was downloading all of my needed files immediately, if for no other reason than to have a backup of them (even if they remain in operation), but I would also be sure that any monthly or annual fees are not billing to your credit card in the coming weeks as they work to liquidate or sell.

As I said when PhotoShelter closed their collection, I am saddened by this turn of events too. I have been a supporter of both platforms, and this is one less capability that has served the photographers that used it well.

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