Behind WPP's Legal Assault on Spot Runner

Holding Company Files Suit Claiming Start-Up Did a 'Pump-and-Dump'

By Published on .

A correction has been made in this story. See below for details.

NEW YORK (AdAge.com) -- Few venture-backed start-ups of the past decade flew higher than Spot Runner, which raised $101 million since it was founded in 2004 and assembled an all-star roster of investors including two advertising holding companies (WPP and Interpublic), two TV networks (CBS and Televisa), and a host of big names such as Bob Pittman and News Corp. scion Lachlan Murdoch.

Along the way, the company generated headlines by the bushel, bought two companies and helped launch another, hired at least 500 people, and ran through three business models. Now, running low on funds and in the teeth of a recession, Spot Runner is reaching the end of its road. Why, then, would one of its biggest-name investors, WPP, want to kill it off?

SORRELL: Invested in Spot Runner though its 'self-serve' concept was unpopular.
SORRELL: Invested in Spot Runner though its 'self-serve' concept was unpopular.
Spot Runner is a tiny part of the $1 billion WPP spent building its digital portfolio in the past three years. It acquired ad server 24/7 Real Media and digital agency Schematic and invested in start-ups such as VideoEgg (also on at least its third business model) and a number of other companies that are, like Spot Runner, attempting to reinvent TV advertising -- including Visible World and Invidi Technologies, which has WPP media-investment unit Group M CEO Irwin Gotlieb on its board.

Earlier this month, after nearly three years as an investor, WPP dropped the equivalent of a nuclear bomb on Spot Runner that could well vaporize any potential it has left. WPP filed a lawsuit claiming Spot Runner founders and venture-capital backers perpetrated a "pump-and-dump" scheme in which the founders used WPP's prestige to bring on additional investors while they took $54 million out of a company that managed to lose $80 million in 2007 and 2008, bringing in just $14 million in revenue.

In suing for $13.2 million, WPP is attempting to recoup only its initial investment -- $11.8 million from two rounds of funding -- but by attempting to do so in court, WPP certainly prevents Spot Runner from raising additional funds and threatens what appears to be Spot Runner's last shot at the kind of game-changing product its investors initially hoped for: an automated TV- and video-ad-buying platform and exchange dubbed "Project Malibu."

Repudiation
Spot Runner is already feeling the effects. Once, JWT CEO Bob Jeffrey said the agency would offer Spot Runner's platform to its clients, but only one program ever ran, and now JWT and several other WPP agencies deny having any relationship with Spot Runner. The suit, and its salacious allegations, also hit as Spot Runner pitched in the final rounds for VistaPrint USA, a Massachusetts maker of printed products for small businesses and consumers with a $20 million media budget.

The suit is also about the go-go Web 2.0 boomlet and the style of Spot Runner's co-founder and CEO, Nick Grouf, a Web 1.0 success story who sold tech company Firefly to Microsoft in 1998 and People PC to Earthlink in 2002. Mr. Grouf brought in investment from companies that could also be make-or-break partners for the company, such as WPP. Now that strategy has backfired, as an entire advertising holding company, along with the biggest media-buying unit in the world, effectively swears off doing business with the company.

Even Mr. Grouf's critics concede there is a great need, and potentially a big business, for whomever figures out how to automate and streamline TV advertising. The question is whether anyone in the industry wants Mr. Grouf to be the guy to do it. "Look, he's drilled a few dry holes, but this is wildcat speculation," said one early personal investor who asked not to be named. "This is the nature of venture investing; it's the riskiest kind of investment you can make."

The relationship with WPP was strained from the first pitch meeting. The company was initially conceived -- and marketed to WPP -- as a self-serve platform for local businesses to buy off-the-shelf creative and place local TV ads -- in other words, showing TV advertisers they didn't need an agency, which more than ruffled a few feathers. Chief Executive Sir Martin Sorrell invested anyway, against the (private) wishes of many of his portfolio companies, but disillusionment came quickly.

The relationship took a turn for the worse last January when the company claims it began to hear "rumors" of insider stock sales. This was about the time the bottom fell out of the local-ad market.

Meeting expectations
"They went after the local-ad market and did a pretty good job hyping that, and then it turned out the hype was bigger than reality," said Spark Capital partner Todd Dagres, a former partner in Battery Ventures, which is named in WPP's suit, and also an investor in a fund that holds Spot Runner as a portfolio company.

So Spot Runner retooled and hired a national sales staff, including former MTV and IPG veteran Mark Rosenthall and former Microsoft sales chief Joanne Bradford. But that wasn't going to be enough to justify the level of investment -- and expectations -- so Mr. Grouf and Co. conceived of a technological platform for buying video ads on TV or online.

Dubbed "Project Malibu," the system is supposed to automate the buying and insertion of video ads on TV and online, as well as act as an exchange for video spots. Since August, Spot Runner has slashed headcount to about 120 from nearly 500.

Both Mr. Grouf and WPP declined to comment for this story.

Will WPP win its claim? Much will depend on what the documents say and whether WPP can prove it was not notified that the founder's stock sales were taking place. Spot Runner claims the founders sold the shares to allow new investors to come in without diluting stakes held by existing investors (including WPP). The company also says that despite the sales the founders and their venture backers still retain a controlling interest in the company.

But WPP said that had it known of the sales, it would have "reconsidered" its initial $10 million investment in 2006 and "would not have purchased" an additional $1.8 million in shares the following year.

'Ticklish' situation
Then there's the issue of timing. "At the time they took the money out did they know there were going to change their business model, lay off 60% of their work force?" Mr. Dagres asked. "If they did know that and can prove they knew all that, then that could be ticklish for them."

It's worth noting that not all of Spot Runner's backers are unhappy. "I have been an investor in Spot Runner since 2006," said media investor Vivi Nevo. "I have great confidence and faith in the company, its board and in Nick, and I look forward to a long and fruitful partnership."

Spot Runner is plowing ahead with "Project Malibu." Already in development for more than a year, it won't be ready until the end of summer. Tim Hanlon, managing director of Publicis Groupe digital unit VivaKi, said one thing for Mr. Grouf and Spot Runner: They're still thinking big. "They are trying to create a media buying and selling marketplace -- that's a grand idea, and many have died trying."

~ ~ ~
Rupal Parekh contributed to this report.



~ ~ ~
CORRECTION: An earlier version of this story incorrectly spelled Bob Jeffrey as Bob Jeffries. We regret the error.
Most Popular