[Herring] Scout's investors turn on each other

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From: Rohit Khare (Rohit@KnowNow.com)
Date: Tue Oct 31 2000 - 14:07:43 PPET


VCs leave Scout to die
By Richard Byrne Reilly
Redherring.com, October 31, 2000

To outsiders, the failure of Scout Electromedia would appear to be
the result of yet another bad business plan, but the real reason is
that the investors turned on each other, according to two company

Scout's simultaneous attempt to build costly hardware while spending
heavily on marketing proved a losing formula, says a venture capital
investor who asked not to be named. And it appears that a dispute
between two of its investors about a bridge loan to keep the company
afloat was the final straw, says the VC source and Matt Fisher, a
former senior editor at the company. (Red Herring chose not to print
the names of the two alleged investors because it could not get
comment from them to confirm or deny the report.)

Investors in Scout include Idealab, Chase Capital Partners, Flatiron
Partners, and Techfund Capital. Red Herring contacted all of the
investors, except for Techfund, but all declined to comment in any
significant way.

After burning through $27 million in venture funding in just over a
year, the startup collapsed last week. Workers who showed up for work
last Tuesday at the company's headquarters in San Francisco were told
to hand in their keys and then brusquely shown the door, says Mr.
Fisher. He adds that he and other employees were not given severance
pay, but that investor Idealab is rumored to be considering giving
them exit packages.

In a bizarre aside, Scout went ahead with a lavish party in Los
Angeles a day later, because it had already paid for it, Mr. Fisher
says. The October 25 bash was attended by the likes of actress Drew
Barrymore, who, Mr. Fisher says, was visibly upset because she had
bought 11 of the company's now-useless handheld devices. He also
claims that actress Whoopi Goldberg purchased 80 of the devices one
day before the company shut its doors.

Scout produced a wireless device called Modo, a Palm-like gadget that
worked as a city guide, sending users updates about movie times and
giving them access to restaurant listings. Listing for $99, Modo
debuted in three U.S. markets, selling from shelves at outlets
including Virgin Megastores and Fred Segal. It was a hit at the Demo
Mobile conference in Pasadena, California, in September. About 3,000
were sold, according to a venture capital investor who asked not to
be named.

What recourse do the purchasers of those devices have? Red Herring
contacted Scout CEO Geoff Pitfield on his cell phone, but he would
only say: "I really don't want to talk to you about this," then hung
up. Other official company spokespeople did not return phone messages.

"The management team was young and inexperienced, and there weren't
that many investors to begin with," the VC source says. "Besides, the
capital market is now pretty tough, and when you spend tons of money
on marketing and manufacturing you need to have deep pockets. And
that's what Scout didn't have."

It isn't clear who lost the most money. The VC source says that
Idealab was the majority investor, with more than $14 million pumped
into Scout's last round. But Idealab spokesman Brad Copeland issued a
terse email that said Idealab was a "minority" investor. He declined
to comment further. Calls to Idealab partners Scott Bannister and
Scott Weiss, the point people on the Scout investment, were not

For Idealab, the Scout debacle represents another disappointing hit
to its portfolio. In addition to the embarrassing collapse of market
capitalizations of public portfolio companies such as eToys (NASDAQ:
ETYS) and GoTo.com (NASDAQ: GOTO), its private companies have
suffered with the downturn of business-to-consumer (B2C) plays. Just
two weeks ago, online cosmetics retailer Eve.com closed its doors.
Portfolio company Firstlook.com recently laid off about one-third of
its 103-person staff, and half of the 95-person staff of Z.com was
also sent packing.

Is not clear what will happen to the technology and assets of Scout.
Given that the CEO has apparently gone underground, with some jilted
employees eager to exact revenge by speaking to the press, it could
be a messy breakup. And whether investors will be able to get any of
their money back appears doubtful.

The unnamed VC says the harsh failure of Scout portends one of many
that will soon begin gracing the covers and business pages of
newspapers ad nauseam. "It's a shame, really, because they deserved a
better fate. In retrospect, we all have regrets that it didn't pan

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