SAN FRANCISCO (www.redherring.com) - 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 insiders.
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, say 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 a 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.
Where is Scout's honor?
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, Fisher says. 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 already had paid for it, Fisher says. The Oct. 25 bash was attended by the likes of actress Drew Barrymore, who, 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, Calif., 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 say only: "I really don't want to talk to you about this," then hung up. Other official company spokespeople did not return phone messages.
Money woes contributed to downfall
"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 e-mail 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 returned.
 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 (ETYS: Research, Estimates) and GoTo.com (GOTO: Research, Estimates), 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 apparently has 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 soon will 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 out."
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