After Pulling Plug, Veoh Networks’ Dmitry Shapiro Says Litigation “Choked Off Our Oxygen”

2/12/10Follow @bvbigelow

In the beginning, San Diego’s Veoh Networks had the support of several prominent VCs, and some of the biggest names in the media business. Venture firms like Boston’s Spark Capital, and names like Michael Eisner, the former Disney titan. After five years, founder Dmitry Shapiro tells me the site had 23 million unique visitors a month, and was by far the largest Internet company that San Diego has ever seen.

But it all came to an end. Veoh Networks pulled the plug this week, even though it kept growing its advertising base and had a run rate of $1 million a month, Shapiro says. All this despite the fact that Shapiro had cut costs—and had been running Veoh with a skeleton crew of less than 20 employees since last April, when he replaced CEO Steve Mitgang as CEO.

“We had good backers,” says Shapiro, who served as Veoh’s chief innovation officer during the growth years, when the Web-based video streaming company had 120 employees in San Diego and Los Angeles. “We all had big appetites for what we were trying to do, which was create a multi-billion dollar Internet media company.”

Dmitry Shapiro

Dmitry Shapiro

Shapiro, who is one of San Diego’s most-visible techies, started the company in late 2004. Veoh officially launched its business in 2005, and raised close to $70 million in the ensuing years. But the business laid off its remaining 18 employees on Wednesday, and now faces a Chapter 7 liquidation in federal bankruptcy court.

Shapiro says he’s not even sure whether the paperwork will be filed in San Diego or Los Angeles. “It doesn’t matter,” he says.

Shaprio says he also doesn’t know what will happen with the millions of videos that have been uploaded to Veoh’s website from users around the world. A trustee who will be appointed by the bankruptcy court to oversee the liquidation will have to decide whether or not to maintain the vidos and keep the website operating.

In addition to Spark Capital and Eisner’s Tornante Co., the investors that will be writing off their bet on Veoh include Los Angeles-based Shelter Capital Partners, Los Angeles media investor Gordon Crawford, former Viacom executive Jonathan Dolgen, Tom Freston’s Firefly3, Intel Capital, Goldman Sachs, Time Warner, and Adobe Systems, according to Veoh’s website.

As I previously reported, Spark Capital founder Todd Dagres said in a tweet yesterday that a relentless copyright infringement lawsuit that the Universal Music Group filed against Veoh Networks two years ago was the main killer. Universal, which Shapiro calls the largest music company in the world, argued that Veoh allowed users to illegally upload Universal’s copyrighted material to Veoh’s website. In a ruling that tossed the suit out last September, a federal judge declared that Veoh was protected from Universal’s infringement claims. By then, however, the damage was done.

There were undoubtedly other factors, most notably the dramatic downturn in the overall economy. But Shapiro says the lawsuit became Veoh Networks’ burden. The company dramatically slimmed down in the restructuring disclosed last April, chiefly to conserve its cash for legal fees.

“At the end of the day, if I had to put my finger on one thing, it would be the UMG lawsuit,” Shapiro says. “These people choked off all or oxygen in terms of our ability to go out and raise additional capital. They not only sued [the company], but they also sued all of our investors. They had a giant legal team.”

Shapiro did not think that competition was a significant factor. Even though Veoh Networks was in market segment that included rivals like Vimeo, Dailymotion, and Joost, Shapiro says he ultimately did not view them, or even YouTube and Hulu as significant threats.

“YouTube was already a runaway hit by the time we started, which was about three months after they started,” Shapiro says. “We were complementary. We were focused on long-form video and high resolution. I don’t think YouTube hurt us in any way. If anything, I think they helped because we were all in it together, trying to raise market awareness.’

In a statement on his website, Shapiro referred to YouTube, saying “While others were working on helping people share short video clips, Veoh created technologies that made it possible to cost effectively transport full-length, long-form, high resolution content. Some of the technologies we pioneered now form the basis for standalone companies and many are now standard features of video services. We grew our passionate audience base to over 28 million users per month, built a business with a run rate of $12 million, and helped educate many blue chip advertisers about the bright future that online video holds for them.”

Shapiro, who arrived in the U.S. from the former Soviet Union in 1979, when he was 10 years old, learned to speak English from watching television. Shapiro also told me he became a self-taught computer programmer because his overly protective Russian mom was too worried while he was growing up in Atlanta, GA, to let him play outside with the other kids. After getting his B.S. in electrical engineering from Georgia Tech, he began working in computer software.

Before starting Veoh in late 2004, Shapiro founded San Diego-based Akonix Systems, as a peer-to-peer network security company. He launched another business last year that he calls “Weekend University” that provides one-day classes in how to use the Internet more effectively.

When I asked what’s next, Shapiro answered, “I don’t know. But I’m going to take the rest of the week off.” When I reminded him it’s already Friday, he said, “I know. It’s still going to be nice to relax.”

Shapiro says the members of the skeleton team that remained to the end are close. They enjoy working together, and Shapiro says he’s already been contacted by some companies that need help on some Internet projects. (He says his email is Dmitry@FluxPartners.com, just in case any more are interested.)

“I would like to thank all of my fellow team members and their families, our courageous, dedicated investors, our suppliers and attorneys, and all of the passionate people that have made it possible for us to be a part of this great revolution of social media,” Shapiro wrote in his farewell post. “This is a critically important time in the evolution of the Internet as an open communications medium, and all of us at Veoh wish those companies that continue to innovate in the space, great success.”

Bruce V. Bigelow is the editor of Xconomy San Diego. You can e-mail him at bbigelow@xconomy.com or call (619) 669-8788 Follow @bvbigelow

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