Sony’s effort to release “The Interview” on the Web last month ended up shining a spotlight on Crackle, the company’s streaming video service. Crackle grew out of Grouper, the video-sharing company Sony bought in 2006. Here, Grouper founder and CEO Josh Felser takes us behind the scenes from startup to sale.
I returned home from Burning Man in 2002, covered in dust and the newbie’s need to show my friends and family the sparkling, desolate wonder of the Playa. I grabbed the SD card from my new Casio camera, stuck it in my Dell PC SD slot, copied all my video (and photos) on to my hard drive, opened up Yahoo Mail, selected a video and hit send.
Alas, NFW was Yahoo going to allow a 10 megabyte file to pass through its servers back then. I started researching how to send large files to a private group. Mail didn’t work, FTP was unusable and pirate P2P networks wouldn’t enable connections to ”friends.”
I shared my problem with Spinner co-founder, Dave Samuel, and we both quickly saw an opportunity. We pulled in two more co-founders — Mike Sitrin (ex-Spinner employee) and Aviv Eyal (met on Craigslist) — and we started building. Aviv convinced us to add all rich-media types, including music. Grouper was born.
We built our own P2P infrastructure that allowed small groups of friends to share their personal media (photos, videos, music). After much debate, we decided, for legal reasons, to limit music sharing to streaming. There was legal precedent for using software to create a virtual living room or house party and thus play music free of any licensing fees. We launched in December 2004 on the backs of an article in the Wall Street Journal, and soon we had thousands of people sharing their personal media in groups of up to 50 people. I believe we were the first desktop-software-controlled, server-authenticated, mass-market darknet.
We grew to about one million downloads, and while some might have called that a success back then, we saw the writing on the wall. Private sharing, desktop software, consumer P2P — all were dying. We had to pivot, so we decided to evolve into a public video-sharing network. Funny that, years later, desktop software has new life as “apps” on mobile devices.
Halfway through Grouper’s development, this stealthy little startup called YouTube released a sneak preview of its video site. We loved everything about what Steve Chen and Chad Hurley had built, and we viewed online video through the same lens. We were so impressed that we pitched the duo on a merger, but they were already off to the races, and for us the race was now on, with even more urgency.
We launched the new and improved public Grouper in December 2005, and we were the first to do a bunch of cool stuff. We were the first to let you post video from one site to multiple social networks with just one click. I believe we were the first to make it dead simple for users to combine photos, videos and music to create a single, uploadable file (we called it a Groovie). We were the first to let you record straight from a webcam to the Web.
After we launched, we (unsurprisingly) began to see a ton of copyrighted content being uploaded. In a fateful moment, and after a healthy debate, we decided to discourage the sharing of copyrighted material. This turned out to be a near-fatal mistake, depending on your risk profile. YouTube exploded on the backs of “Saturday Night Live’s” “Lazy Sunday” clip and a ton of “illegally” shared copyrighted content.
In a funding meeting with Draper Fisher Jurvetson, we shared our commitment to deemphasizing this type of content, and VC Tim Draper called us “boy scouts,” while swiftly walking out of our pitch. Ironically, we were contributors to the creation of the DMCA, though that didn’t stop Universal Music from suing Grouper for millions after Sony acquired us.
We found ourselves in a heated battle with a hundred other video sites for a distant second place behind the YouTube Goliath. To help us try and catch up, we starting talking to big media companies about leveraging their content and captive audiences. We had multiple colorful meetings with Fox and Simon Cowell to bring “American Idol” online. Talks fell apart when we couldn’t agree on who would ultimately own the online audience. Sony Home Entertainment wanted us to build their online video presence, but we were worried that effort might consume us, so we stalled.
We got a term sheet from Institutional Venture Partners to raise $10 million on a $30 million pre. Since Dave and I love optionality, we starting thinking about what our acquisition price might be. We always tell entrepreneurs that every funding round is an inflection point and a trigger to think about your price. When we sold our last company, Spinner, to AOL for $320 million in 1999, we experienced the trifecta of acquisition goodness: Hot company, hot vertical, hot Internet. Grouper was a warm company, but in a hot vertical and hot Internet. We decided if we could attract a buyer for $55 million-plus, we would sell.
At the D Conference in 2006, Rob Glaser, CEO of RealNetworks, invited Dave and me up to his room for a drink. He thought that Grouper would be a good fit within Real. We had known Rob from our Spinner days, and always had good chemistry (except when Rob had me thrown out of a meeting when I was at AOL). While we were negotiating a term sheet with Real, I got a call from Ben Feingold, president of Sony Home Entertainment. I told him we were likely not going to be able to deliver on a partnership, since we were considering an acquisition. He was shocked, reminded me that I had told him that we weren’t for sale, and asked if we were open to an offer from Sony. Within a week, we had two term sheets, and hired Montgomery to represent us in the sale. We also shared the situation with IVP, who was disappointed but totally understood.
Sony offered $65 million, Real offered $50 million. Sony won. The deal was nearing a close in August 2006, but was taking a little longer than expected, as we bickered over our employment contracts. My close friends know there is one non-negotiable week every year where I go off the grid. When I dropped the Burning Man bomb one week before I was due to leave, everyone freaked out. It catalyzed all of the players involved, we crammed to close the deal with a day to spare, and I went to Burning Man as a Sony employee.
After we were acquired, our sponsor, Ben Feingold, left the company, and we became part of Sony Television under Steve Mosko. I was told that Steve was an incredible salesman and sure enough, after every meeting with him, I felt like a million bucks. Unfortunately, getting stuff done at the right pace and with the right personnel proved more challenging. This wasn’t really Sony’s fault, just the typical clash of startup and big-company cultures.
There were some highlights. We were among the first to build a multi-million-dollar content studio working with established talent like Penn Jillette, Seth Rogen, Dennis Leary and a ton of new talent. We were pioneers in bringing online content to connected TVs, and now Crackle is everywhere. Watching the Soup Nazi scream “No Grouper for You!” in Grouper promo spots on national TV was pretty cool, too.
As we moved even more toward Hollywood content, the name Grouper no longer made sense. We changed our name to Crackle, with the help of Marc Hershon, a former Lexicon staffer who helped name BlackBerry, Swiffer, Nuvi, Pentium and Dasani. We started streaming the Sony content library and, to no one’s surprise, Sony decided to move Crackle to their Culver City studio lot. It was the right move. Since emigrating to Los Angeles was not in the cards for most of the team, Crackle rebooted with an all-Sony cast.
Dave and I went off to start Freestyle, and the Grouper team spread to the winds. We did have the pleasure of reuniting recently to talk about “The Interview” and, oh yeah, the minor hacking incident that exposed all of our personal data.
Most of us look back on our Crackle experience as a cultural highlight, but wonder if we had launched three months earlier, perhaps it would have been Crackle acquired by Google for $1 billion.
Josh Felser is a successful entrepreneur and investor with a passion for startups, music and the environment. He is a co-founder of Freestyle, an early-stage venture capital firm. He also recently cofounded #Climate, a nonprofit dedicated to using technology and social media to help mitigate climate change. Prior to Freestyle, Felser started two successful Internet companies, Spinner and Grouper, which were acquired by AOL Time Warner and Sony for $320 million and $65 million, respectively. He graduated from Duke University’s Fuqua School of Business, where he’s currently on the board of the Center for Entrepreneurship and the Task Force for Duke I&E. Reach him @Joshmedia.
This article originally appeared on Recode.net.