The Big Deal: OnLive or dead

The Big Deal this week looks at a company that has seemingly burnt through $100m in about two years then told its corporate venturing backers they are likely to be wiped out as the assets were being sold to a new company funded by one of the other investors. Ouch.

Oh, and the staff are to be rehired or work as consultants in return for options in the new company.

The old and new company with the assets are both called OnLive, which is a a US-based online entertainment technology service investors had included phone operators AT&T, British Telecommunications (BT) and Belgacom Group, filmmaker Warner Brothers, software provider Autodesk, phone maker HTC, network equipment provider Juniper Networks and venture capital firm Maverick Capital and family office Lauder Partners.

An affiliate of Gary Lauder’s eponymous venture capital firm has backed the new OnLive, which bought the assets to the business and retained the partnerships with its former corporate investors who had struck service relationships with the old OnLive.

It could be seen, in effect, as an unusual acqui-hire where everyone was made redundant, shareholders wiped out but the business goes on effectively uninterrupted from a customers’ point of view, just with lower costs.

As John Coyle and Gregg Polsky, two professors at University of North Carolina School of Law, put it in a recent paper, “Acqui-Hiring”, for the US university first covered by Fortune columnist Dan Primack that the vast majority of acqui-hires are for VC-backed companies that would be unable to raise another round of financing.

But as OnLive is hopeful of raising another round of funding perhaps a better way of looking at the deal is as a debt-for-equity swap where existing shareholders are replaced and financial obligations to others are reduced – in OnLive’s case by cutting staffing costs.

It is unclear if OnLive had any debt or whether investors used convertible loans to fund the business but the company seems hopeful that its work developing its business over the past few years will not be wasted.

If the corporations retain a service their customers find valuable then the old maxim that “I invest for strategic reasons and if I gain financial and/or strategic benefits I don’t mind” might come into play. Certainly, none of the corporate venturing units appear willing to stump up more cash and none have gained a pecuniary return on the equity invested.