Splashed: The fall of Hot Liquid Media
A Morality tale of how a smart idea got skunked
By Gabriel Spitzer
In the spring of 2000, Justin Fortune was in Arizona, setting up his booth at a conference organized by the Outdoor Advertising Association of America and the Transit Auto Bureau.
Fortune was there to introduce his company, Hot Liquid Media, and the coffee-cup sleeves that HLM placed advertisements on, to the advertising community.
“That was kind of our coming-out party,” recalls Fortune, former president and chief executive officer of Hot Liquid Media.
As it turns out, Fortune’s booth was right next to the booth for Pinpoint Golf Marketing, with whom HLM had an investor in common.
“An employee of Pinpoint introduced himself to me and said, ‘Oh, you’re Hot Liquid Media. Phillip wanted me to see if you would be a good candidate to be rolled up into the Pinpoint Golf media family,’” recalls Fortune.
That’s funny, Fortune thought. This was the first time he’d heard anything about “rolling up” Hot Liquid Media into anything.
Phillip Father, one of the partners at venture capital firm Kremen, Father and Partners in San Francisco, hadn’t mentioned anything about it to Fortune.
“That was the moment I knew they were up to something,” says Fortune.
For Fortune, the episode in Arizona turned out to be the prelude to a yearlong drama that would culminate in the collapse of Hot Liquid Media about a month ago.
Stories like this, that involve lawsuits and hurt feelings and disputed facts, often have two very different sides.
This is Fortune’s side of that story, and it is something of a morality tale of what can happen to a young, successful business that tangles with a venture capital firm and comes out the loser.
Calls to Kremen, Father and Partners for its side of this story were not returned.
Hot Liquid Media formed in early 1999 when Fortune, then working in radio ad sales, had the idea that the coffee cups so ubiquitous in his hometown of San Francisco were an untapped advertising resource.
Soon, Hot Liquid Media was turning the insulated sleeves on coffee cups into little billboards. The company’s first client was Streetlight Record, a small, local chain. Next came Pennzoil, then CNET.
Before long, Hot Liquid Media had assembled an impressive list of clients, including Disney, Boeing, Sony, CBS Marketwatch, Columbia Tri-Star, Kosmo.com and The Washington Post.
“From there we just kind of exploded. Within our first year, we were billing about $2.6 million. We had offices in San Francisco, New York, Chicago, Los Angeles and Albuquerque,” Fortune says.
At one point early on, Fortune’s then-girlfriend (they are now married) and business-partner Sarina Wolff called a friend of hers for financial advice. That friend worked for Kremen, Father and Partners.
“A day or two later he called back saying that he and his partner were interested in our company and would like to invest. It wasn’t something we asked for, it was just kind of dangled in front of our faces,” says Fortune.
“They invested $60,000, and we gave up 30 percent of the company.”
Fortune and Wolff gave up one other thing that they would soon come to regret: three seats on Hot Liquid Media’s five-person board.
“There were three original investors, and we thought, why not? That was just a mistake we made,” says Fortune.
Meanwhile, Hot Liquid Media continued to grow. It improved the quality of the photos on its coffee sleeves and began placing ads on beer coasters.
But then came the incident in Arizona, and Fortune quickly found out what he believes were his investors’ true intentions for the company.
“The company was a cash cow, and the investors wanted a quick payoff. They told us to roll it up with one or more of the other companies they had investments in, or buy their shares back,” says Fortune.
Moreover, Kremen, Father and Partners presented Fortune with a valuation of the company at $10 million, and they wanted a third of that sum in a buy-back, Fortune says.
According to Fortune, that valuation was way, way too high, and came not from an outside source but from the investors’ own calculations.
“They gave us a one-month deadline. When that deadline came around and we didn’t give them any answers, they became upset and started taking aggressive action,” says Fortune.
“So they held an illegal board meeting in the attorney’s office over three days and essentially executed the buyout.”
After the meeting, Fortune and Wolff fired the board. Soon thereafter, Kremen, Father and Partners filed suit against Fortune and Wolff.
Then, says Fortune, things started to get really ugly.
Somehow, he says, the investors managed to lock up the company’s cash holdings, leaving it with no operating funds.
From there the company’s demise was swift.
“That made it difficult to operate. If our clients couldn’t get us the money up front, we had to turn the deal down.”
Finally, with lawsuits still pending and lawyers’ bills piling up, Hot Liquid Media closed its doors for good.
Since then, Fortune has gone back into the advertising world. The transition from CEO to desk job has not been easy, but Fortune has definitely learned a thing or two.
“Business partners are like personal relationships. You have to be very careful who you get into bed with. The sheets can get soiled. It can put you in a position where you’ve screwed yourself so royally if there’s a dispute, that people can turn your life upside down,” he says.
“An investor is always going to take you down a different path than what you intended. Whether you’re giving up five, 10 or 90 percent, that investor is never going to view the business the same way you do. A dime is a million bucks to them.”
-Gabriel Spitzer is a staff writer for Media Life.
I found this interested tidbit in a leaked law enforcement doc:
Kremen, Father & Partners, LLC
North America USA California San Francisco
Address: 2544 Third Street, San Francisco, CA 94107, USA
Phone: +1 415 920 0944
Fax: +1 415 920 0945
Kremen, Father & Partners, LLC firstname.lastname@example.org 2544 3RD ST SAN FRANCISCO, CA 94107-3113 US …
KREMEN FATHER & PARTNERS in San francisco is a company that specializes in Investment Advice. Our records show it was established in California.
Estimated Yearly Revenue: $1,245,000 in 2002 SIC Code: 6282
Founders/Owners: Match.com, Sex.com
Consultants to: Kleiner Perkins, lithium ion battery sources, political campaigns
Kremen Father invited ClickMovie.com, the first internet video on demand company, down to visit them at their Third Street offices. Kremen Father had a great interest in ClickMovie and even hired ClickMovie’s staff. Later, Kremen competed with the same ClickMovie people with his social networks and again with his lithium and solar energy holdings. Alas, now those Clickmovie people have been testifying to The FBI, GAO, FTC and SEC about tricky Silicon Valley maneuvers. See Case File 34-556788DF-CA. Have Andy bring us the Vinod data.