M8 Capital uncovered, Part I: false friends

By Mic Wright on July 2nd, 2012

This testimonial on M8 Capital’s website tells a cosy story. “M8 [pronounced "mate", for the uninitiated] have been incredibly supportive of Rummble Labs while we successfully executed upon a change in strategy – less than a year later the company has healthy revenues and a solid business plan for further growth… we even shared M8’s swanky Jermyn St office for a while, which enabled us to speed up the feedback loop!”

Well! Doesn’t that just sound like The Waltons, remade with clever pocket entrepreneurs and big pappy VC? But documents from the recently concluded employment tribunal between Rummble and its founder and former chief executive, Andrew J Scott, one of Europe’s most recognisable technology entrepreneurs, tell a darker and more sinister tale. It’s a story that has left Scott out in the cold while M8 controls – and, some observers are saying, destroys – the future of the company he created.

What was the extent of the wrongdoing, and how typical is this story of M8′s behaviour toward entrepreneurs? That’s what this report, released in two parts over the coming fortnight, will reveal. Today’s instalment focuses on the ugly fallout after the collapse of Rummble, M8′s first investment. Next week’s will examine a spread of unrelated claims from others in the community, including existing M8 portfolio companies.

Shattered promise

Documents leaked to The Kernel from a source close to M8 Capital reveal a plot to oust Scott for reasons never fully explained in writing. They shine a light on behaviour from M8 and its representatives which appears to be in painful discord with the principles of ethical and responsible investment. When Scott allowed M8 into his business he descended into a world of backbiting, double dealing and subterfuge which saw his investors, like blood-crazed Fabian social workers, seizing his baby and running off into the night with it.

Editor’s Note: The Kernel contacted Andrew J Scott and one other member of Rummble Ltd.’s board of directors during the preparation of this report, but both declined to comment on its contents. Our reporting has therefore been produced on the basis of the documents passed to us, which include letters and emails passed between the company’s management team and its board and evidence offered up to the recent employment tribunal.

Rummble was a location-based app for mobile phones launched before Foursquare. Ironically, considering the fate that was later to befall Scott, it used technology called “trust networks” to work out who you might trust for different types of recommendation. If only Rummble had been able to gain sentience and tell Andrew Scott to stay well away from M8 Capital! But it didn’t, and on 3 June 2010, it was announced that Rummble had raised $800,000 from the firm, with M8 taking a controlling stake in the business.

The deal was M8’s first investment after it emerged from beneath the umbrella of its parent, Kuwaiti-backed AGC Equity Partners. As a condition of the investment, M8 Capital general partner Joseph Kim joined Rummble’s board as Chairman. The cuckoo was in the nest; signs that Scott was in a weakened position were there in the announcement.

“‘The user interface has suffered,’ says founder and chief executive officer, Andrew J Scott, ‘Now that we can hire we’re looking for UI/UX designers and software engineers in both London and San Francisco…’”

The situation at Rummble deteriorated rapidly after the investment round closed. Eight months and three days after the investment, Scott was out as chief executive, ousted by the board – or, more correctly, the chairman of the board, Joseph Kim, according to documents we have seen.

Such was the breakdown in relations between Scott and M8 Capital by the time he ceased to act as chief executive, the firm he had partnered with to help build his company, that the clash ended in a hearing at the Central London Employment Tribunal last month. Scott was not successful in his attempt to gain damages and restitution from his former company. A source close to M8 reports that this was a default judgment due to “a technicality” and that Scott was not able to present any of his evidence to the tribunal.

Playing dirty

Scott’s submission to the tribunal, which The Kernel can exclusively reveal portions of today, makes for shocking reading. Here’s how Scott explains his removal as chief executive of Rummble in his evidence:

“I believe I was removed as CEO of Rummble Ltd without due cause or fair process. In addition, I believe the position I held is still current and being occupied by a less experienced person on a higher rate of pay.

         1. A number of justifications have been given by the Respondent [M8 Capital] for my dismissal. The first was that it is a legitimate redundancy. Firstly, did Rummble ‘cease or intend to cease to carry on the business for the purpose of which I was employed’?  I do not believe so because:

                        a. Rummble did not ‘cease to carry on the [consumer] business’, as evidence today shows.

                        b. In fact, the consumer service was further developed, relaunched in February 2011 and was still operating until at least June 16 2012.

                        c. The evidence also shows new services used by consumers; TweetLabs, was launched in March 2011.

                        d. As Mr Kim states in his evidence, the Rummble API has continued to be used, enhanced and developed;

                                    i. the idea to develop this API was originally mine and I ran the project, so I have great depth of experience and knowledge about this technology 

                                    ii. also as evidence today shows, the business-to-business part of Rummble already existed before my dismissal, and it was part of my job to generate business leads for the Rummble API

                        e. Finally, I was employed as Chief Executive, and any serious company must have someone to be in charge of day to day operations, whatever the nature of their business.

         2. Secondly, the evidence does not support redundancy on grounds of cost

                        a. another person, Mr Housley, has taken up my role and on a higher salary

                        b. a commercial director was hired only a few weeks after my dismissal, who also has less experience than me and has also been hired on a higher salary.

                        c. as evidence shows, the salary bill in the six months since my dismissal is 15% higher overall despite only half the number of people being employed, representing an average increase in salary of 230% per employee.

                        d. overall, overheads have also increased since my dismissal:

                        In November 2010, they were £41,000 (£24,297 in salaries) in May 2011 they were £57,544 of which £28,453 on salaries.

A 230 per cent increase in salary? No wonder the current Rummble team have such a sunny disposition about their new overlords. In further documents submitted to the tribunal, Scott declares that his salary as chief executive was £37,800 at the time of his dismissal.

Everything changes, everything stays the same

Rummble’s technology is now predominantly used through its API under a new company name, Rummble Labs. While the Rummble website is still live and still lists Scott as founder and chief executive, Rummble Labs shows only the team supported by M8 Capital.

The Rummble Labs team sheet includes current chief operations officer, Alex Housley, the man who de facto took over Scott’s job. He’s the man quoted offering gushing praise for M8 at the start of this report. Clive Cox also remains at Rummble Labs.

Digging into the bundle of documents we were sent, we have uncovered a timeline in which Scott appears to have been systematically undermined by M8 Capital from the very start of its investment, as though this were intended even prior to the closing of Rummble’s funding round. He says himself in the documents that “M8 made it extremely difficult for me to run the company effectively from shortly after their investment”.

A litany of abuses

April 2010: M8 Capital invests £550,000 in Rummble, taking a controlling stake, and, according to the documents, agreeing to his business roadmap which proposed to push the technology as both a direct-to-consumer and business-to-business play.

The documents show that M8 was providing 10 months of runway cash, allowing Rummble to operate until December 2010. The same plan committed the service to having 169,000 active users by the end of 2010 with the intention that M8 would inject further investment into the firm in November 2010.

The documents claim that M8 Capital offered repeated reassurances that cash would not be a problem and that further investment would be forthcoming. They also show that M8 agreed, prior to completing its investment, that Rummble would be permitted to relocate to the US if the management team felt it would be advantageous.

Recalling the first board meeting after M8 took its controlling stake, Scott says in the documents that he ran through current statistics – user numbers and user engagement – and received no negative feedback or indications of concern from the investors or the rest of the board.

Things apparently changed significantly the following month, at the second board meeting, where new chairman Joseph Kim “prevented any board discussion, cancelled the agenda proposed by [the chief executive] and announced M8 Capital’s belief that the company [was] failing”. M8 then demanded a 6-week plan from Scott to be submitted within 14 days. That plan was delivered.

The goals of the 6-week plan were “largely achieved – aside from some business development goals under the department of [now Rummble Labs chief operating officer] Mr Housley”. Plans were advanced to open a Polish development office and the documents allege that Kim recommended a US immigration lawyer to assist Rummble with the projected American move. The plan also included bringing in a chief operating officer with corporate experience. The request came from M8, but was accepted by Rummble’s management team.

September 2010: In the documents, Scott claims that he received support for his leadership and the direction he was taking Rummble in from Kim during a dinner held in London. He says the meeting also included discussion of his plan to bring a US-based senior manger onto Rummble’s management team and his continued moves to get a Polish development team up and running.

A major change in the relationship between M8 Capital and Scott appears to have occurred in October 2010. The key figures in this were Joe Neale, a former MySpace community manager who is now a principal at M8 Capital (possibly the only VC in world history to have bothered gaming his Twitter followers), and Laurent Souviron, another partner at M8 and an ex-Morgan Stanley man. Scott’s tribunal submission says the pair requested a review of “the fundamental direction of Rummble Ltd and said all time should be diverted into a full strategic review process of the direction of the business; the industry it was targeting, the type of product it was building and who it was targeted at”.

Scott’s submission says the next month saw the all the resources at Rummble dedicated to new product ideas and analysing the company’s strategy. On 14 October 2010, Scott asked for a board meeting as the September board meeting had been cancelled by M8. He received no response. Two days later, Scott was told by Joe Neale, via email, to “freeze any further plans to open a development office”. Four days after that, Neale, clearly the point man for M8 at this stage, asked to interview all of the Rummble team without Scott present.

On 21 October 2010, Neale, an M8 associate called Sid Thekkepat and Shiraz Jiwa, London Executive Director of M8’s parent AGC Equity Partners, arrived at the Rummble office. The trio interviewed team members without Scott present, asking questions about what it was like to work with him, how they felt about the company and his fitness to remain as chief executive, in apparent breach of several UK laws.

25 October 2010:Neale and Thekkepat sat in on a strategy session with Rummble’s advisors Ribot which focused on the future strategy of the company. On 29 October, Neale presented a new idea to Scott: Rummble should pivot to produce a “mood app” which would share people’s moods and sell that data. Scott indicated he did not support the plan and that he believed believed his team would be wasting their experience in a known space in an entirely unknown one. (Somehow he also avoided bursting out laughing.)

The pressure on Scott from M8 increased. At the investors’ request, he presented the result of a strategic review to M8 Capital – and not to the Rummble board – on 9 November. Scott’s main conclusion was that the company should continue to pursue a dual strategy of consumer products and offering its API to businesses but make changes to the consumer product to differentiate it and enhance its viral appeal and usability.

In a follow-up email on 10 November 2010, Scott confirmed that Rummble had 169,000 active users and 330,000 users overall. That 169,000 number meant the previously agreed target, set in April, had been hit two months ahead of schedule. On the same day, management accounts were delivered to M8 and the Rummble board. Scott informed Jiwa that the company, as indicated in its previous accounts, risked insolvency if action was not taken. Two months’ runway was left at this point.

Eight days later, Neale requested by email that Scott provide full details of Rummble’s algorithm in a format suitable for presenting to “a technical individual rather than a marketing person”. There was no context to provided for the request. Scott replied:

“…as I will potentially be sending over the core IP and research behind [Rummble Ltd] perhaps you could tell me who its going to and the context of the decision to send it. In that way I can also ensure the information is the most appropriate for the recipient. Also, how is thinking progressing? You’re evidently talking with others/third parties – be good to know who and to what end and not be left in the dark.”

Only then did M8 confirm that it had decided, without consultation with Rummble’s board, to sell the company’s technology and intellectual property to various third parties. It requested the chief executive’s co-operation with that process.

20 November 2010: Another crunch point for the relationship between M8 and Scott. M8 rejected all previous strategies for the future of Rummble presented by Scott – including the business-to-business strategy the firm is currently pursuing. Kim told Scott that M8 would not invest further in Rummble.

Presented with that situation, the documents show that Scott put forward a proposal to merge with LikeCube, another business-to-business firm in the area of personalised recommendations. The move would, Scott suggested, have allowed Rummble to continue trading and raise new capital. But it would also have diluted all Rummble shareholders and meant M8 Capital would lose its controlling interest. M8 rejected the offer.

Scott claims the meeting became heated and that Kim personally insulted him. In his submission, he reports: “At the same meeting Mr Kim called Mr Scott ‘stupid’. He also said to Mr Scott: ‘You are behaving like a child’. Mr Scott responded: ‘I am sorry you feel that way but I disagree.’ Mr Kim continued: ‘You are, you’re behaving like a child.’”

Scott says he agreed to co-operate with M8 Capital’s plan but strongly objected to Rummble being offered up in a “fire sale” to another small start-up. He also says he still believed the company had a future and could seek further investment if released to do so and allowed to agree a deal. He wanted to continue operating the business he had founded.

The messages coming out of M8 Capital during this period seem confused and contradictory. On December 2 2010, Scott emailed Neale reiterating his belief that simply rushing to sell the technology would be a bad move given that Rummble could “yet perform very well”.

3 December 2010: an email arrives from Kim asking Scott: “Why don’t you organise a meeting with LikeCube and Mr Shiwa/Mr Neale?” This was directly at odds with the meeting he had had with Kim and M8 Capital on 20 November. Was there any clear strategy for Rummble being developed at M8, or were the VCs simply making it up as they went along?

The same day, Scott requested a board meeting yet again. He stated that the meeting was “urgently required to consider the current cash-flow and the implications that this has for [Rummble] – specifically whether the company is solvent”. The situation was critical; a meeting was finally agreed for 6 December.

That meeting was inconclusive. While solvency was discussed, no decisions were taken, and a further meeting was called for the following day.

10am, 7 December 2010: Scott and non-executive director John Paterson asked that the shareholders be contacted as soon as possible. Jiwa agreed but stated that this could only take place once he had been informed of the correct procedure by M8’s legal team. The directors agreed that the company should cease incurring further liabilities and that staff should be given notice.

9pm, 7 December 2010: the board agreed that Scott should send M8’s lawyers a drafted letter to shareholders. The intention was that letter should be sent in parallel with letters of notice to Rummble staff. The board also agreed to give Alex Houseley notice of his 2-week consultation period. Jiwa suggested letters should be back from the lawyers by the following morning.

Scott himself was not safe. The board also agreed to give him notice of his 2-week consultation period as chief executive. Kim suggested that Scott should discuss his position with Clive Cox, then chief technical officer, to decide how he may be retained by Rummble in a paid advisory position to assist in realising an exit for shareholders.

Paterson protested that the board should, if it was suggesting that Scott be jettisoned while Cox was retained, institute a formal scoring exercise to objectively select the best person to keep in the service of the company’s future interests and those of the shareholders. Jiwa confirmed that would take place.

During that board meeting, Scott circulated drafts of the board meeting minutes from that day and the previous day. As of 5 April 2011, he had not received approval of those minutes from Kim, Neale, Jiwa or any other representative of M8 Capital.

On 8 December 2010, Scott provided the board with Rummble’s management accounts to November 2010. The next day, another board meeting was convened and the liabilities of the firm were discussed again. With its current cashflow, Rummble faced £12,000 in liabilities and would run out of resources in February 2011. It was agreed that all staff, including Scott, should be laid off immediately. M8 requested costs for providing operational capacity for Rummble Ltd minus costs. Scott supplied those on 10 December.

A week later, 15 December 2010, a heated board meeting was convened at which Kim questioned both Paterson and Scott. The documents make Kim seem angry and paranoid. He asked Paterson whether the non-executive director had “any knowledge that Andrew Scott and Clive Cox might be starting a new company”. Paterson replied: “No.”

Kim then moved onto Scott, asking whether the Rummble founder had disclosed the details of the term sheet from M8 with third parties. Scott said he had discussed general information on all potential investment deals with those shareholders that had asked him specific questions. He said he believed this was in line with “the board’s preference that he should be honest with people”.

The question of Scott founding a new company was raised by Kim again. Scott stated that he had no intention of doing so. Kim pressed him further asking if he had discussed “the nature of his restricted covenants” with potential investors or Clive Cox. Again Scott replied that he had not. Yet another board meeting was scheduled for the following day.

16 December 2010: The meeting does not open cordially. Kim, according to the documents, told Scott: “We don’t care about your opinion. I don’t think we care what you have to say any more.”

18 December 2010: Kim emails Rummble’s board members stating: “As per our board meeting discussion, I’ll circulate to shareholders a letter updating them on the current situation.”

19 December 2010: with the board having again decided not to make the management team and staff of Rummble redundant, Scott withdraws an offer to resign which he had proffered on 10 December. He had made that move after, he claims, being pressured in a phone call by Kim who suggested resignation “might look better for his career”.

Scott says at the time he was not aware of his loss of rights if he resigned and he only offered to do so when it appeared that his staff would be laid off. He says he took back the offer when it became clear that M8 Capital did not intend to go ahead with redundancies. It appears that M8 were after him alone.

The situation became more grave on 20 December when Paterson, the only non-M8 capital affiliated board member besides Scott, resigned from the board. Paterson cited his reasons as “bad board governance and prejudice to minority shareholders”.

It was at the 20 December 2010 board meeting that Kim indicated that Scott’s employment was being terminated. The board now consisted of only directors from M8 Capital and Scott as Rummble’s chief executive. Kim emailed Scott with formal confirmation of his ejection at 9.53pm.

On 29 December 2010, Scott had an email discussion with Jiwa to discuss his redundancy. The AGC Equity Partners representative told Scott that “every possibility would be looked at as an alternative to [his] redundancy”. Scott says he asked if the decision was being taken on cost grounds and Jiwa confirmed that was the reason and that Rummble would now pursue a fully business-to-business strategy.

A new year rolled around, and Scott was left, once again, in the dark by M8 and AGC Equity Partners. He emailed Jiwa on 4 January 2011 to request an update on the consultation process. He received no reply until two days later, when Jiwa sent him a letter confirming that his employment had been terminated by reason of redundancy.

That contradicted Jiwa’s apparent suggestion that Scott was being ousted due to cost. Moreover, while Rummble Labs has pursued a business-to-business strategy it still creates consumer-facing products; two months after Scott was made redundant, Rummble launched consumer products at SXSW.

Evading justice

Rummble and M8’s approach to resisting Scott’s claim for unfair dismissal was initially to get it thrown out without hearing. In its submitted Grounds Of Resistance document it attempted to claim that Scott was late in submitting his claim, which was not true, and not entitled to a hearing, owing to his employment tenure being insufficiently long.

Aware that both those details may not prevent it from having to face an employment tribunal, M8’s submission also accused Scott of presiding over “high operational expenses, inefficient use of capital, late/non-payment of supplier and [risking insolvency]”. The document says Jiwa met with Scott on 23 December and that a subsequent offer of a meeting on 29 December was not taken up.

An ugly rift

How did Andrew J Scott come to be left out in the cold after his company’s not so significant “pivot”? And why are Clive Cox, previously his chief technical officer and Alex Housley, a business partner brought into the firm through acquisition, still sitting pretty? The answer lies perhaps ins Scott’s management of those individuals, about whose performance he was not always delighted.

In the document bundle leaked to The Kernel, Housley and Scott seem to have repeatedly been at odds with each other. In the first board meeting after M8’s investment, it is Housley who is raised as a concern by Scott, who notes that “the goals of the 6-week plan are largely achieved, aside from some business development goals under the department of Mr Housley”. Notably, Housley refers to himself in correspondence with Scott as his “business partner”, suggesting that there were differences in perspective at work inside Rummble that left Scott without an ally when M8 decided it wanted him out.

Housley was facing redundancy as of the Rummble board meeting on 7 December 2010, but he prevailed, keeping his job and ascending to run the newly minted Rummble Labs just a few months later. Perhaps he seemed just that little bit more malleable to M8 Capital, compared to the strong-minded and forceful Scott? Certainly his performance in the business had been under close scrutiny for some time, following a “poor performance warning” issued by Scott on 6 October 2010.

Whiffs of the Erick Schonfeld-Mike Arrington feud at TechCrunch don’t stop there. In the same communication, Scott details seven areas of business development that he does not believe Housley has undertaken effectively and notes that only 7 per cent of his team’s targets have been hit. While Scott is forthright in his email, he offers Housley opportunities to develop and rectify what he believes are failings.

His conclusion is: “If we are unable to [change things] in a timely way – i.e. not only set goals but have them achieved – we’ll have to consider whether it can work going forward at all.”

Housley’s response runs to three pages addressing the long list of points to him put by Scott. The most relevant section to what would come later comes right at the very end:

“We started out as business partners with mutual respect for each other… I do share your frustrations when things aren’t going right and appreciate that you’re directly under pressure from the board; however I feel there has been a marked decrease in the amount of respect you have for me in the tone of recent communications.

“I hope this can be fixed soon since I have started to dread catch-ups and feel I would be better motivated and productive going forward if you could take this on board. I’m not asking you to become Mr Nice if I’m fucking up but let’s try to focus on the solution instead of the problem.”

Scott’s problem appears to be that he had no allies on the board and Housley was quick to assume the role of preferred successor. Cox seems to have done little to come to the aid of his chief executive. At a TechCrunch conference in April 2010, Scott advised attendees to “hire and fire the right people”. His biggest regret? “Every time I fire someone, I wish I had done it a month earlier.”

It’s hard to escape the conclusion that Scott should have followed his own advice.

Lessons

By 16 February 2012, with Housley installed as chief operating officer of Rummble Labs, the company was dismissing Scott as a disgruntled ex-employee in a letter to Rummble shareholders:

“On 7 April 2011, the Company was notified that Andrew J Scott had issued an employment tribunal claim against it for unfair dismissal following his redundancy in January 2011. Having taken advice from the Company’s legal counsel, the Company has applied for Mr Scott’s claim to be struck out as we believe there is no merit to the action.

“This action has unfortunately reduced the cash runway available to the Company and distracted the management from its primary responsibilities, however, we are all working to resolve this matter quickly and efficiently.”

Quickly and efficiently. That is how M8 Capital also wanted to dispense with Andrew J Scott. From the tone of its communications with him, it seems clear that it wanted Rummble but it did not want the company’s chief executive. The minute M8′s representatives parachuted onto Rummble’s board, with Joseph Kim as chairman, Scott was toast.

“And people wonder why Mark Zuckerberg so jealously guards Facebook board seats,” a friend of Scott’s who preferred to remain anonymous, told The Kernel last night.

The tale of Andrew Scott, Rummble and M8 Capital is a parable for start-up founders: give up the controlling share in your business and the venture capitalists that have it can soon start controlling it, you and your future, turning employees against you with the promise of salary hikes and promotions.

Andrew J Scott again refused to comment on the contents of this report when The Kernel contacted him this morning. M8 Capital also declined to comment. Rummble Labs issued the following statement:

Andrew Scott’s tenure as CEO of Rummble Ltd and his employment with the company came to an end at the beginning of January 2011 as, at this time, Rummble was unable to meet its financial obligations, including to Andrew and a number other employees.

At that time, the decision was made to pivot the focus of the technology owned by Rummble and its trust-based recommendation platform. In light of this decision, those people with technical programming expertise were retained in the business, and, today, Rummble Ltd is  successfully executing that strategy.

Andrew Scott brought a case of unfair dismissal against Rummble Ltd  at the London Central Employment Tribunal. The Tribunal found that the case did not meet its jurisdiction requirement and dismissed the case.

We’re unable to discuss any further specifics surrounding the confidential employment history of any individuals employed by Rummble, or discuss further the business’s investment or business strategies.

Parts II and III of our report into M8 Capital will deal with the firm’s reputation in the European start-up scene and a number of revelations centred on other portfolio companies. We also take a look at the personal histories of M8′s principals and partners.

Editor’s Note: Andrew J Scott is a contributor to The Kernel.