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Digital Railroad Likely Being Liquidated

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In a move that was more of a “when will it happen?” than a “will it happen?”, Digital Railroad announced today a slew of seismic changes that illustrates that the wheels of the train that went round and round are slipping off their axles. Last August, we wrote about the DRR experience – (Digital Railroad – All Aboard?, 8/20/07), and began our summary with the sentence “Digital railroad of course, must serve itself (and it’s investors)”, and we’ve been following very closely what’s been happening with them. So, what now?

DRR’s investors’ final action was to move CEO Charles Mauzy from the position of CEO to just another employee (no doubt with a decent retainer pay structure) to facilitate DRR’s liquidation strategies. Mauzy just changed his Facebook profile, writing “Charles left his job as CEO at Digital Railroad.” – see here. Maris Berzins, changed his Facebook profile moments ago to read “Maris left his job as President at Digital Railroad. “, followed moments later by “Maris is looking for new opportunities. ” The board has now retained Diablo Management, a firm known for liquidations, to shop the entire company, as is, around, or to sell off the company in parts.
(Continued after the Jump)

Investor Mike Brooks, a general partner at venture capital firm Venrock Associates is no doubt looking at his exit strategy. Brooks previously was with Morgan Stanley & Co., where he was a managing director responsible for the firm’s investment banking activities. Hmmm, perhaps he brought Morgan Stanley’s failing high-risk investment strategies to Digital Railroad?

Also assessing his exit strategy is board member Ken Gullicksen. Gullicksen is a general partner at Morgenthaler Ventures, based in Menlo Park California. His eyeballing the closest exit door no doubt comes as good news to the boards imeem, Danal, Nominum, and Voltage Security, where he also serves as a board member. More time for them – but is that a good thing?

The late-comer to the party, with series B overseas funding, was Steven Schlenker, the chief investment officer ofDN Capital Limited, where he is responsible for overseeing the company’s compliance and financial responsibilities, looking after DN Capital’s early stage investment strategy. This failed investment no doubt serves as a bit of a stumble for Schlenker, and his upstart VC firm.

One thing is for certain – This is a huge blow to Evan Nisselson, founder of Digital Railroad, and his father Peter Nisselson, whom was the principle financier during the formative stages of Digital Railroad’s inception. The elder Nisselson is the Chairman of Star Struck Ltd (OTC: SRSK), which is a publicly traded company, and he has been investing in small companies like DRR since 1982, frequently as an officer. The younger Nisselson got his start with the highly regarded SABA Press Photos back in 1993 through 1995, under the tutelage of Marcel Saba, before SABA was aquired to Corbis back in March of 2000 (AllBusiness: Corbis Acquires Saba Press Photos, InternationalPhotography Agency, 3/2/00). Prior to that, Saba headed up Picture Group, and currently runs well-regarded Redux Pictures. Last November (Stepping Down, or Stepping Up? DRR’s Nisselson Makes A Change, 11/21/07) we wrote about Evan’s promotion to Chairman of the Board. It is rumored that Even has been serving on the board and as Digital Railroad’s public face since last January’s bloodbath of terminations, with over half of the staff being let go, without pay, as an effort to stem the flow of red leaking from the spreadsheets over the last year. DRR was Evan’s Brainchild, and while well intended, has gone awry in recent years.

With the board likely out of the way, and Diablo running the show, let’s take a look at what Diablo’s roadmap looks like. Diablo, headed up by Richard Couch, who founded the company as a liquidation specialist, has likely been tasked with a few things – get back as much of the investor’s $15M that they have sunk into the operations of DRR, is no doubt priority #1. Priority #2, which will likely come in short order, is to slash – and I mean slash – the burn rate. Looking back at the $15M that DRR received last December 31st, which was followed by the laying off of over half of the company (Digital Railroad Makes Major Layoffs, 1/10/08), the remaining half will be likely halved again, to a skeleton crew charged with managing servers, resolving member technical issues, and collecting whatever sales that the Digital Railroad Marketplace (The Marketplace is now Open, 4/11/07) has generated. What isn’t known is whether or not those sales will be distributed to the member photographers who’s images generated the sales. With the restructing last December, and the additional funds that were probably internally deemed “bridge funding”, Mauzy was likely charged with reducing the burn rate as well as continuing the growth of the Marketplace and the number of members paying a monthly fee. This would explain the challenges faced by several trade organizations that DRR has committed to sponsorships with, in securing full payments for the balance of those deals.

A reasoned look at their burn rate and $15M means that that funding is likely near depleted, so it’s reasonable to expect a very short period of time for the final resolution of DRR – no less than 30 days, and a maximum of 90, but I expect they will surely want everything either closed down or transferred to a new owner by December 31st at the latest. There is a glimmer of hope that Mauzy and Diablo will be able to find someone interested in picking up the company at a fire-sale price and retain it’s normal operations, but that looks unlikely.

What would be the value of DRR’s underlying programming code (sans DRR interface) that could be repurposed? Would the sale of that core coding strip DRR of it’s core operations? At this point, that would gut DRR of it’s core, and is a highly unlikely sale – likely only in the waning days of a void of buyers. It can be reasonably assumed that the investors will never see their original $15m, but are hoping for between $5m and $10m. In this market, that’s also not likely. Capital is scarce, and getting back 50% of an investment in high tech these days just isn’t going to happen, and there’s a big “maybe” next to $5m, or a 25% salvage of the original investment.

What’s next? Well, there remains one platform in the field now (assuming DRR doesn’t remain as a platform and run by a new buyer) – PhotoShelter, who recently shuttered their image licensing operation – The PhotoShelter Collection (see PhotoShelter Collection To Shut Down October 10th, 9/11/08). If I were a Digital Railroad subscriber (and I am – Digital Railroad, PLUS, and A Stock Sale, 6/17/08), I would be making darn sure I was downloading all of my needed files immediately, if for no other reason than to have a backup of them (even if they remain in operation), but I would also be sure that any monthly or annual fees are not billing to your credit card in the coming weeks as they work to liquidate or sell.

As I said when PhotoShelter closed their collection, I am saddened by this turn of events too. I have been a supporter of both platforms, and this is one less capability that has served the photographers that used it well.
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Originally published on Photo Business News & Forum on October 15, 2008. Comments are closed; this post is part of the archive.

36 thoughts on “Digital Railroad Likely Being Liquidated”

  2. As usual John, you’re on the ball fast! I only got my DRR e-mail a few minutes ago…

    Interesting point you make on whether photographers will be paid out on Marketplace sales. I personally have 4 outstanding MP sales dating back to June of this year which have not yet been paid. The payment status suspiciously states they are “Pending”… Hope to see them come through, if for nothing more than getting my royalties paid. I also just renewed my annual subscription last month too. Argh!

    Cheers, Josh
  3. As you pointed out, tough to see, but not surprising. Given the industry trends, I’d be surprised to see someone buy DRR as a going concern.

    After all the changes we’ve seen in stock agencies, the real question now is what happens now? Which agencies changes their rates (e.g. Alamy), cut expenses, cut marketing, or just close up? What other outlets are there for photographers? Where will photographers shift their attention, their time, their images, their brand?
  4. I too was very sad to hear this news earlier today. I actually was informed by a phone call from one of their senior longtime staff. We talked at length about the circumstances. I am especially saddened because I know the staff at DRR worked hard to build DRR/Marketplace, in my opinion, always with the best interests of photographers in mind. My input was always well received and they always took time to listen to my opinions. They were also a consistent supporter of APA/DC.

    Even with what is going on there today I received an e-mail message regarding an inquiry of payments due on images licensed through Marketplace:

    “I understand your concern, but please be assured that you will be paid for the use of the images which were sold via the Marketplace. As always, once we receive payment from the buyer we will remit the payment to you. “

    I wish them all the best, I am hoping for the best but then again u Always do.
  5. I’ve made numerous sales through marketplace to the tune of a several thousand dollars. So I’m pretty bummed to hear this. I’ve always had high hopes for DRR’s potential.

    Odd, is that I had written last week to DRR member services, and was thinking, “Why haven’t I gotten my usual quick response. Just this morning, I thought to write Charles directly for an answer. The issue was regarding a disturbing trend I saw with how the marketplace searches seemed to be returned with a high preference toward certain contributors. I guess there isn’t anyone left to address that question.

    I have my fingers crossed that the train isn’t plunging off the cliff a al “Back to the Future III”.

    Cheers, (Figuratively, not literally)

    Gary
  6. Great software for photographers , but awful useless search engine for buyers in my opinion.
    Good luck DRR team , I hope somebody buys you and sorts things out.
  7. Someone should buy DRR and Photoshelter and combine the two.

    Photoshelter has better software, developers, and site designers. DRR has more stock clients and industry momentum and better image collections.

    –Terry
  8. Well, this does indeed really seem to suck. I too have a couple of sales “pending”, so I’m beginning to wonder. I had hopes for DRR, but it looks like our profession will be hit hard by the economic mess. With Getty and Corbis looking to be the only stock agencies left “if” they make it themselves, looks like the stock business may have sunk. Flickr may be it for stock and that really would be a weird situation.
  9. I’m not quite sure how to interpret this.

    On the one hand, this is a venture capital deal in the techno marketplace. Venture capital dries up fast under tight economic conditions. In fact, just last week Sequoia Capital (of YouTube fame) had a coming-to-God meeting with all their investments telling them to slow spending and cut overhead to keep rolling.

    On the other hand, maybe this is another shovelful of dirt in the grave of photography, and DRR couldn’t make money in the best of economic environs.

    With the finger of the invisible hand firmly on the economic reset button, I wouldn’t be surprised at all to see more companies fold.

    I just hope when we come through the tunnel, there’s something left to salvage.

    They say adversity breeds opportunity, but this is bad no matter how you look at it.
  10. Not sure your VC comments are appropriate/accurate. When a VC invests in a tech startup, its always risky and VCs know that only a fraction or their portfolio companies are going to hit a “home run” and exit with a high multiple return.

    So, to comment on Mike Brooks’ past with MS or to call DRR a “stumble” for Schlenker is probably unwarranted.

    As for DRR, its a bummer. The thing is, even in the last 2 years the costs to create and manage a platform like Photoshelter or DRR have dropped dramatically. I expect to see some innovation in this space–especially since DRR is leaving a gaping hole.
  11. Erik —

    What is past is prologue, and Brooks’ firms past is worthy of review in discerning how he was “schooled” in investmenting. VC’s should have known that investing in a risky market that is a NICHE one is not the type of investment that likely has the normal expected huge returns. Further, with Schlenker’s firm so new, its is a stumble for certain this early in the game when they are trying to establish a track record of success. Was this a “fall flat on their face”? No, not at all, but a stumble is a fair assessment.

    Lastly, I submit that there is NO “gaping” hole – PS will do well.

    Oh, and one more thing – check the DRR blog, where they wrote, just a month ago about the PhotoShelter Collection closing – http://blog.digitalrailroad.net/membershowcase/2008/09/drr_responds_to_photoshelter_c.html

    “But the proof is in the pudding. What makes us so confident that DRR has what it takes to succeed? Let’s take stock:…We’ve done it before: Every member of our executive team and staff has been involved in the creation and growth of the dominant players in the stock licensing and ecommerce industry today.

    But what about the future? PS exited the licensing business because “the growth trend isn’t steep enough to sustain the stock photography business in the long term.” We disagree. We are bullish about the future and believe sustainable, aggressive growth is possible. ”

    REALLY?!?! This is the type of language that has been described by some, just a month or so ago, as highly irresponsible, and possibly even misleading, especially at a time when they were no doubt shopping around DRR to potential buyers.

    — John
  12. that’s nightmare! It took me more then a year to build an archive on drr and now what?

    Is the only solution to buy my own server and host images there? Does somebody know for alternatives like that?
    Cheers,
    B5
  13. John

    I’m not trying to defend DRR–I don’t follow their blog so if they want to say stupid/misleading things, that’s their problem.

    Just seems like you’re calling out these VCs for acting like … well, VCs. Brooks was involved in technology at Morgan Stanley, but you make it sound like he was buying mortgage backed securities or something. You don’t become a general partner at firm like Venrock unless you know your stuff and share their vision.

    DRR doesn’t look any riskier than some of DN Capital’s other investments … after all, there have been decent exits/acquisitions in the photography space over the years (Flickr, iStockPhoto, Photobucket, etc.) … granted, not the same segment of photography, but still.

    Not sure Photoshelter will do well as-is. With the collection gone, they are now little more than a storage service selling space at a 8x markup. For real growth, I think they need to do more.
  14. The problem with both the Photoshelter Collection and Digital Railroad Marketplace is that they never did the most important thing needed to sell stock: Attract qualified buyers to their sites. They were services designed to appeal to photographers, not buyers. And they either had no idea how expensive it is to market to stock buyers, or they somehow thought they had a “secret sauce” to do it on the cheap. I think it was the mentality of “if we build it they will come” (if we collect enough good images, somehow photo buyers would instinctively sniff it out), and that isn’t how the stock business works.

    What’s really needed is a platform for photographers that allows them to host their stock images on a state-of-the-art stock system but also gives them the tools they need to market their work proactively, with mailing lists, email campaign systems, market insight and advice. While the Photoshelter Collection and Digital Railroad Marketplace made some of these things available, it was more about different companies cross-selling their services than giving photographer the tools and guidance they need to market their stock directly to buyers.

    The only time that photo editors or art buyers I know would go to DRR or Photoshelter to look for stock is if they were specifically directed there by a photographers. Otherwise, none of them would even think of looking for stock on those sites.
  15. concerned persons:
    dont be unhappy about this situation, this model was never viable. it was pushed by some blind “experts” and publishers.
    the bad IT technics and the closed golden cage named DRR was from the beginning a wrong strategie.
    bettre the crash now than later.
  17. Many years ago I worked for a company that was taken over by the Diablo crew and it was a nightmare. They were supposed to fix the company up to go public, but they never managed it, when they finally got thrown out by the owners the company was in worse shape than when they went in.

    In addition they made some of the most idiotic changes possible. Couch is this ex-Marine type, he comes into this software company full of geeks, brags about how he doesn’t know how to use a computer (that’s why he had a secretary he told us) and how much he could bench press. Then he insisted all the developers start wearing ties. Brilliant understanding of the culture!
  18. I am sorry to see them go. I went to see one of their presentations at the Apple store in Soho, nyc, and was impressed. They had a really cool presentation and I knew a few of the guys on their team.

    That said, I hope that some of their users would consider using a site like Cutcaster. Despite being a young company and still in beta, it is on solid financial footing and will be for a while, is converting sales for our contributors and adding new contributors and images everyday. I would welcome anyones feedback. http://www.cutcaster.com.
  19. I think DRR has shown that it has a potentially viable business, but made the mistake of building it on venture capital. Venture-funded startups are good choice when you have a potentially disruptive technology where the payoffs are huge if you succeed. But any dreams DRR might have had of dethroning Getty are pure fantasy, and by focusing on the top line and relying on the next round of funding to support the business, it’s game over if the funding does not materialize.

    If DRR instead had chosen to grow their business organically with a focus on the bottom line (like Alamy has done), they would be in much better shape today.
  20. John ‘The Vulture’ Griffin jumping in again on a agency-out-of-business post, to fluff his fantasy agency. Cutcaster, you can’t build a business on blog spam- show some respect here.
  22. This is classic. I was just about to jump into DRR after the collapse of PhotoShelter. An incentive? DRR is offering a 20% discount to former PS Collection contributors through Oct. 31. Unbelievable. Clueless about the coming trainwreck, or a misleading stab at trying to get some quick cash?

    With both PhotoShelter Collection and now DRR falling apart within a couple months of each other, it’s going to be hard not to be gunshy about investing time and money into companies like this in the future. If there are any.

    And what’s to say PhotoShelter Archive isn’t next? Just because they’re (now) re-focused on the archive part, with they’re income being based on paid subscriptions? Um, wasn’t that what DRR was all about?
  23. hahahaha “anonymous.” If I was leaving spam, wouldn’t I have left my comment under “anonymous” like you did. I was offering my experience with DRR and a viable alternative which is a company I started and is completely relevant unlike your comment which was thrown out and tries to insult me.

    I was truly surprised and upset bc this was a company in a sector I am involved in. Of course I am relevant and care. I couldn’t agree more with what Jon Hornstein said. He is spot on about attracting qualified buyers to the site and the costs associated with marketing to this crowd. DRR had a great idea, was pretty much first to market, had great technology, great content, industry pros on staff, and a LOT of funding. Probably too much. And they had two forms of revenue as well – licensing RM content and archiving services. I honestly thought they were a bright spot for differentiation and would be successful in their corner of the market.

    But sorry I am full of spam 😉
  24. I’ really surprised and worried, two years ago after a though carreer in editorial photography I start my new buiness in wedding photography, it was not easy but after some times I start to expand and to reach a niche of elite customers.
    Now I finally can produce fine reportages and stories but I was looking for the right place for my archive. I believed that DRR could be fine. This relly a bad news
  25. There is a huge difference between the number of photographers using PS compared to DRR. There are a few thousand at best on DRR compared to over 20,000 on PS. The PS team cut the collection loose before it cut into their archive side of the business. DRR on the other hand was depending on the marketplace to be their main revenue generator as their archive business never had the numbers necessary to sustain them.

    But the issue really isn’t about the “business model” per say, but rather with taking too much venture capital and out of control spending.

    Both companies took venture capital money. DRR took $20 million, and PS took $4 million. The founders of PS still own their company because they didn’t have to give it all away to venture capitalists because they knew just how much money they needed, and didn’t take a penny more.

    DRR took so much venture capital that they had to give up ownership and control of the company to the money people.

    The economy right now is really scary. If you’ve been following the news, almost every internet company is taking measures to “cut the burn rate,” so they can get to at least a break-even point and weather this storm. That’s what PS just did with the closure of the Collection, and it was a very wise move.

    Bottom line is that PS is a fiscally responsible company who doesn’t take on debt, and doesn’t take more investment money than it needs. That is a massive difference, and one that makes me feel like my work is safe with them.
  26. Jock – You have acted like a corporate flak for PS for years now. So much vitriol and venom. You really ought to move on a little.
  27. Sure, the burn rate at DRR was a problem, as it is at many startups. But that wasn’t the biggest problem.

    While smart enough to hire some of the most experienced, energetic and creative people in the industry, management at the company never quite got the hang of taking their opinions seriously. Most of them left long before the money got tight, the rest were let go when it did…
  28. As a DRR member with sales payments “pending” since August, it certainly looks like I won’t be paid for my 2 images sold via the Marketplace.

    Here is the response I got from my delayed sales payment inquiry just today:
    “I have asked our Accounting department to follow up with you on the outstanding payment for the August sale.”
  29. I have made 4 sales via Marketplace. Two of them were only payed after my persistent demands months after Marketplace has made the sales. Two sales are still “pending”. One of it was a quite good sale to an international and well known publisher. This sale was made in December 2007(!). Maris Berzins told me that the DRR accounting team has allegedly recognized this sale not before July 2008!!! Now, October 2008, I still wait for the check. Now DRR tells me that the client hasn’t payed till today! Who want’s to beieve them???
  31. ddr is waving goodbye:
    From their website:
    We deeply regret to inform you that Digital Railroad (DRR) has shut down.
  32. Safe alternative to Digital Railroad.

    Were you left high and dry by Digital Railroad going bust?
    I know a company that has a good piece of image library software – they do footage libraries too.
    Big advantage is that you’ll own the software; I hear they are offering credit terms too.
    Take a look at http://www.big-easy-footage-library-software.com
  33. In the light of the unfortunate demise of Digital Railroad, Canadian Based Lightbox Photo™ is stepping forward to offer it’s photo gallery software as the alternative solution. Photographers can create dynamic e-commerce enabled image websites empowering them to present their work how they want, where they want and when they want.

    Lightbox Photo™ allows users to create their own stock photo libraries or online proofing systems, meaning no more commissions to third party providers.

    For further information please visit http://www.lightboxphoto.com
  35. Then you add the fact that everyone will then try to download their content simultaneously – and your bandwidth will dwindle instantly – and your pretty much ensure the digital apocalypse…few if any will be able to retrieve all of their images in time – before the servers are shut down. This is utterly irresponsible of them – it’s completely reprehensible. It’s something they should revisit immediately.
    ———————–
    john edwin
    MLS
  36. Dear user of Digital Railroad,

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