Spot Runner Looks Like a Scam Runner

There's something adorable about Nick Grouf, the babyfaced, waggle-eared cofounder of Spot Runner. Who would think he'd be capable of bilking investors out of tens of millions of dollars, as one shareholder charges?

WPP, the advertising conglomerate, is suing Grouf and Spot Runner's other board members, charging them with a massive scheme to enrich themselves to the tune of $54 million while the online-advertising startup bled $80 million in losses. WPP is seeking $13 million in damages. (The lawsuit is embedded below.)

So many people believed Spot Runner's story — a startup ostensibly dedicated to simplifying the process of buying television ads, a challenge Grouf experienced firsthand while working on John Kerry's failed presidential campaign in 2004. Media giants from WPP to Grupo Televisa to CBS invested more than $100 million in the company — some of which WPP charges went into Grouf's pockets instead of into the company's coffers. Bob Pittman, a Spot Runner board member, is also accused of selling his shares, as are Battery Partners and Index Ventures. Spot Runner claims WPP just wants to get back its investment in a declining ad market.

Everyone loves an upstart. In 2006, as it raised its first round of venture capital, Spot Runner cast itself early on as the David against Google's Goliath as the search engine was starting to dabble in brokering television commercials.

Grouf told a gullible Kara Swisher last summer that the company was "scrappy," bragging about the low rent it paid on its headquarters on Wilshire Boulevard in Los Angeles. But the company lurched from business plan to business plan — first hiring dozens of video producers to churn out cookie-cutter TV ads, then buying a search-advertising startup, then switching from selling TV ads to small businesses to wooing national advertisers. Executives came and went, and the company laid off hundreds in waves starting last fall.

John Gentry, the company's president, blamed the economy, telling Fortune Small Business that "everyone's hard hit." But the WPP lawsuit has revealed the economy excuse as an obvious lie. Spot Runner took in $5 million in revenues in 2007 and lost $35 million. 2008 was hardly an improvement: The company took in $9 million and lost $45 million. (Spokeswoman Rosabel Tao would not comment specifically on those figures, saying that WPP's filing had "inaccuracies.") At those figures, Spot Runner didn't have anything resembling a real business, let alone one that would wax or wane with the swings of the economy.

WPP alleges that Spot Runner's executives and board members, including some of its early venture-capital backers, sold shares to new investors, pocketing the proceeds rather than putting the money in the company's treasury.

Spot Runner is now betting the company on something called Project Malibu, a digital system for buying television ads. Wait a second: Wasn't that the initial idea, to use technology to make buying TV ads easier? The fantasy of perfectly liquid markets has long entranced entrepreneurs, who can't understand why all business processes aren't as efficient as the equations they studied in college. But it's hard to imagine a business less efficient than one which loses $5 for every $1 it makes.

The picture painted by WPP charges are of a market that functioned very efficiently for Grouf and his pals. Too bad it didn't have anything to do with advertising.