B-side Entertainment, the Austin-based tech and distribution company that provides website services to film festivals, is closing. The company, which launched a New York-based distribution arm just 13 months ago, lost its funding from venture capital fund Valhalla Partners in late 2009. “We have spent the last four or five months looking for a [financing] alternative,” B-Side CEO and founder Chris Hyams told Filmmaker. “But we reached the end of our cash before we could secure new investment. We had to shut the company down.”

B-Side laid off the majority of its staff last week and throughout the weekend notified its filmmakers and festival partners. In the coming weeks Hyams and core staffers will seek new homes for B-Side’s films and its online festival scheduling service, Festival Genius.

In an interview, Hyams, President of Distribution Paola Freccero, and V.P. of Marketing Liz Ogilvie discussed the history of the company and recent events. Hyams launched B-Side in 2005 after working in the software industry as V.P. of Engineering at Trilogy. “I had spent 15 years in the software business, building huge websites for Fortune 500 companies,” he said. “At the end of 2004, Wikipedia was taking off and showing how groups of fans could create the largest encyclopedia in the world. I believed something like that could work in the film business. The goal was to build a business that connected directly with audiences — to help films be financially successful, and to do so in a way that was fair and transparent to filmmakers.”

B-Side’s first round of funding came from an early-stage VC fund in Austin, Texas. Said Hyams, “The [funders] said, ‘We don’t know anything about the movie business, but we think the idea of applying information science to a business with no access to that is intriguing.’”

The company’s initial thrust was in developing online festival guides that added social networking functions — audiences would rate films and trade recommendations — to a fest’s traditional assortment of informational and schedule materials. Said Ogilvie, “By doing the back-end of film festivals, B-Side used technology in order to explain how films connected to their audiences.”

The company did not charge festivals for running these sites. “The idea behind our business was to connect with audiences and filmmakers through the online program guides,” Hyams said. “[The festival business] gave us a direct line to audience opinion. We collected audience ratings and reviews for over 40,000 films on the festival circuit, and we built up a dedicated mailing list of people who love indie film.”

B-Side’s user base was four million people annually, and the company ran websites for over 250 festivals, including the Sundance Film Festival, Silverdocs and Fantastic Fest.

B-Side also offered distribution and marketing services to filmmakers like Doug Benson, whose Super High Me was an early success. B-Side organized a grass-roots “Roll Your Own Screening” program for the marijuana-themed doc. Marshalling demand from viewers who connected to the film through B-Side’s site, the company coordinated a “peer-to-peer theatrical” release for Super High Me in over 1,000 alternative venues in a single day in 2008. B-Side partnered with Netflix’s Red Envelope and Screen Media, and Hyams says the entire campaign cost $8,000. “Every screening was planned, booked, and executed by the venue or an individual, not by us,” he said. “It was a ‘no P and no A’ release, but it had the impact of [traditional] theatrical. Super High Me grossed $3.5 million on home video.”

Encouraged by this success, B-Side raised second-round financing from Virgina-based Valhalla Partners in Fall, 2008, and hired Freccero, formerly of the Sundance Channel and Tribeca Enterprises, to head a New York-based distribution division. Said Hyams, “Our film distribution strategy was to use our market research to identify films [to be acquired] and then use our audience to help market these films. The distribution side of business looked almost like a straight-to-video business where the primary revenue was coming from DVD, VOD and television. But we were also handcrafting grassroots alternative theatrical releases.”

B-Side quickly acquired nine films, paying no advances but deducting no expenses and splitting revenue with the filmmakers 50/50. The diversification away from pure service work, however, had its challenges. Said Freccero, “On a tactical level, there were barriers. Every filmmaker wants to see their film distributed to traditional theaters. We believe in the power of people in a dark room, but we didn’t want to fall into the old trap of spending gargantuan amounts of money. When filmmakers heard that we didn’t do traditional theatrical distribution, they’d say, ‘Maybe I want to go with IFC or Magnolia, where I know my film will open in a traditional theater.’”

The company’s most recent release, however, did open in a traditional theater. Still Bill, a documentary about soul singer Bill Withers by directors Damani Baker and Alex Vlack, played the IFC Center in January where it grossed $12,500 in its first week. “It was our first opening in New York with a New York Times review,” said Hyams.

Freccero says the specialty film business’s fixation on the traditional theatrical release was ultimately detrimental to B-Side. “When it comes to the DVD world and to some extent VOD, statistics drive sales, so when you have a film that is not reported on Rentrak, it doesn’t matter that it had 900 engagements across the country. Video buyers just know it is not on Rentrak.” Hyams also points out that B-Side’s acquisitions have played traditional theaters alongside alternative venues. “Lots of arthouse theaters around the country have been embracing our model all along,” he said. “Tim League at the Alamo Drafthouse has played all of our films.”

Still, B-Side’s films were never heavily advertised in traditional media, and its opt-out of traditional P&A spends, while curtailing costs, made it hard for the company to achieve the visibility of its distributor competitors. “I don’t think quarter-page ads in the New York Times make that big a difference when you are targeting small niche audiences,” Freccero said. “But from a perception standpoint, sure, if we had spent more money on films we would have closed contracts faster and caused some bigger films to come our way. But it wouldn’t have made our films more profitable.” “We would have had an easier time getting covered in the trades,” said Hyams, “but our financials would have been worse.”

In the last few months, Hyams says the company’s prospects were encouraging. “We were in the process of translating our festival business from a free model to a pay model,” he said. “It would have paid for itself in another year. And on the services side, we were making money. We established B-Side as an entity that people could understand, and we had a lot of demand from other distributors looking for ways to connect directly with audiences. Distributors are realizing that in a VOD world they need to be in direct contact with their audiences, but no distributors today are. B-Side has something to offer them.”

Freccero said the mainstream success of Paranormal Activity, which relied on fans to spread the initial word and to request screenings, has also stoked recent interest in B-Side’s model. “People initially wrote us off as a kooky distribution attempt to digitalize the film distribution world,” Freccero said. “But recently people were saying, ‘Wait, you guys are onto something.’ Younger filmmakers, who grew up experiencing film content in a different way, have been more open to our model, and in the last couple of months they have started to come to us first, before their films were even finished.”

Ultimately, though, the revenue being generated wasn’t enough to satisfy B-Side’s funders. Valhalla had invested $2.5 million but in November, 2009 declined their option to continue financing the company. Said Frecero, “The VC world is one that looks for astronomical success in short amount of time, but the film business has never been about quick success. It’s about who can stay in the business long enough to become profitable. There is just a big discrepancy between what a traditional VC [fund] wants to see as a success and what is possible in independent film’s new world order. It’s not anyone’s fault — just unfortunate timing.” “It takes 12 to 18 months to release a film and begin to collect,” Hyams said. “Everything we know about the films is that they would have been profitable, but we had yet to collect 80 percent of the revenue.”

In recent months, B-Side, represented by William Morris Endeavor Entertainment, has met with potential new funders. “We have gotten in front of everyone,” said Hyams. “However, the larger companies have longer decision-making processes. The independent film business is in some kind of freefall, and there is tightness in the capital markets. Quick deals are not getting done. We haven’t been getting ‘no’s,’ but, instead, ‘We could put in ‘X’ in six months’ or, ‘This is a perfect fit for us but we’d like to be in business with you for a year first.’ The clock just ran out.”

Concludes Hyams, “We find ourselves at a time of great upheaval in the film industry. We are somewhere between the old and the new world. Technology is altering the way films are being made, and there are new avenues for how films can be consumed. How audiences discover and find films — that’s what’s we have been focused on. We have proven an amazing amount of things about how audiences become engaged and how to connect with them, but we were not able in that time to build a business that would sustain itself.”

Now, Hyams says, “We are wrapping up the distribution business, working with different partners to find the best homes for the films. We want to make sure the filmmakers are being taken care of. Lots of times when companies go out of business, the films go into limbo, and it’s important to us that that not happen. We are also looking to find a home for the festival technology we have been building for five years. Lots of people have been interested — there’s been a tremendous outpouring. This festival technology will be back.”