Scour, the multimedia file sharing site, said it has been forced to slash its workforce because investors have been scared off by fears of litigation against it by the recording industry.
The company's file swapping service is similar to that provided by Napster but offers the exchange of video and pictures as well as music.
Scour said in a statement that it had laid off 52 employees - the vast majority of its workforce - after it was forced to delay its next round of funding.
The statement stressed that despite the job cuts, its scour.com website will remain online and its services to millions of users will continue, albeit with a skeleton staff. Most of the casualties are believed to be software developers working on the next version of the company's multimedia search and swapping packages.
Scour is being sued for copyright infringement by a variety of industry groups, including the Motion Picture Industry of America, the Recording Industry Association of America and the National Music Publishers Association.
Concerns about the cost and potential management distraction caused by the litigation are behind a decision by investors to hold back from further financial commitment, according to Scour.
But despite the layoffs, the company said it remains confident it will win the lawsuit. "We remain hopeful that our dispute will come out the same way that the David and Goliath battle did," said Dan Rodrigues, Scour's chief executive.
Jay Marathe, head of consulting at Durlacher Research, said whether or not organisations like Scour and Napster survive, the ideas which such companies are pioneering are compelling and will change the music and video industries for ever.
"Scour and Napster are at the bleeding edge and whilst they may not survive, they have created huge demand. The concept of downloading music will go on because it is flexible and convenient," said Marathe.
Consumers now have to choose between obtaining music illegally from the likes of Napster or from "limited and high price" record label sites, said Marathe, adding that businesses which legitimately offer a fuller catalogue will emerge to meet user demand.
"Eventually someone will work out [how] to deliver music online in a way that does not upset the music industry," he said.
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