How Spark Capital invested in startups like Twitter, Tumblr, Foursquare
Spark capital, a Boston-based venture capital firm, managed to take early stakes in some of the hottest names in consumer tech. How did he do it when he was based thousands of miles from Silicon Valley?
Founded in 2005, Spark has a specific focus on tech startups in media, entertainment, and mobile. The company invested in Tumblr in 2007 and Twitter in the first half of 2008. They are now two of the most prominent social media companies. Spark has also invested in Foursquare, Boxee and OMGPOP, which was acquired by Zynga. Unlike other companies, Spark does not invest in businesses, clean tech, or other areas of technology. While other companies have raised $ 1 billion in funds, particularly from 2006 to 2007, Spark has kept their funds relatively small. His first fund was $ 265 million, his second was $ 360 million in 2007, and his third in 2010 was also $ 360 million.
Spark is also organized so that all partners can work with a holding company, not just the partner assigned to a company. Finally, Spark invested aggressively nationally even though it was based in Boston. Associate Bijan Sabet, for example, had already spent ten years in Silicon Valley and is regularly in Silicon Valley.
Perhaps the most important factor has been the focus of investors on consumer technologies, as users themselves. Sabet, for his part, is active on Foursquare, Twitter and Tumblr, posting photos, music and other items he encounters. âThe other thing that has given us an advantage is that we are hyper-obsessed with the consumer,â says Sabet. âWe are also users of these products. Because we are so focused as a fund and we are all passionate about these products. We tend to get our hands dirty. We don’t just accidentally sign up (for a service) and look at the stats.
When investing in mainstream internet companies, many investors look at the founders, the market, or the original traction or plan of the company. But there’s also a certain instinct, or an attraction that Sabet – as a user himself – had for companies like Twitter and Tumblr. âTumblr had a 20-year-old (founder David Karp) and they had just launched a product without any significant metrics,â says Sabet. “I fell in love. We invested in Twitter when it had 11 employees and a few hundred thousand active users. I got hooked. It guided our instincts.”
With these kinds of businesses, there’s something you can’t forget, says Sabet. He felt it even when these companies were relatively small:
âIt immediately grabs your attention and you can’t get it out of your head,â he says. âAs you use it, it becomes more and more obvious why it’s so powerful. When I first joined Twitter, I was blown away by how easy it was. But I didn’t. not a lot of followers. But as I used it more it had an interesting little community then. As each day went on the value grew exponentially. It’s not like the first day the clouds parted. But that was the kind of thing where I couldn’t get it out of my headâ¦ The question we asked Can we imagine these things becoming massively important? C ‘was the act of faith we were ready to take. “
How did Spark, as a new business, get entrepreneurs to take their money when there were a lot of other more established businesses? They had to establish that they knew their subjects coldly. âNo one had really heard of us,â says Sabet. âWe were 3,000 miles away in the case of Twitter. We had to demonstrate that we would be good partners and we really understood what we were doing. It was not obvious for entrepreneurs to take their chances on us.â
But building a successful mainstream internet business requires attracting a massive user base. But how do these companies do this while building a business model? Sabet believes in getting the users through first. Even if it means waiting several years, as was the case with Twitter. Likewise, Google has waited several years, says Sabet. Twitter considered going for a paid version, he notes, but decided not to go that route. Instead, he wanted to focus on improving Twitter as a free service, even if that meant delaying revenue generation. âI really believe that with consumer apps and services, you have to reach massive scale before you think about revenue. Twitter, one of the first things we thought about – we didn’t commit but we went through our minds – you could subscribe (and pay) for analytics. A premium versionâ¦ But that would have required so much attention. The main product failed to attract attention. You have to constantly give the user more and more good things. And the answers (on the economic model) are revealed. If you crash your business model too early, you will never profit from these things. “
What was unique about the founders of Twitter and Tumblr? âThe two have merged extraordinary technical capabilities with consumer taste and design,â explains Sabet. âIt’s really unusual. We’re looking for that a bit. This combination is so rare. You usually have highly technical people or people with good design but not the ability to do things. When you see this combination, it can. produce magical things. I think those two had that in the beginning and still do today. “
Spark is interested in founders even if they don’t have the best references. A number of the founders of the portfolio did not complete their college education. Some may see this as a plus. âThey wanted to go looking for something. They see the world very differently. They are self-taught. They wanted these things to exist in the world. They wanted these products to exist. For me, it’s much more interesting than it is. an MBA student who found white space in a market and outsourced engineering … Biz, Jack and Ev each had something special. Even something like the Fail Whale. You saw the personality ooze out of the service, while other products are utility products. “
Another Spark investment, Foursquare, also had a founder with outsized ambitions and big vision. âFirst of all, Dennis (Crowley) is amazing. He had that mix of fun and utility. He had the play element of serve plus the utility of knowing where your friends are. a game. We’ve seen people try these things before. But they didn’t do it elegantly. If you had to describe these things, it’s hard to describe in the abstract. If I describe it in the abstract as being fast, simple and easy to use you would say, yes I would use it. If I told you it would be limited to 140 characters and SMS. You would say in an abstract way, eh I have to (try) this. “
Meanwhile, Sabet is now particularly interested in bringing social media and new technologies to markets that have been slower to change. The things that really excite us. These are the things we’ve learned in the consumer social space – bringing that to new markets around a traditional gatekeeper. Areas like education, finance or health. Twitter is completely democratizing the media. But look at other markets where there are still custodians.