The Barbelling of the Venture Industry

December 18, 2014

Much has been said recently about the shifts in the Venture Capital industry since 2009.

Mark Suster focused the debate in his discussion of “The Changing Structure of the VC Industry.”

I recently chatted with Nabeel Hyatt from Spark Capital about 2014, their new growth fund and how they view themselves given these substantial shifts.

I met Nabeel over a year and a half ago when he was first planning to set up shop here in San Francisco. Spark Capital was founded in 2005 in Boston where the founders were based, but from the very beginning Spark has invested with a bi-coastal focus.

Spark were early investors in Twitter (NYSE:TWTR 2013), Tumblr (acquired by Yahoo! 2013) (first investment being a couple hundred K), Oculus (acquired by Facebook 2014) and Admeld (Google in 2011). To date this year Spark Capital has made 31 investments as per CrunchBase including two investments out of their newly raised $315M growth fund into WealthFront (series D $64M) and VivaReal (series C round of $41M). Spark Capital’s top co-investors as per Crunchbase are #1 SV Angel #2 Union Square Ventures and #3 Betaworks.

Crunchbase and Spark Capital maintain a spreadsheet reflecting Spark’s investments. This is part of a program called the CrunchBase Venture Program. You can see their spreadsheet here.

My interview with Nabeel is below.

What is unique about Spark Capital in the marketplace?

We look for three things: Product, Founder, & Vision. The traditional VC approach of Market/Model/Team doesn’t work for us. Often times we like taking risky bets on a founder who is creating a new market, when there is no way to analyze the market size, and sometimes the business plan is entirely unknown. We use the product experience and the founder as our guiding light. The most powerful technology companies today are built and led by people who can mesh beautiful design with brand new technology. They build with people in mind and really understand how they live, work, and play. When a product is the perfect balance of art + people + tech, real desire builds and it leads to product market fit. You see this pattern in many of our best investments, including Tumblr, Twitter, and Oculus. Magical products driven by imaginative founders can often create or grow a market in ways you could never add up on a spreadsheet.

How is your portfolio divided up geographically given your offices are in Boston, NY and SF?

We believe it’s important to go where the entrepreneurs are, which is why we’ve gravitated towards SoMa, SoHo, and the Back Bay for our offices, not Sand Hill Road. San Francisco has always been our #1 city for investment in terms of deals, because it’s just the global hub. But we always invest wherever we find amazing companies, so we have a very strong presence in New York and Boston, plus outliers in places like London, Detroit, Waterloo, really wherever we find that amazing product & team.

How has the venture landscape shifted in 2014?

Venture investing seems to be barbelling. On the one hand, larger and larger fund sizes where they are focused on writing huge checks & have huge staffs, on the other hand you have seed stage funds that are trying to get into 100s of deals and make an ecosystem play. The similarity in both of these approaches is that they are about scaling something that we feel is relatively un-scalable. As a founder you are picking a person, a partner, for the next two to ten years of your life and we strive to be the best partner to our entrepreneurs and the most active user of their products, which means keeping that personal, high touch relationship.

What have been your key investments for 2014 in terms of sectors and/or companies?

We have had some great companies partner with Spark this year, from Postmates to Wealthfront to Crowdrise to IEX. We also saw Oculus exit to Facebook, and Wayfair go public. That said, you can never be complacent, it feels like an amazing time to be building companies and we look forward to helping where we can.

Why did you raise a growth fund in July 2014?

We added the growth fund in 2014 to enhance our ability to support our internal breakout companies, acknowledging that sometimes they want to stay private longer. In addition it allows us to participate in some of the companies and founders that are close to our hearts but perhaps we missed along the way. Lastly, it helps our early stage fund stay focused on what we do best, partnering with founders on amazing products at the early, high risk, high reward stage we love so much.

There has been a lot of conversation focusing on the current requirement that many firms have – traction from the startup? Some say that “traction” is the opposite of true venture investing, where everything is still at risk. How do you think about the current focus on “traction.”

We’ve always marched a bit to the beat of our own drum, so I care a lot less about how other VCs are doing business than focusing on whether we are doing our own thing well. I will say at Spark we just don’t believe in having hard requirements for investment. The amazing companies are by definition exceptions, so when you set up a hard thesis it’s easy to miss something. For instance Oculus broke a lot of rules the Valley has about when and how you were supposed to invest, it was pre-product, pre-traction, and the prototype was still making people nauseous! But when you use that product even in the early state we first did, and then hear what the founding team’s vision was, it was the easiest thing in the world for us to get behind.

The CrunchBase Venture Program is open to all investing firms of all types. The goal is to represent the investments of all firms accurately. Join here.