Startups And Investors Are Moving From Easily Definable Products And Services

As convergence increasingly influences the direction of innovative products and services, entrepreneurs and the venture investors who back them must prepare to embrace less familiar concepts and strategies. JL  

Michael de la Merced reports in the New York Times:

As the start-up world continues to move away from easily definable consumer or corporate products and services, investors have had to take less-charted paths.“No one knows what the next big platform is. Now is a new market time.”

Betting on an automated driving start-up in 2015 may not have been the most intuitive gamble at a time when Google and Uber had already declared that self-driving vehicles were among their top research priorities.

But in the fall of 2015, Spark Capital was one of a few established venture capital firms to wade into the industry, helping lead a $12.5 million investment in Cruise Automation, a start-up based in San Francisco whose software helps cars pilot themselves. One of Spark’s partners became the only outside board member of the firm.

It was a bet that paid off quickly: Within six months, Cruise sold itself to General Motors for about $1 billion.

Investing in a company like Cruise might once have seemed unusual for Spark, an 11-year-old firm that first gained prominence by investing in consumer internet companies like Twitter and the microblogging site Tumblr. But as the start-up world continues to move away from easily definable consumer or corporate products and services, investors have had to take less-charted paths.

And so Spark, which formally announced on Monday its two latest investment funds, with a combined $1 billion in capital, has backed Cruise as well as some other eclectic companies: an upstart stock exchange called IEX, and Mark43, whose software helps police departments organize their records. Those investments sit alongside bets on more recognizable companies like Slack, the popular messaging software, and Wayfair, the online home furnishings retailer, which is now publicly traded.

“No one knows what the next big platform is,” Nabeel Hyatt, a Spark partner, said. “Now is a new market time.”

The firm, which has expanded to San Francisco and New York from its home base in Boston, has had some big wins. Tumblr, one of the firm’s first investments, was acquired by Yahoo for almost $1 billion. Twitter, where Spark also got in on the ground floor, went public in 2013 with a market valuation of over $14 billion. And Oculus, the maker of virtual reality headsets, sold itself to Facebook for $2 billion.

Not all of Spark’s bets have paid off. The firm was an early backer of Foursquare, a location-based start-up that has lost much of its popularity and whose valuation was cut in half by January.

Many of the best-known venture capital firms live on the fabled Sand Hill Road in Menlo Park, Calif., but Spark was born in Boston in 2005. Two veteran venture capitalists, Santo Politi and Todd Dagres, said they believed that as the dot-com bust receded from memory, the time had come to make bets on consumer internet companies once more. And they persuaded Bijan Sabet, a longtime acquaintance and entrepreneur, to come on board.

Relatively few firms, such as Union Square Ventures in New York, were ready to jump back into the consumer internet field, even as Facebook and Myspace were on the ascent.

“I think the lesson drawn from 2005 was, ‘That’s crazy,’” Mr. Politi said.

In founding Spark, Mr. Politi and Mr. Sabet said, the idea was to create a firm that was different from many traditional venture capital shops, where partners specialized in, say, enterprise software or clean energy investments. Instead, each partner can bring any idea to the table, and after debate, the partners decide whether to pursue the opportunity.

“Most firms are market-first; they’re in a market or not,” Mr. Hyatt, a serial entrepreneur who joined Spark in 2012, said of other firms’ focuses.

Investing decisions are often made by reaching consensus, without strict voting. (The partners briefly tried formal voting on investment decisions — via Slack — but quickly scrapped the idea.)

“When entrepreneurs get married to us, you get married to the whole family,” Mr. Sabet said.

The firm’s earliest and best-known bets were grounded in what Mr. Politi and Mr. Sabet called an appreciation for good product design. That has remained a constant, the two said, whether applied to a computer security start-up or the automated investments firm Wealthfront.

“In my view, they’re very smart and helpful investors, and really thoughtful about products and technology,” John Lilly, a partner at Greylock Partners who worked with Mr. Sabet as a fellow investor in Tumblr, said in an email.

All told, Spark oversees $3 billion in investment funds and has expanded the number of partners. One, Kevin Thau, is a former senior executive at Twitter, while another, Megan Quinn, came over from Kleiner Perkins.

Like other venture firms, Spark broadened its focus and added a growth fund aimed at older companies in need of bigger sums of money. To lead the effort, Spark hired Jeremy G. Philips, a serial entrepreneur who got his start at McKinsey, to work out of its New York office, and later Ms. Quinn, to be based in San Francisco and offer her insight as a former product designer for Google and the payments company Square.

The firm will now have more money to invest. Its fifth venture fund, announced Monday, will have $400 million under management, and its second growth fund will have $600 million.

Spark’s partners insist that the firm is unafraid of pushing into new industries, without slavish regard for whether there is an existing, easily defined market for a start-up’s products. The Twitter investment, Mr. Hyatt argued, would not have been made if the firm had been focused that way.

He also said that Spark tried to avoid investment fads.

“We’re not ambulance chasers,” Mr. Hyatt said, though he added that the firm has invested in what became hot deals.

On the flip side, some of its picks have been more esoteric. In June 2013, Spark invested in the first major round of Oculus, then just a promising virtual-reality start-up that subsequently became a sensation on the crowdfunding site Kickstarter. Other venture firms joined in, and Oculus surprised many by selling itself to Facebook a year later.

Spark was also one of the first venture firms to pour money into IEX, which was explicitly designed as the opposite of modern-day high-speed trading and gained fame as the subject of Michael Lewis’s book “Flash Boys.” Alex Finkelstein, the Spark partner who led the investment and who learned about IEX from Mr. Lewis’s book, praised the start-up’s ambitions to shake up the world of stock market trading and the quality of its founders.

And then there is the start-up Cruise. Kyle Vogt, one of its founders, recalled meeting several times with Mr. Hyatt and forming a personal connection. Several days after their third or fourth meeting, Mr. Vogt recalled, Mr. Hyatt came back with a “ridiculously complex” financial model and analysis that proved to be accurate.

“They ‘got’ the business, and they took the time to go deep,” Mr. Vogt said.