] HipMojo.com » Will Spark Capital Be Moving Upstream?

Will Spark Capital Be Moving Upstream?

Spark Capital - who has invested in a number of media and entertainment startups - is raising a second, larger $360M fund.

Todd Dagres thinks plenty of profitable ideas remain to be hatched in areas such as cross-platform media publishing and broadband networking. “There are still a lot of things that we can’t do with technology that we are going to be able to do down the road,” he says. “Internet video, for instance, drives a need for better network quality, which drives the networks to evolve, which leads to better content. We’re optimistic this is a virtuous circle.”

Spark I is 75 percent invested and will add roughly five more companies to its portfolio before year’s end, Dagres says. Spark’s partners saw that if they wanted to keep going in the same direction, they’d need more money by early 2008—hence the Spark II offering. The funds may differ in small ways, Dagres says. Whereas Spark I holds only minority stakes in its portfolio companies, for example, Spark may use the Spark II money to become the lead investor in some ventures. But as with Spark I, according to Dagres, the firm’s intention is to invest the entire amount raised, without holding back money to cover its own fees—something investors like to hear, Dagres says.

Spark has been one of the few companies even touching media and content… look at the panel last year where Spark’s Dennis Miller was the lone bull on content and media.

But, I wonder if they will all of a sudden move upstream by investing in mid-market and large cap companies?  Why do I wonder that?  Consider the following:

On January 8, according to SEC filings, Spark Management Partners exercised options to buy 2,583,979 shares of CNET for $7.74 per share at a total cost of $19,999,997 (call it 20M). Last week’s sale price was $11.50 per share, meaning that Spark will cash in $29,715,758 (before any fees). That’s a profit of just over $9.7 million, or 48 percent, in just four months. Nice.

Nice indeed.  I mean no disrespect to Spark here, because they really are a refreshing lot who is touching web video content, but that is better than most of their returns in their early stage startups.  The XConomy.com article points to ThePlatform, acquired by Comcast for $80-100M.  That’s great, but I doubt it’s the kind of 10x - 100x returns VCs typically strive for.  Moreover, the same article points to Veoh, who has raised $80M thus far… call me an old school traditionalist, but a company’s success should be measured on return on capital invested, and not capital invested.

Furthermore, another reason why I believe Spark might do that is the rise of digital media funds which will increase competition and demand for such startups, compressing Spark’s returns by making the cost of admission pricier.

Admittedly, I am not sure if the rise of new digital media funds is competition more so that cooperation, after all, Velocity Interactive Fund (the brainchild of Ross Levinsohn and Jon Miller) invested in the Series B for Next New Networks (along with Goldman Sachs) whom Spark had invested at the Series A round.

For more on that, check out my post on 2008: The Rise of Digital Media Funds.

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Posted By: Ashkan Karbasfrooshan | Jun 25th

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