Todd Dagres on the Media Trends Taking Spark Capital Way Beyond Boston
Boston venture firm Spark Capital launched three years ago with a relatively small $260 million fund mainly targeting early-stage investments at the “conflux of the media, entertainment, and technology industries.” Small funds typically focus on a given geographical region, in addition to their specialty areas. But on Monday, when Spark announced the hiring of former New York media executive Moshe “Mo” Koyfman as a principal, it was billed as helping the firm expand in the Big Apple. Indeed, Spark has made only a small percentage of its investments on its home turf—and it’s looking farther and wider as it establishes itself among the elite of media investors, with major plays in CNET Networks and Twitter, as well as a variety of interesting startups.
To learn more about the strategy behind the firm’s expansion, I asked Spark co-founder and general partner Todd Dagres about the trends he sees in media, technology, and entertainment—trends that are driving Spark’s investments (the company closed a new, $360 million fund earlier this year). We spoke, in particular, about how social media sites like YouTube, networking services such as Twitter, and Internet TV networks like Veoh (another Spark portfolio company) are using technology to distribute content directly to consumers—and how consumers, in turn, are using them to program their own entertainment. These changes are rocking traditional media, and everyone—old media and new media—is struggling to understand how to capitalize on the new media behaviors. The stakes are enormous. Says Dagres, “It’s hundreds of billions of dollars that are now ups for grabs in the whole distribution and consumption of content.”
Taking part in this disruption, and finding ways to monetize it, has always been a focal point for Spark—and its growing footprint in New York and beyond is only a manifestation of that.
“We had to make a decision. Do we want to invest in the best deals we can find close to home, or do we want to invest in the best deals we can find? And we decided on the latter,” Dagres says. As a result, he says, “We find ourselves less focused geographically on the New England area, and more focused on the space that we’ve targeted. Right now about a third of our companies are in New York, a third are in California [split evenly between north and south], and a third are everywhere else, including Boston. We’ve actually got more deals in New York than we do in Boston, but that’s because New York is a media capital.”
The strategy seems to be working. Judging by the scope of the firm’s deals, and its participation in major plays like CNET’s recent sale to CBS or Twitter’s financing, Spark is becoming an increasingly influential presence on the media-entertainment-technology landscape. Dagres says it took a while for the firm to make its mark. But now, three years into Spark’s existence, he says: “People know who we are. We’re productive as a team. We feel like we have a good sense of where to invest. We feel like we can compete with anybody in the areas we’ve chosen to focus on.”
So what are those areas? I asked Dagres what trends, or aspects of the ongoing media disruption, he is focused on now. He named three.
“One huge trend is monetizing all of this digital media and this social Web experience,” he says. “You’ve got lots and lots of eyeballs on the Web now looking at video, listening to music, and creating their own personal presence on the Web. The monetization has not yet caught up.” But, he says, “that’s normal. When TV first came along they didn’t know how to monetize it.” Indeed, TV shows had sponsors, rather than advertisers—and they sold tickets to the shows, he says. “And now, of course, it’s an $80 billion business.”
Dagres gave me a few examples of Spark investments aimed at “bridging that gap between the engagement online and the money that’s flowing there.” One is San Diego-based Veoh, which aims to deliver full-screen, high-quality video over the web, bypassing traditional broadcasting systems and regulatory restrictions. Another is Next New Networks, a New York startup founded by veterans of AOL and MTV, among others, to produce web-based “micro television networks” that combine traditional TV programming with community-based Web interactivity. Still another is Eqal, the Los Angeles studio behind the cult Web video series Lonelygirl15. While Veoh is a distribution platform, both of the last two companies are content creators that use the Web to get around the traditional media dominance of distribution channels. As Dagres puts it, “You don’t need a studio or network to be involved, or give up economics to them.”
The second big trend is what Dagres calls “life streaming.” Here, there are few better examples than Twitter, the text messaging/social networking/microblogging service in which people convey to their friends and followers what they’re doing at the moment.
“Twitter has taught me something that I didn’t know,” he says. “There’s a growing community of people out there that basically want to stream their lives, and they want to consume…the streams of other people’s lives.” This might sound strange to many, he says. But he notes that there are hundreds of millions of people, most of them under 30, who don’t find it strange at all. “These people, they connect with their friends and they connect over the Web in a way that we only used to do in physical venues,” he says.
Besides Twitter, another Spark investment that seeks to capitalize on this trend is called i’minlikewithyou, or IILWY. Dagres describes it as a cool little New York startup that produces multi-player, social games that attract communities of like-minded players. He calls it half game playing and half life streaming. “I think you are going to see more examples of live content flying around the Web where people are almost creating a kind of virtual proximity,” he says. “I think that’s a very powerful trend that we’re going to see.”
The third trend, an “infrastructure backlash,” stems from the disruptive power of the other two. The upheaval in media and entertainment is not all about applications and content, Dagres says. At some point, the information infrastructure will have to go through what he calls a generational shift in order to handle all the new forms of interaction and consumption. “We’re going to run out of…what I call quality of service,” he says. So to counter that, and provide the connections needed to do what people want to do, he predicts, there will be a wave of investments to add capacity and features to network systems.
One investment Spark has in this space is Intune Networks, an Irish firm that is developing optical switching technology for next-generation metropolitan area networks that will be better able to deliver high-bandwidth content such as streaming HDTV. Another Spark company, Westford, MA-based Verivue, is developing advanced networking solutions for enabling next-generation IPTV (Internet Protocol TV), in which digital television content is transmitted in the form of Internet data packets.
We spoke about one last aspect of Spark’s investment strategy that relates to the current turmoil in financial markets, including the poor market for public offerings—and investor concerns about whether portfolio companies will need lots of additional financing before an exit is possible. “Right now, everybody’s worried about what’s going on with the markets, and when is there going to be an IPO,” Dagres says.
Spark’s approach is to continue being aggressive in its investments, but not to pour huge amounts of money into firms that will need lots of additional capital any time soon—allowing the firm to be patient with its investments. “We pay attention to that, but we don’t let that paralyze us,” he says of the financial climate. “And our early stage focus allows us to let companies pursue big ideas rather than try to get to cash flow break even.”
Especially in these times, that would be welcome news to any entrepreneur.