Spark Capital’s Todd Dagres on NY vs. Boston, What’s Beyond Social Media, and Why Tech Investing Is Better Than Making Movies
“The time to invest in social media was two years ago.” That was a quote—or the gist of it, anyway—from Todd Dagres, co-founder and general partner of Spark Capital, during the venture panel at XSITE, Xconomy’s innovation summit last month.
Dagres ought to know, since Spark is an investor in both Twitter and Tumblr, the white hot mixed-media blogging platform—and Twitter co-founder Biz Stone recently became a Spark strategic advisor. So his quip seemed a perfect setup for me to ask the obvious follow up: What’s next?
I sat down with Dagres last Friday in Spark’s offices on Newbury Street in Boston to get the skinny on what he sees as the emerging new areas for investing that might take off the way social media has the last few years. “I can’t tell you that,” was his first reaction, but he wilted, as you’ll see. We also covered some other interesting ground—such as his views on what has made New York tech so hot and how it compares to Boston, why Groupon doesn’t get his investor juices flowing, why tech investing is better than making movies (Dagres had a stint as a Hollywood producer and still does it on the side), and more (Governor Patrick—read on, because there’s some stuff for you, too).
We started with New York, since late last month Spark closed its 19th deal in the Big Apple—joining in a new $50 million round for Foursquare—out of a total of 43 the firm, which was founded in 2005, has done. And Dagres says Spark has signed two more term sheets with NY companies. That’s a whopping percentage, almost half the total. The rest, he says, break down as a dozen in Silicon Valley, seven or eight in the Boston area, and a few others scattered around.
Here are the take-homes from our conversation:
Boston vs. New York—Dagres says New York surpasses Boston on some key parameters for entrepreneurship. “It really is a vibrant community of entrepreneurs. It’s a very creative environment. It’s an environment where there’s a sense for the customer. And it’s also a community where there’s a lot of sharing going on.” What Dagres calls “a powerful mixture of factors” has led to the ascendance of New York entrepreneurship. “I think it grew out of the Wall Street bust and also the transition from traditional media to digital media. Kids grew up in a media hub and an environment of a lot of risk-taking. That all mixed together. The other thing I will throw in there is the artistic element.” All these things previously existed in pockets around the city. “Now, it’s kind of come together into one big vibrant, collaborative community.”
Boston, says Dagres, now falls short of New York on at least two of the factors listed above: collaboration and sense for the consumer. When it comes to venture firms, he says Boston VCs have traditionally invested in enterprise-focused software companies-and see consumer-oriented startups as too risky. “It’s all risky,” he counters, and meanwhile the unprecedented ability of small companies today to reach billions of consumers is “incredibly powerful.” Besides Spark, Dagres could only name one other Boston-based firm he felt was comfortable investing in consumer plays and taking big risks (another, oft-cited critique of Boston venture firms, which Dagres agrees with)—and that was General Catalyst.
But Boston’s shortcomings vis à vis New York don’t stop with venture firms. Dagres says as a whole, Boston’s entrepreneurs lag New York startups when it comes to collaboration and sharing—and that, in turn, has prevented Boston from matching the spirit of the entrepreneurial community in New York. “We don’t quite have the critical mass in the community,” he says. “And we don’t have the same collaborative demeanor here. I think people here are a bit too insular: this is mine, don’t look, stay away.” Meanwhile, in New York, according to Dagres, the prevailing attitude is: “I got to collaborate and see what others are doing and improve my profile.”
Dagres calls efforts like the Boston Innovation District, created to attract startups, a start. Says he, “That’s nice, but when you consider what’s going on elsewhere, it’s a drop in the bucket, really. It’s not really creating that community effect that you have in New York. We need the community to flower and blossom, and then if it does we have the best, most creative minds in the world here.”
How Working in Hollywood Helped Spark, and Why Tech Investing is Better than Making Movies—In the early 2000s, after leaving Battery Ventures, Dagres became a movie and TV producer and spent time in Hollywood. So did general partner Alex Finkelstein, who created and sold several TV shows before joining Spark. Dagres says the Hollywood stint gave him a great appreciation for the ecosystem around the entertainment business and how the various stakeholders—producers, writers, audience, and so on—fit into a successful concept. That appreciation has helped Spark in its investments, he says, many of which also fall into the media and entertainment categories. “You got to have a sense for the ecosystems, everything from the initial creation to the ultimate monetization. You have to understand that cycle and the ecosystem around that cycle,” he says.
Moreover, he says, the tech business—specifically Internet-based business—is far better than Hollywood. With Web companies, he says, “you’ve got entrepreneurs, creators, and customers. That’s the way it should be.” Hollywood has all those, but in the middle of them come agents, studios, lawyers, and distributors. “The middle of that is basically anti-entrepreneurial,” says Dagres. “That’s what wrong with the entertainment business. It’s not what’s wrong with the tech business, which is why I like the tech business.”
A Message to the State of Massachusetts: Forget Movies, Think Video Games—“If you look at Massachusetts, we are giving hundreds of millions of dollars a year so that Hollywood will come in here and produce movies. Half of the movies are basically ‘why Boston is a shithole,'” Dagres says. “If you saw The Departed, did that make you want to come to Boston?” he asks. Or The Town?
But even if the movies were all positive about Boston, Dagres says, “We’re misspending that money.” It makes no sense, he says, “to bring Hollywood here to shoot a movie for 10 weeks and then leave. They’re gone, and the money’s going. Instead of spending hundreds of millions on that, why not spend the hundreds of millions to foster the development of companies here that will employ thousands and generate hundreds of millions in tax revenue?”
So where should the money be spent instead? “I’ve been pushing for years to give the same incentives that we give Hollywood to come here to shoot movies to the video game industry. The difference is if you start a videogame company, people stay here and work. They live here, they pay taxes.” And software constantly requires updates, unlike movies. “You’re never done with software. With a film you’re done.”
So did Massachusetts blow it by not matching the perks Rhode Island gave Curt Schilling to take his video game company, 38 Studios, from the Bay State to Providence? (Here are some details.) “No, because I think he wanted too much. He had a company that was unproven that was asking for a lot. He was an outlier. For every Curt Schilling company, there’s 10 that are worthy of receiving support, because they’re not asking for much, they’re just looking to have a competitive advantage and a little bit of a break.”
What’s Beyond Social Media—After his initial pronouncement that he couldn’t tell me which areas he believes are poised to take off, Dagres did talk about his investment philosophy and gave a few pointers to what he considers hot. “Here’s what you do,” he says. “You invest across a fairly broad horizon and then what you hope is one of the areas you’re investing in is going to be hot in the future.”
“If you look at what we’re investing in these days, I think one of the themes is going to be globalization.” Sometimes that means investing in U.S. companies bringing things that worked here—group buying, discount tickets, whatever—to emerging markets. But sometimes it is firms out to take advantage of the unique ways emerging markets have evolved. One recent investment is in Boston- and San Francisco-based Txteagle, which is developing a global ad network platform for mobile phones. In the U.S., Dagres says, advertisers have plenty of ways to reach people besides mobile phones: TV, radio, Internet, desktop, and so on. “In emerging markets, the only way you can reach people other than a billboard is mobile phones. That’s their lifeblood.”
On another front, says Dagres, “We continue to look at the commerce area. Right now, the group buying and all that, that’s way overdone. Groupon has no competitive advantage. It’s going to be kind of like a situation where there’s no customer loyalty, there’s no barriers to entry—and that whole market is going to get squeezed in terms of margins and cost of doing business,” he says.
But what he calls social commerce is different, he says. That’s not about selling coupons. “Social commerce means that people like me are interested in something, interested in a product. So if we’re interested in something, there’s an opportunity for us to collaborate…to get a better price and to provide a payment. It’s more about discovering what you want and fulfilling it in a social environment.”
Social commerce—this is a very interesting concept to me, although it has been bandied about for some time. It’s especially interesting because Spark is a big investor in Twitter, which despite its immense social success has yet to find a way to make a lot of money. Could this, I wonder, be the financial future of Twitter? Or Foursquare for that matter?