#sparkcapital

I just got back last night from a machine learning conference hosted by the University of Toronto Creative Destruction Lab. It was a well-organized conference that had tremendous energy. There is clearly something very interesting happening in machine learning right now.

One of the most important themes of the conference was the rapid acceleration of commercial opportunities for deep learning. There were a number of big developments in this area shortly before the conference, including Google open-sourcing its TensorFlow deep learning library. Geoff Hinton (legendary professor at University of Toronto, now employed by Google) gave a well-received talk on deep neural networks. Many of companies that presented (such as Atomwise and Clarifai) have deep learning at the core of their business. I believe that innovation in this area will only continue to accelerate as technology improves and businesses build crucial enabling infrastructure.

Geoff Hinton schooling the crowd on neural networks

After the conference, I hosted a dinner with my friend Blair Silverberg from DFJ for a small group of academics, journalists, entrepreneurs, and business people focused on machine learning. I made some new friends and left inspired by the market applications for machine learning, from real-time transportation optimization to deep learning-driven molecular diagnostics.

Not only was the conference a success, but I have to say that I was impressed by the city of Toronto. I had fun while I was there and ate well — which, if you know me, is always a priority. I also had a chance to visit with folks from the University of Toronto Creative Destruction Lab and the MaRS incubator. There’s an awful lot of talent in Toronto directing intellectual and creative energy toward startups.

It has been 10 years since we started Spark. As Bijan eloquently wrote yesterday, we are all very proud to have been part of it. We have great memories of all the amazing people we work with, of all the good times and bad, the endless travel and the moments of pure joy. 

Yet some memories stand out, like Goat Boy - one of us who shall remain nameless that has an uncanny ability to become Goat Boy at will - who still shows up regularly.

Or the sign at the door of our first ever office - somewhere in Cambridge, a sublease from Boston Private Bank - which surprisingly was effective in turning back some shady characters that would show up. 

Here is to many more years of “Goat Boy” and “no cash transactions”.

Exactly ten years ago today we launched Spark Capital. 

If memory serves we came up with the name at our partner Todd’s apartment one night over a bottle of wine. 

The other names were pretty boring. The one other leading candidate was the school newspaper where Todd went to high school. It was a horrible name. We debated, made jokes, had some laughs and debated some more. And we made a decision as a team. The firm was going to be called Spark Capital. Once we made the call we never looked back. 

We don’t make decisions over wine these days, and our team has expanded quite a bit over the years, but we still make team decisions with the same passionate debates and our sense of humor is alive and well.

We had so many ideas about what we wanted to be when we grew up. What types of startups, how we would invest, how we would treat founders, and how we wanted to change vc industry norms. We learned so much together through our shared mistakes, success and luck along the way. 

I am proud of these last ten years. In every possible way the journey has exceeded my wildest expectations. I can’t believe I get to work with our team every day. I’m thankful to our limited partners that backed our first fund and each fund since. And I’m especially grateful to the founders that have given us the opportunity to serve them. It is a true honor and privilege. 

And a special shout out to our families who have supported us over the past ten years. All the crazy travel and late night meetings seemed endless at times. I know it hasn’t been easy and I thank you from the bottom of my heart. 

Your work is to discover your work And then with all your heart

— The Buddha (@_Buddha_Quotes)

One year ago, we made our first loan to an amazing digital agency called Gin Lane.  Emmett Shine, the founder & CEO, had built an incredible brand working with companies like Warby Parker, Harry’s and J.Crew.  The business was growing, and he was looking to move their rapidly expanding team into a new office.  When we first met, he described the painful process of trying to raise debt capital, despite his healthy, profitable business.  

To me, Emmett’s story was symptomatic of an existing financial system that had left many of our country’s most inspiring entrepreneurs behind.   Business owners were too often faced with the unnecessary choice between waiting months to receive a decision or accepting fast cash at egregious rates.  

We started Bond Street to build a better future where access to financing would be simple, transparent and fair.

In the 12 months since we made that first loan, we’ve been proud to play a small role in growing some amazing businesses led by incredible entrepreneurs. We have been lucky to partner with owners like Bec Brittain who has designed Vogue-featured lighting fixtures, Jonathan Rubinstein who has helped foster New York’s coffee culture, and Brian Linton who through retail, is helping save the world’s oceans.

Along the way, we’ve also been inspired by the stories of dozens of other small business owners who are transforming their communities and deserve that better future.

Today, I'm thrilled to announce that Bond Street has raised $110 million in new financing from a group of investors including Spark Capital and Jefferies, most of which will go towards empowering hundreds of small businesses across the country to invest in their future.

I’m really proud of what our team has accomplished and even more excited for what’s ahead.  We know we’re just getting started on helping solve this important need in our country.

Over the next few months, we’ll be growing our team and scaling our lending. If you are a business owner who is looking to invest in your growth or if you are an entrepreneur who is excited to help change the future of small business financing, we hope you’ll join us!

#longlivesmallbusiness

Special thanks to our friends and family - you help make this possible!

VC firms like Spark see thousands of deals a year and only invest in 10-15. What makes us pull the trigger? 

Every investor is different, and people can get excited about wildly different companies. However, I believe you can boil down almost any venture investment thesis into three basic ingredients. This isn’t rocket science, but hopefully provides a simple window into how we think about things on this side of the table. 

1. Could this have a huge impact?

Imagination around what could be “huge” is a VC’s secret sauce. Spark happens to be a firm that’s very product and team-focused: we invest in high-performing teams building beautiful products we believe will capture the imagination of the world. Most VC firms are highly focused on business model and market, carefully analyzing a company's unit economics and the total addressable market for a new product or service before committing capital. We do this too, especially at the growth stage, but we also invest in companies creating completely new product categories, like Oculus. When Spark invested in Twitter, we had no idea how big the “market” was, but we believed that the product and team had the potential to change the way that people communicate globally. (To be clear — I had nothing to do with either of these investments and hadn’t yet joined the firm.) 

When we make an investment, we’re about to get married to a founding team for what could be a decade. We take this commitment seriously and think critically about the team’s ability to shoot for the stars and push through the hardest times because of the passion they have for their product. That's why we have backed some founders in our portfolio multiple times: we trust them and know that they are thinking big. 

From a financial perspective, discipline around only investing in companies that could be huge is probably the most important feature of a venture firm. For a $450M fund like ours to meet LP expectations, it needs to contain multiple exits in the $B range, or at least one big multi-$B outcome. (1) 

2. Could this company have a sustainable competitive advantage at scale?

Most businesses don’t fall into this camp, but venture investments need to. Businesses that could be huge in theory but have no competitive advantage at scale are difficult to invest in as a venture firm, as they are easily displaced over the 10-year investment horizon of our deals. The ideal is to invest in a company that could be winner-take-all in its category. 

Oftentimes, for internet companies this advantage has to do with network effects — for example, the “strong” network effects of a communication platform (e.g. Kik, Whatsapp, Snapchat), where users pull other users onto a platform because it’s necessary for their product experience, or the “weak” network effects of a marketplace (e.g. Kitchensurfing, Uber), where increased supply drives increased demand and vice-versa. For enterprise software businesses, the moat is often based on platform / data lock-in (e.g. SurveyMonkey, eShares). Sometimes, you get all three (e.g. Slack: a communication tool, app marketplace, and system of record for collaboration). (2) 

3. Does this business have substantial barriers to entry?

Operationally complex businesses or ones that rely on IP have the advantage of keeping out hordes of copycats and newcomers. This isn’t a necessary condition, and only provides a short-to-medium-term advantage. However, barriers help us to believe that we’re picking the right horse in the race in a potential winner-take-all category (see #2) where a long-term sustainable competitive advantage can be built. Postmates is an example of a logistically complicated business where only a few competitors have achieved any scale in the US. Freight Farms has substantial IP around its vertical farm technology and produce growing techniques, which gives it a leg up on the competition in building a distributed food production network. Biotechnology firms invest in companies that go through the FDA process, a harrowing ordeal and huge barrier to entry. (3) Oftentimes, an unusually talented technical team or one with a substantial “unfair advantage” (relationships, etc.) in their given industry creates an effective barrier and discourages would-be competitors. Palantir is a success story in this category.

Putting these three ingredients together, you have the recipe for an enormous outcome. With a huge business opportunity, the potential for a long-term competitive advantage at scale, and barriers for newcomers, there’s the chance for a truly defensible category-leader to break out. Companies like this are career-defining investments and are the ones that drive outsized returns in venture capital.

Ultimately VCs are human, and venture capital is a human business. We care about these three ingredients, but we also invest with our heart. When we can really see a founder in his or her product and know that the passion runs deep, that’s what helps us to become believers. Out of the thousands of teams we encounter each year at Spark, the 10-15 we back are the ones that win both our minds and our hearts.

Thanks to Andrew Parker, Ryan Shmeizer, Danya Cheskis-Gold, and Christina Phillips for helping me to edit and think through this piece.

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(1) Some quick VC math on this, which is applicable to funds of our size/stage at Spark: Limited partners are looking for 3x+ returns over 10 years when they invest in a VC firm. VCs who lead early-stage deals like Spark own roughly 15% of a company when it exits. Therefore, each $1B exit returns ~$150M to a VC fund. Most venture investments fail or merely return invested capital, so only the companies that exit for many times our investment valuation drive performance. You can do the math on what the aggregate exits need to be for a fund like ours to return 3x+. It’s a lot. 

(2)  I couldn’t be more excited about our recent investment in Slack, both as an avid user and for these more intellectual reasons.

Yesterday @nabeel and I recorded the 20th episode of our podcast Hallway Chat. During the podcast we also broadcasted the video live with Periscope which is in private beta but here’s a dropbox link to the video 

Show topics include:

-Live mobile video streaming apps: Periscope and Meerkat -Apple Watch -the state of valuations and financing in startup land

A (late) post, but very excited to see Sift Science grow. Fraud systems for commerce in general are very outdated, and as mentioned, have not kept pace with the growth of commerce platforms, and subsequently, variations of fraud.

Perhaps another side opportunity is helping marketers better combat fraudulent users and/or customers from their marketing efforts (versus fraud at time of transaction and payment). I saw this a few times at Gilt Groupe, and it certainly was not fun having to manage in the moment, or after the fact when trying to clean our data of these users. 

Hallway Chat #18 with Nabeel Hyatt (@nabeel) and Bijan Sabet (@bijan) Today's show: "What does Sony's entry to VR mean for Oculus? Plus Calendars, Secret, and Reed Hastings latest moves."