Tumblr Inc.'s $1.1 billion purchase by Yahoo! Inc. marks the biggest deal for a venture-backed New York startup, bringing a windfall for East Coast investors Union Square Ventures and Spark Capital while laying a foundation for further investing in the region's entrepreneurs.
Union Square, founded in New York in 2003, and Boston-based Spark, which opened two years later, first led an investment of $775,000 in Tumblr in 2007, and then $4.5 million the following year. The firms owned a combined 47 percent of the company, giving them about a 50-fold return, according to PrivCo, which tracks private companies and venture capital.
While about 40 percent of venture funding happens in Silicon Valley, twice the amount in New York and New England combined, Union Square and Spark have spent about a decade investing in a revival of the East Coast technology industry. Though not all of the joint bets have panned out, their success proves there's still growth in New York's startup scene.
"There are a bigger concentration of companies in New York getting exits than in recent memory," said Eric Hippeau, managing director at Lerer Ventures in Manhattan. "This Tumblr acquisition puts New York at the very front and center once again, and shows that this can be a good place to start something." Tumblr is the largest venture-backed purchase for a New York company, according to research firm CB Insights. The second-biggest was Yahoo's $680 million acquisition of Right Media Inc. in 2007, the researcher said in an e-mail.
Of the 10 startups listed as portfolio companies on both Union Square's and Spark's websites, seven of them are based in New York, including Foursquare Labs Inc. One is in Canada, while the most notable of all, Twitter Inc., is in San Francisco.
Spark recently opened a New York office as well.
The two venture-capital firms had poured about $10 million combined into New York-based Tumblr before any others joined the fray. Of the $1.1 billion from the Yahoo deal, about $286 million is going to Union Square and its partners and $231 million to Spark and its partners, according to PrivCo. David Karp, Tumblr's 26-year-old founder and chief executive officer, will receive $253 million, while Menlo Park, California-based Sequoia Capital, which joined the financing group for a $30 million investment in 2010, gets $176 million, PrivCo said.
About $88 million is going to later-stage investors, including Greylock Partners, Insight Venture Partners and Draper Fisher Jurvetson's growth fund, PrivCo said. New York-based PrivCo gathers its information from inside sources and data that's not all publicly disclosed.
Bijan Sabet, the Spark partner who led the Tumblr investment, said the two firms owned an equal share of the company, without saying how much. This deal is "one of the bigger ones" they've exited together, he said.
"We really like those guys," Sabet said of Union Square. "We like them personally, we like them professionally and we're proud of the things we've done together." Albert Wenger, a partner at Union Square, didn't respond to requests for comment. In a blog post Monday, Wenger said the acquisition means that "most of the big Internet companies will have a strong presence here, which is great for the local community." Union Square and Spark haven't had as much luck with Foursquare, the location-based mobile service that has struggled to find a viable business model.
With Tumblr, the board wasn't looking to sell the company, and the deal came around because Yahoo instigated the talks, Sabet said. Tumblr received various inquiries over the years from potential suitors, and had chosen to stay independent, he said.
"We weren't running around looking for a buyer," Sabet said. "We were talking to Yahoo, just strategically, about making our products work better together, and they got more excited about what we were doing." Founded in 2007 by Karp, Tumblr hosts more than 108 million blogs across its network. The acquisition is the biggest deal yet for Yahoo CEO Marissa Mayer since she joined the Sunnyvale, Calif.-based company in July. The startup had $13 million in revenue last year, according to PrivCo -- about as much as Yahoo generates in a single day.
Yahoo, which faces stagnating growth amid competition from Google Inc. and Facebook Inc., is betting that Tumblr will attract a younger audience of Web and mobile users, making the portal a more appealing platform for advertisers.
Sequoia's Roelof Botha said he couldn't resist betting on Tumblr in late 2010 after mistakenly passing on Twitter. He'd seen Facebook, Twitter and YouTube, another of his investments, find ways to generate advertising revenue without turning off users, and was confident Tumblr would do the same. Sequoia decided to invest less than a day after meeting Karp, he said.
"I thought, these are exactly the same revenue models that could apply to Tumblr," Botha said in an interview. "None had been built yet, but that was the organic type of ad that I thought could work." The focus now turns back to startups. For Union Square and Spark, that means companies like Work Market Inc., an online marketplace that matches businesses with freelancers. The New York-based company raised $6 million from the two firms in 2010 and recently brought in $10 million more.
Work Market is one of several emerging marketplaces that Union Square and Spark have backed, along with Kitchensurfing Inc., which lets residents of New York and Berlin find chefs for hire, and Skillshare Inc., a site where consumers can take video-based classes from a growing roster of teachers.
Jeffrey Leventhal, Work Market's CEO, said he first knew the partners at Spark and they introduced him to Union Square. The name recognition that both firms have established in New York is an asset for any East Coast startup, Leventhal said.
"It helps with recruiting, it helps with building a great board and it brings a lot more cache to the deal," Leventhal said. "They feed off each other."