Spark Capital Dumped Lauren Leto Without a Breakup Fee

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Photo: Twitter

New York's nubile, young tech founders like to present the scene as sort of chummy place where technological innovation brings nothing but promise and everyone's happy to pass along a connection if they can help out a fellow entrepreneur. After all, with the influx of angel investors and VCs, there's more than enough funding to go around. But the bubble's rosy exterior got a bit tarnished over the weekend when TechCrunch's Sarah Lacy unearthed a dustup between Spark Capital, Texts From Last Night founder Lauren Leto, and Tumblr founder David Karp. According to Lacy, Andrew Parker from Spark Capital — a high-profile VC firm that has invested in Twitter, Tumblr, Boxee, and a number of other hot web start-ups — approached Leto about investing in her new venture, Bnter, a social site that illustrates little snippets of conversation that would otherwise get lost in the Internet slipstream. After Leto traveled to Boston for a pitch, Spark faxed over a term sheet, unsigned, but to consider it a done deal. The hitch? Spark neglected to run it by Karp, who "was incensed, viewed them as clearly competitive and told Spark he wasn’t OK with the firm doing the deal." Spark killed the investment, ticking off Leto's powerful angel investors Chris Dixon and Ron Conway. The rub came when Spark refused to pay a $200,000 breakup fee for expenses incurred when Leto thought she had the funds in the bank and started spending.

This might be what passes for drama in New York, but competitive portfolios are nothing new to the Valley. After all, investors like Sand Hill bubble enthusiast John Doerr is known for the investment strategy "no conflict, no interest," whether or not he actually said the phrase. Even Conway, the godfather of angel investing, has long been associated with the "spray and play" strategy that involves funding multiple start-ups going after the same audience. For now, however, Spark's Bijan Sabet looks to be sticking by comments in an earlier post (on Tumblr, naturally), "“If the idea of the new startup is completely radioactive to the existing founder (even if [we] are pretty sure it’s not competitive) we don’t pursue the new company.” Guess Spark is hoping loyalty to an older investment will outshine bad press around yanking a new one.

The Betrayal of Bnter [TechCrunch]
Bnter’s Funding Fallout and the Breakup Fee [Betabeat]