As Spark Capital Raises Its Third Fund, LPs Focus On Its Twitter Stake

They say a rising tide raises all boats. Twitter seems to be having the same impact on Boston-based Spark Capital.

The 5-year-old firm is in talks with LPs about a third, $360 million fund, one that would match in size its second, 2007 vehicle, according to Private Equity Insider. And “expectations are that if it does take any new backers, they won’t number more than a few,” reports PEI.

The reason? That gleaming polestar worth potentially billions of dollars: Twitter.

Indeed, while Spark’s second fund was posting a 25% rate of return as of May 31, based on return numbers published this summer by UTIMCO, the firm hasn’t returned any money to its investors yet because its performance hinges almost entirely on the value of Twitter.

As of Twitter’s last funding round last year, its value was pegged at $1 billion. Analyst estimates since that time have ranged from $800 million to $1.5 billion. Spark has invested in three of Twitter’s five rounds of funding, including a $15 million infusion in 2008, a $35 million round in February 2009 and a $100 million investment in September 2009.

Altogether, Twitter has raised $160 million since its launch in 2007.

As PEI points out, Spark’s pre-Twitter, debut fund from 2005 isn’t doing nearly as well, with a negative 13.8% IRR as of Sept. 30, according to Preqin’s latest data.

Two investments in particular have been a drag on Spark’s performance: Verified Identity Pass and Veoh Networks. Verified Identity Pass, known for its “Clear” travel system, was founded in 2004 and raised $52.4 million from Spark, RRE Ventures, Lockheed Martin and others before it shut down last summer after failing to negotiate an agreement with its senior lender, Morgan Stanley. (Verified Identity owed it approximately $33 million.)

The video site Veoh Networks was another stinker. The company raised $67.5 million over four rounds, three of which included participation from Spark. Veoh was acquired in March by the Israeli company Qlipso, whose CEO proudly told the Wall Street Journal that he made an offer for the company two hours before it planned to file for Chapter 7 bankruptcy. The deal, said the exec, Jon Goldman, was for “sub $20 million.”

In addition to Twitter, Spark, which focuses on digital media, has a number of “hot” companies in its portfolio right now. Tumblr, focused on a subset of blogging, is one; the 3-a-half-year-old—now a top 50 site, according to Quantcast—has raised $10.3 million from Spark and Union Square Ventures.

Spark has also backed Boxee, a popular maker of an open-source software platform for entertainment across computers or traditional media devices. Boxee has raised $10 million from General Catalyst Partners, Union Square and Spark.