Bnter’s Funding Fallout and the Breakup Fee

As Betabeat noted a few weeks back, there was a little angst in the New York startup scene recently, after a large and well established company quashed the funding for a smaller, potentially competitive start-up.

The whole story broke over the weekend on TechCrunch. According to several sources in that report, Andrew Parker from Spark Capital got interested in Bnter and approached the company about an investment. Bnter founder Lauren Leto travelled up to Boston and by March, Spark had faxed over a term sheet, unsigned, but with the note that Bnter should consider the deal done.

Bnter, thinking they had big bucks in the bank, started spending capital and plotting expansion. Problem was, Spark decided they needed to run the investment by Tumblr’s David Karp first, and the young founder nixed the investment on the grounds that the two companies would be after the same users. It was a sudden reversal that blindsided Bnter and its high profile angel investors like Chris Dixon.

It’s hard to see direct competition between the two start-ups, and Spark partner Bajin Sabet alludes to this in a post he wrote at the time. “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.”

The final wrinkle to this tale is the so called “break-up” fee which VCs sometimes pay to company’s when the deal falls through. It’s a lot more common in M&A than it is with funding rounds, and in this case there was no John Hancock binding Spark to Bnter. Still, a number of VCs we spoke to wondered privately why Spark wouldn’t pay to avoid the blemish on their image from a story like this.

We chatted with sources familiar with the affair and it seems like Bnter has put any ideas about fundraising on pause for now. They have enough money to keep running for a while and the experience with Spark has made them wary of the VC process. More than anything, folks are curious what would make the idea of Bnter as a portfolio company so “radioactive” to Mr. Karp. Bnter’s Funding Fallout and the Breakup Fee