Spark Capital has had a busy few years. It launched in 2005 after raising $260 million, raised another $360 million in July 2007 for a second fund, and announced a funding initiative five weeks ago to focus on smaller bets in the $250,000 range. Spark has invested in a range of digital media companies, from thePlatform, which was sold to Comcast (NSDQ: CMCSA) for $100 million, to buzzy startups including Twitter, Veoh, Boxee and Tumblr. The firm has invested heavily in online video, which has come under pressure the last year because of the tough ad environment and has steep operating costs. Last week, I sat down with Mo Koyfman, principal at Spark, who came to the Boston-based VC fund from IAC (NSDQ: IACI) where he held a variety of strategic, transactional and operational roles. We talked about VC culture, Twitter (in which Spark is an investor), and the Asian gaming industry, among other topics.

Excerpts from our conversation are after the jump.

A Sanford Bernstein analyst published a report recently in which he called out Silicon Valley for having a culture where large Internet companies are often wooed by VCs into buying buzzy startups that have no real business model.  What is your response to that?

There are certainly deals you can point to where businesses were bought that performed poorly, yet there are many other examples where they have performed tremendously well for the acquirer.  It’s hard to speak in generalities. But what I will say is that big companies in general often have a very hard time innovating from within.  So it is very important for the larger companies to look externally to acquire innovative businesses and technologies. Often with these acquisitions they’re not just buying the businesses, but are buying entire teams of employees – tech teams, business teams – that often will stay around for a long time and add tremendous value. But also some of the larger companies that make these acquisitions don’t always make the best home in terms of environment, support, etc., which is important in understanding why these acquisitions succeed or fail, and how much it’s a function of the acquirer versus the acquiree.

Twitter seems to be the “it” startup these days. Some of the other “it” companies of the past few years have either gone out of business or are rumored to be looking for a quick sale. How is Twitter different?

What Twitter has done is create a concept that seems very simple but is very smart in a couple of fundamental ways in terms of the character limit of instant messages and the notion of following someone online rather than the traditional friend relationship. And it’s an incredibly powerful tool because it constrains what you can put out and allows you to singularly determine who you want to follow at any time and allow others to do the same, yet not force that reciprocal relationship.

In terms of them maintaining their position in the marketplace, one of the most important things the team decided early on was to keep the platform open and to allow lots of different folks to build on top of the platform in interesting ways. And what you have now is a rich, robust ecosystem being built around Twitter, and that’s a very powerful thing. It’s not just Twitter, it’s everything that ties into Twitter. It’s the entire universe that Twittter sits in, and the more that continues to happen, the more it’s difficult to upset that ecosystem.

Digital-music startups have huge cost challenges because they have to pay the labels to get access to the music. Doesn’t Twitter have a similar issue because it has to pay a fee to the cellphone companies every time someone Tweets?

We’ve got some great folks on board that are helping us navigate those relationships, and we don’t see it continuing to be a prohibitive cost of the business going forward. 

Do you think Twitter’s revenue growth is going to come mostly from advertising or commerce (i.e. sales or subscriptions, virtual goods, etc.)?

I won’t speculate on where it will come from and the mix, but I will say that they are smartly and deliberately thinking through all the monetization options.  You’ll see Twitter launch some initial stuff in the near future and continue to do more over time.

You’ve invested in a few different online video companies, including Veoh and Next New Networks. Veoh is a video aggregator, while Next New Networks produces its own programming; and Veoh sells mostly banner and pre-roll ads, whereas Next New Networks sells more custom sponsorships and syndicates its content. As a VC, do you see these companies as different types of bets?

I think that there are certainly two different sides of the content/distribution video landscape, but video is an area that we believe is going to be valuable long-term on the web and we’ve placed a number of bets – from Veoh to Next New to Boxee – to try and capitalize on the video explosion we’re seeing on the web.  It’s a challenging marketplace because the cost of hosting and streaming video is still expensive, but the costs will come down and advertisers have been a bit slower to take to the medium than we may have hoped, exacerbated by this economic environment. So it’s not a space without its challenges, but it’s one that over time will have some real winners.

Who will be the biggest winner – the aggregators or producers?

I think there will be winners on both sides.

You’re an investor in OMGPOP, which said it plans to make money by selling premium subscriptions and virtual goods. Some of the Chinese gaming and internet companies have been doing this well for the past year.

More than the past year, and not just in China – Korea and other nations. And by the way, Facebook by some estimates has sold in the hundreds of millions of dollars in virtual goods themselves over the past year. 

Let’s talk about virtual goods—why is that market growing so rapidly?

At the end of the day, virtual goods are purchased either for status or to enhance performance or for gifting purposes – all the same reasons we buy these things in the real world. And the more time we spend in the virtual world, it follows very clearly to me that we’ll be willing to spend money to fulfill those basic human needs and desires in the virtual space as we do in the real world. 

As we spend more time racing cars in the virtual space we’re going to want more stuff for those cars.  As we spend more time living in the virtual space with our avatars we’re going to want to make sure they are dressed the way we’d like them to be.  As we spend more time on Facebook and MySpace we’re going to want to give people Valentines’ and birthday gifts in those worlds as well. When you get down to the underlying psychological motivations for buying and giving goods many of those are transferable to virtual goods and fulfill the same need. You’re not just paying for the underlying product, you’re paying for the experience.