Madrona Venture Group today announced a new $300 million investment fund, creating a fresh pool of capital that it will use to bankroll more than 30 new tech startups in the Pacific Northwest.
It’s the seventh fund for Madrona, one of the region’s most active firms that launched in 1995, and equals the size of its sixth (closed in 2015) and fifth fund (closed in 2012).
It’s also another injection of capital for the Seattle tech ecosystem, which has long been criticized for its lack of available investment dollars relative to the robust engineering and entrepreneurial talent pool. Venture capitalists invested $1.5 billion in Washington state companies last year, compared to about $35 billion in California companies.
Madrona not only has a new fund but soon will have a new physical space. The firm is opening up another floor below its existing downtown Seattle office where it will house an innovation space for its new Madrona Labs accelerator, as well as the larger tech community. That’s an effort by Madrona to get connected to earlier-stage entrepreneurs — often the most risky time for startup investing, but also holding the potential for the most lucrative returns.
“We are very bullish on Seattle,” said Matt McIlwain, managing director at Madrona. “…We’ve really got the groundwork for a lot of different kinds of entrepreneurs to emerge. We are at the early days of where we see Seattle fully claiming its leadership in the global tech ecosystem.”
The fund will be used to make 30 to 35 venture investments, and at least 10 seed investments. McIlwain said the firm will continue its “Day 1” strategy of partnering with early-stage entrepreneurs and sticking with them throughout their startup journey. He pointed to four companies that Madrona backed from Day 1 — Apptio, Impinj, Redfin, and Smartsheet — that have all gone public in the past 20 months.
“It’s that combination of being there at a seed stage where we are helping to formulate the initial strategy and build the initial team, and also be there when the company goes public or gets acquired or has its long-run success,” he said. “That’s what differentiates us from really just about every kind of firm that tends to focus on one or more of the aspects of that.”
Investors in the new fund are mostly those that have previously participated in past funds — endowments, universities, foundations, large family offices, and high net worth individuals. The investment vehicles of Jeff Bezos (Bezos Expeditions) and Paul Allen (Vulcan Capital) also participated. Madrona now manages nearly $1.6 billion across its funds.
McIlwain said about 90 percent of Madrona’s investments are made in Pacific Northwest startups. The firm made 34 investments in 2017, its highest amount ever, according to data from PitchBook. Over the past year, it saw the fruits of early investments in longstanding companies that went public (Redfin; Smartsheet) or startups that were acquired (Placed; Mixpo; Lattice Data; Kitt.ai).
“Across the board, we’ve been very fortunate to have top quartile, top-performing funds, fund after fund after fund,” McIlwain said.
Madrona has long been one of the few venture capital firms in Seattle of its size, but new micro-funds from groups like Pioneer Square Labs and Flying Fish have recently launched. Despite added competition for potential investments, McIlwain welcomes more available local capital.
“We are subscribers to the bigger pie theory,” he noted. “We think there is a much bigger pie of innovation, opportunity, and ultimately successful businesses emerging in the Pacific Northwest and Seattle innovation ecosystem. Having others to partner with in that regard is a huge win for Madrona and for entrepreneurs.”
McIlwain said Madrona has a four-pronged investment strategy for its seventh fund, or as he put it, a “four-layer cake”:
- Bottom layer: The cloud and next-generation infrastructure. “There are big themes around serverless, micro-services technology, event-driven function, hybrid, multi-cloud,” he said.
- Second layer: Intelligent applications. “That means taking data and different artificial intelligence techniques, machine learning approaches, deep learning approaches, data labeling … to solve business problems better than ever,” he said.
- Third layer: Multi-sense. “We’ve used our hands to interface with computing for decades,” he said. “Over the next decade, we’ll use our eyes, voice, and gestures. Our computer will have its own set of eyes in the camera. This is an area where the Northwest is a little under-appreciated in terms of how much it has emerged as a leader.”
- Fourth layer: Digital and physical worlds coming together. “If you start with a customer problem and work your way back in the digital and physical world, together, you will come up with some pretty disruptive innovations,” he said. “Uber and Airbnb are a couple of the most celebrated examples, but let’s get even more of those types of companies to start here.”
Madrona is also closely watching blockchain and cryptocurrency startups, particularly at the “bottom” and “fourth” layer of said cake, McIlwain said.
“Generally we are skeptical about ICOs and a lot of these so-called currencies related to things that can live on top of the blockchain,” he added. “There are some exceptions, but we think some of the bigger opportunities are these applications and solutions and services that reduce friction through this combination of the digital world and physical world.”
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Though McIlwain remains optimistic about Seattle’s future as a tech hub, he did question the new head tax on Seattle companies making more than $20 million in annual revenue. The tax, passed last week by the Seattle city council, will levy about $275 for each full-time employee in the city.
McIlwain, who was also critical of an income tax on Seattle’s wealthiest residents approved last year, said he’s talked with several senior executives at large companies who are rethinking their growth plans. He said the tax will stunt growth “when you discourage the attracting of jobs and talent into a region.”
The tax is expected to generate $45 million to $49 million annually over five years to fund affordable housing construction and homeless services. It has won praise from many supporters in the community, but frustrated leaders in the tech industry.
“We are seeing decisions get made at bigger companies that will hurt our ecosystem over time,” McIlwain noted. “Even decisions made by medium-sized companies that could have benefitted Seattle significantly, will end up benefiting other cities, perhaps in and around the Pacific Northwest or the greater Seattle area instead.”
McIlwain also talked about Madrona’s efforts to increase diversity internally and among its portfolio companies at a time when just 11 percent of VC firm investment partners are women and less than 3 percent of VC dollars went to all-women founding teams last year.
“Having diverse backgrounds and experiences both at a cultural level and professional level is super important to us and to our portfolio companies,” he said.
McIlwain added startups “need to be intentional about having gender diversity on your board.”
“That’s been a big push for us for several years,” he said.