Madrona Venture Group Has Big Plans for the Seattle Area Tech Industry

For nearly a quarter-century, Madrona Venture Group has invested in and nurtured the region’s tech industry. It intends to do even more.
 
 
  • VENTURING FORTH. Tom Alberg, left foreground, started Madrona Venture Group in 1995 with three other partners. Today, the firm employs 30.

VENTURING FORTH. Tom Alberg, left foreground, started Madrona Venture Group in 1995 with three other partners. Today, the firm employs 30.

This article appears in print in the October 2018 issue. Click here for a free subscription.

A lot of tech giants call the Seattle region home, but one small company most Seattleites haven’t heard of has an outsize impact on the regional tech scene. 

Since its founding in 1995, Madrona Venture Group has been the primary early investor in many successful startups. Since 2016, four of them have gone public: Redfin, Smartsheet, Apptio and Impinj. Madrona cofounder Tom Alberg was also an early investor in Amazon. What’s more, Madrona has evolved from a straightforward investment firm into a company that nurtures the companies it invests in. It has also developed a platform for launching its own startups.

Madrona is decidedly different from your traditional VC firm. Besides a remarkable record for recognizing promising tech firms, it has always kept a tight geographical focus, with about 80 to 90 percent of the $1.6 billion it has raised being invested in Pacific Northwest entrepreneurs and companies.

In part, this geographical focus deliberately takes advantage of the synergy of expertise in and around Seattle. “[It was] the beginning of the modern tech revolution in Seattle,” Alberg says of Madrona’s early days. “People literally called us up and said, ‘Well, I understand you’re making some investments.’”

That synergy has continued. “There is so much going on in Seattle,” notes Alberg. “It has become in my mind the second-leading tech place in the world, next to Silicon Valley.”

HEAD START FOR TECH.The Create33 space designed by Madrona Venture Group includes conference rooms, lounges and a video production studio.

For the first five years, Madrona’s investments were made solely with funds from its four founders — Alberg, Paul Goodrich, Gerald Grinstein and William Ruckelshaus.

“If we found an investment we liked, we’d do some investigation and if we still liked it, each of the partners would decide if they wanted to invest in it and how much,” Alberg recounts. “Then, we’d take that combined amount and invest it. We were what I would call a group of ‘professional angels.’”

Madrona’s founders also embraced early seed funding of companies. “We like to talk about being involved from day one,” says Tim Porter, a Madrona managing director.

This focus on early investment — and on helping companies take their first strategic steps — persuaded Matt McIlwain to join the firm in 2000, just after Madrona opened itself to outside investors. “We crystallized our strategy that we were going to be really committed to early-stage information technology, roll up our sleeves and help build the companies in the Pacific Northwest,” says McIlwain. “I liked that.”

Early investment can, of course, be riskier. But McIlwain says Madrona — and the Seattle business community generally — has a uniquely entrepreneurial view of risk. In Atlanta, where McIlwain was VP of business process for the Genuine Parts Company before joining Madrona, he says, “If you tried something there and it didn’t work out, people would say, ‘Well, why did it fail?’ Here, people would say, ‘Well, what did you learn?’”

Early success made it easy for Madrona to attract funding from other tech leaders when it decided to bring in outside investors in 2000, including, according to Alberg, several McCaw brothers, Jeff Bezos and Microsoft executives. “We set out to raise $125 million,” he says, “and we stopped raising money six months later at $250 million.”

The key to specializing in early-round investment, Alberg says, is not simply recognizing winning technologies. “Part of it is selection,” Alberg acknowledges, “and part of it is helping. The helping is as big as the selection.”

Since launching 23 years ago, Madrona has expanded to a staff of 30, including specialists who analyze technologies and markets and advise companies on hiring and personnel, as well as financial advisers, information technology experts and communications professionals.

“Many of our companies are two people to five people when we invest in them,” says Alberg. “They don’t have an HR department or even an HR person. We are constantly trying to connect with people at Microsoft and Amazon and others who are looking for jobs and want to be with a small company.”

The help has been well received by companies Madrona invests in. “As a first-time founder, what you want in a venture capital firm is a partner — you want someone who will help you with the hard part and cheer you on through the good part,” says Amy Nelson, founder and CEO of The Riveter, a company providing “female-forward” workspaces and support for entrepreneurs and freelancers. Launched in Seattle in 2017, it has opened two locations in Los Angeles and opened in Bellevue in August.

In addition to seed funding, Nelson says Madrona helped fill key positions and, most critically, assisted with finance decisions. “My background is not finance, so to be able to work with a CFO who can help guide me is invaluable,” Nelson says. “Madrona doesn’t expect you to know everything 100 percent.”

Nelson says Hope Cochran, a venture partner at Madrona, was crucial to The Riveter’s early development. “I tend to partner with the CFO,” Cochran says, “but often these young companies don’t have someone in that finance seat yet, so I’m able to partner with the CEO as they are contemplating how the organization should grow and what their structure should be.”

Aaron Easterly, CEO of Seattle-based Rover.com, calls Madrona the “voice of reason” that helped make his pet-sitting and dog-walking service, founded in 2011, a success. “You have to be a little bit delusional to be an entrepreneur because the probability that you succeed is objectively really small, but being delusional is not conducive to making thoughtful decisions,” he explains. With Madrona’s advice and patient backing, Easterly says, Rover.com didn’t rush to market with its online platform.

“We really focused on the quality of the service and the quality of the tech versus short-term revenue,” he says. “Madrona does not seem to get as caught up as some venture firms in pursuing the shiny object of the day. They take a longer view.”

That patience has paid off. Rover.com now has 375 employees, $350 million in annual revenue and a presence in more than 10,000 American communities.

Even companies that have already launched and begun generating revenue find it helpful to tap into Madrona’s pool of expertise. Smartsheet, the Bellevue-based work-management platform provider founded in 2005, partnered with Madrona more than 10 years ago. “We wanted to further invest in our offering,” says Smartsheet CEO Mark Mader. “We wanted to take what we built and commercialize it. That was the objective in teaming with Madrona.”

Besides funding, Mader says Madrona gave Smartsheet access to its “talent ecosystem,” providing specific hiring recommendations for open positions. Mader also appreciates the networking offered by Madrona’s regular hosting of events, such as an annual CEO summit that brings together leaders of tech companies. “This is a way for earlier-stage entrepreneurs to get exposed to companies of scale, not necessarily in the context of trying to pitch them but to learn from them,” Mader explains.

Through the economic ups and downs of recent years, Mader adds, Madrona has been a steady guide. “That’s one thing I do not take for granted,” he says.

Madrona’s close involvement with companies it invests in has spurred the firm to go beyond finding, funding and nurturing. Rover.com, in fact, originated within Madrona Venture Group at the firm’s 34th-floor headquarters in downtown Seattle in an informal organization devoted to encouraging new startups. Easterly was an “entrepreneur in residence” at Madrona when, he says, one of the company’s managing directors came up with the idea for Rover.com.

After Rover launched, Alberg says the company decided to formalize the process by launching Madrona Venture Labs, a spinoff that has eight staffers working on prospective projects. With angel investors 

playing a more active role, Alberg notes, it has become far more competitive, even for well-established companies like Madrona, to make investments in strong startups.

In September, Madrona Venture Labs launched a new program for startups called MVL Accelerator, which will give selected teams $100,000 and a three-month course to help them launch with support from Madrona’s network of investors and entrepreneurs.

Madrona Venture Labs and the accelerator will both be based at Create33, a new space where startups and potential startups can work and network. It occupies the entire 33rd floor directly below Madrona — the two are connected by a new staircase — and offers wired workspaces for more than 100 personnel.

Despite its close ties to Madrona, Create33 is designed to operate independently. “What I really want to do is recreate the old salons,” says Executive Director Micah Baldwin, a tech entrepreneur who got his start at Amazon Web Services.

Create33’s 20,000-square-foot space will house some companies Madrona has invested in, but Baldwin expects about half the space to be occupied by firms with no funding ties to Madrona. It had signed up six businesses by the end of August.

Baldwin says that while Create33 will charge for use of its space, it intends to keep costs low. For example, an individual entrepreneur can use an unreserved workspace and conference room for as little as $100 per month. Interested parties from Silicon Valley and elsewhere can pay for a “drop-in membership” that gives them access to Create33’s 20 conference rooms, two boardrooms, an event space, and a shared kitchen and collaboration space.

Among Madrona’s partners in the effort are Amazon Web Services in cloud computing, Perkins Coie and Fenwick & West in legal services, and Jones Lang LaSalle in real estate. The University of Washington’s Comotion innovation hub is also a partner, though not a sponsor. 
So, what’s in it for Madrona?

Having entrepreneurs close at hand and networking with each other and with Madrona’s staff helps everyone, Baldwin observes. “They get more at-bats,” he says. “That’s what every venture firm wants.”

McIlwain agrees. His firm doesn’t expect to make any money directly from Create33. “We’ll be lucky if we break even,” he says. “It’s a discovery of people, potentially of companies we might want to invest in someday.” It is also, he says, a great way to learn about emerging new ideas. “It’s a two-way street,” he points out. “There’s nothing like direct physical interaction to learn from one another.”

Madrona’s geographic focus on the Northwest, its intimate involvement with companies it invests in and its expanding interactions with companies it hasn’t invested in speak to an awareness that the venture capital firm’s interests are closely tied to the interests of the broader community.

“Madrona wants to help build up the technology ecosystem in Seattle,” says Scott Jacobson, a Madrona managing director and a driving force behind Create33. “Our belief is that there are world-class technology companies that can and will be built in Seattle. Whatever we can do to benefit that ecosystem, even if there’s not a clear return on investment, will be good for us and good for the market that we play in.”

While Silicon Valley has become a sort of perpetual-motion machine for tech startups, Jacobson says Seattle, for all its successful tech companies, still needs to build its ecosystem. He sees Create33 as an important piece of the puzzle in bringing together the region’s rich tech resources — including university researchers, entrepreneurs and existing tech companies.

“We want to make it the nexus for entrepreneurs who are serious about building great companies, the place where they can learn and build and grow,” says Jacobson. “Many of those will not be Madrona-portfolio companies. But a rising tide lifts all boats.”

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