Adeo Ressi

Adeo Ressi was in town this week, battling a nasty case of pink eye and a broken toe. But those ailments aren’t slowing down the creator of The Founder Institute, a high-tech incubator which is attempting to help nurture as many as 600 new companies this year, including as many as 50 in Seattle. GeekWire chatted with the Silicon Valley entrepreneur — who was in town to attract recruits for his next class  — to get his thoughts on the state of the startup market, whether there’s a bubble forming in tech and what he thinks needs to happen for Seattle to emerge as a truly great innovation center.

In his view, Seattle is kind of stuck at the moment with an inadequate mix of both angel investors and venture capitalists. The most important thing that needs to happen to break that logjam is for wealthy Seattle techies to get off the sidelines and start making some deals.

“The one thing that is clear is that the funding environment is pretty poor,” said Ressi. “(There’s) a rather anemic group of venture capitalists, and a rather anemic group of angels. And so, if you ask why is that? It seems that you have a lot of entrepreneurs and executives at tech firms that have money, but for some reason they are not being enticed off the sidelines.”

For a technology market to thrive, Ressi says that there needs to be a strong symbiosis between the angel and VC community. At the moment, that doesn’t exist here. There’s plenty of potential, with Ressi noting that Seattle likely has as many rich techies as Silicon Valley. “There are a lot of rich people here,” he says. “So, there’s no reason why there shouldn’t be more angel investing.”

The Pacific Northwest also has a number of angel investment groups. But Ressi thinks those groups can actually have a dulling effect on the market, noting that they often lead to inaction.

“The naysayers in the room tend to dull the momentum of a deal, and if one guy is really negative it can kill the entire group’s interest,” said Ressi. He compares that to AngelList, an online matchmaking service of sorts which he says is a completely positive reinforcing cycle.

“You can’t say you don’t like the (deal),” he says. It is that sort of positive momentum which the region needs more of, which doesn’t always work in an environment known for the “Seattle Freeze.”

Nonetheless, Ressi sees opportunity in Seattle. And that’s one of the reasons why he and Dave Parker — who leads the Seattle program — are spending time helping to cultivate a new class of entrepreneurs.

“You have the talent,” he says.

But, for whatever reason, the community hasn’t produced a blockbuster consumer Internet company in at least five years.

Asked whether there’s a new bubble forming in the tech industry, Ressi pointedly notes: “Well, it is not happening in Seattle, that’s for sure.”

Ouch.

That kind of hurts, but it does speak directly to one of the challenges that faces the tech community here and it is one I’ve touched on frequently in the past. Where is Seattle’s version of Facebook or Twitter or Zynga or LinkedIn?

Globally speaking, Ressi — who sold the startup Game Trust to RealNetworks in 2007 — doesn’t think there’s a bubble forming like what occurred in the late 90s. That’s because the amount of capital going into startup companies is about the same as it was two or three years ago.

“I would be concerned about it being a bubble if the total amount of money going into startups had doubled, but that’s not happening,” he says. What’s occurring — which Ressi says is “really kind of weird” — is a class of companies at the top of the heap getting massive amounts of venture capital.

Instead of making five $10 million bets, Ressi says some VCs are opting to make one $50 million bet. “There’s a higher degree of concentration at the top, so the landscape has shifted dramatically,” he says.

Unfortunately, Ressi worries that this new environment could create a wasteland of companies in the mid-tier.

Programs like The Founder Institute, TechStars and 500 Startups — which he says are designed to make the company creation process easier — may help fill that void. [See also: Two Days in Silicon Valley: An inside look at 23 startups from Dave McClure's Demo Days]

Over the past 21 months, The Founder Institute has helped launch 300 companies. To date, more than 90 percent of those are still alive.

So, what’s it going to take to get those angel investors backing more startups in Seattle?

Ressi — whose program attracts mentors such as Z2Live’s David Bluhm, Big Door’s Matt Shobe and LiveMocha’s Michael Schutzler  — said it will take some coaxing. And he’s looking to spark that process with the new class of companies, which enter the program April 18th.

Ressi is still working out the details, but he plans to give a single digit percentage share in the entire pool of Founder Institute’s Seattle companies to any angel investor who bankrolls a graduate of the program. In other words, if an angel steps up to invest in a single company over a certain threshold, they will get a small slice of equity in all of the graduates of the program.

“The idea is to pull people off the sidelines,” said Ressi. “I think there are  a lot of people sitting on the sidelines in Seattle, and they need pulled off.”

John Cook is co-founder of GeekWire. Follow on Twitter: @geekwirenews and Facebook.

Comments

  • http://www.duncanhaley.com John Haley

    I had a client once ask to go from 80% small technology, emerging company holdings to 70% high quality municiple bonds. I asked him about the giant change in investing stance and he replied, “this money was hard enough to make once, I don’t want to have to make it again.”

    He still kept 10% invested with start up or early stage companies though (not 0%), which we encouraged. No risk = no reward, there’s just no way around it.

  • Bill

    Seattle should have a more robust angel community but I’d be curious how Seattle compares to other comparably sized markets in angel investing. There are not as many rich techologists in Seattle as in Silicon Valley, so I believe Mr. Ressi’s starting assumption is not accurate.

    It appears angels tend to be generated from home run technology deals. It generally takes huge home run deals to really create enough captial to generate a large group of angels, such as the PayPal mafia or former Googlers in Silicon Valley. Success then begets success with a group like PayPal then investing together, being successful and doing more investments. There have only been a handful of companies in Seattle that have generated significant new wealth in the past 5 or 10 years. You can probably count on one hand the number of $1+ billion deals in the past 5 years, and the list of $250+ million deals is not much longer. And a $250 million deal probably only generates a couple of new possible angels, not the dozens that PayPal generated or the hundred plus that a Google has generated. Early Microsoft and early Amazon money is now 10+ years old and not much new has been in to replace it. Certainly there are some great angels–the Second Avenue Partners team, Geoff Entress, etc. but it is not a deep bench.

    Also, how do you sort out which comes first, chick or the egg? Is the angel market anemic, are the ideas being presented copycat/me too ideas or both? Seattle is a great technology market and there are some really cool ideas but not a huge volume of them. There does not seem to be the steady drumbeat of new, original ideas that exist in Silicon Valley. Some of this is that it is a smaller market, but hard to tell cause and effect.

    • Danielle Morrill

      Do you really think Microsoft and Amazon have not generated just as many wealthy technologists? The problem is, they leave Seattle to start companies in the Bay Area or they retire to “work life balance”. At least that is how it looks from the outside.

      • johnhcook

        In fact, I am working on a story of a group of young entrepreneurs from Seattle who after college are planning to go to Silicon Valley rather than Seattle. That’s part of the problem in Seattle, and the community needs to come up with ways to foster young entrepreneurial talent.

        • http://twitter.com/chrisamccoy Chris McCoy

          Pay attention to what’s happening at UW in the entrepreneurial program. The B-School and CS-School are recruiting really top-tier talent. Why aren’t they producing really top tier companies? Why aren’t they working together more? What happens to companies that win the B-Plan competition? Why aren’t they blowing up? Please do some work there John. It’s an important issue, considering the state dollars that go into that talent curation system.

      • Bill

        I don’t disagree on the retire to “work life balance” point, but many of the angels in the Valley have semi-retired and angel investing is a hobby for them to stay involved after their retirement. After all, you can fairly easily be semi-retired as an angel because you don’t plan on taking board seats and if you leave for a few weeks at a time no one cares.

        There are some great angels in town, but most of us can list them pretty quickly–Geoff Entress, Bill Bryant, the Founder’s co-op team, the Second Avenue Partners group, etc. For a while, Ignition and Madrona both acted almost like angels because both did a lot of seed deals but I don’t know if they are still as active in the really seed deals.

        I don’t think there have been enough home runs in Seattle to create the possibility of a large group of angels, unlike the larger community in Silicon Valley. It would be hard to raise a steady number of $2+ million angel financings in Seattle. There just isn’t enough capital or enough people inclined to invest the capital they have. There is something about the combination of large scale home runs, particularly those generated at a point where they create large numbers of wealthy people ages 30-45, plus an entrepreneurial bent that spawns an angel culture which seem to be lacking here. Most of the people with serious money in Seattle made the money 10 years ago, weathered two massive crashes and are more focused on preserving wealth than on new investing.

        No, I don’t think Microsoft and Amazon have generated as many wealthy technologists overall. Microsoft in particular has generated no new real wealth in a decade. It is not an environment that fosters great entrepreneurial talent and few people with the inclination to be angels seem to stay at Microsoft, very different than my friends at Google in Silicon Valley. Amazon certainly has a lot of very good people but has not seemed to spawn many angels.

        I’d agree with John Cook that we need to make sure there is a way to retain good, new entrepreneurial talent in Seattle.

        • johnhcook

          Agreed. Here’s the big challenge facing the Seattle tech community, a story I just posted on two 18-year-old entrepreneurs from Seattle who want to build their next company (or companies) in Silicon Valley:

          http://bit.ly/ge9h4L

          My question: How do we keep this young blood here?

          • http://twitter.com/chrisamccoy Chris McCoy

            Highlight the money. It’s a wheel (TechCrunch) that can be repeated here in Seattle.

        • http://www.daniellemorrill.com Danielle Morrill

          I totally agree with you and John on the point that there needs to be a way to retain strong entrepreneurial talent in Seattle. I wonder what would attract more angel investors fro the Bay Area to Seattle to invest. I know Dave McClure has invested in several Seattle companies – which other angels from out of town make regular appearances?

  • http://www.puzzazz.com Roy Leban

    As both a grad and a mentor of the Founder Institute, I may be a bit biased, but I think Adeo is largely right. There are certainly far more angels in the Bay Area, but there are also far more people. It would be interesting to have hard numbers on percentages of potential angels vs. actual angels in all the major markets.

    We do have some great angels here, but we don’t have any super-angels, not by SV standards anyway, and it seems to me that people who could be angels here don’t step up nearly as often as they do in the Valley.

    I’ve been told it’s easier to raise $5M or $50M than $500K. Is everybody swinging for the fences here? That results in a lot of strikeouts. Perhaps we should look at the Ichiro model more.

    • Tacob

      Look where that got you. Grad then mento … scientology?

  • http://twitter.com/danshapiro Dan Shapiro

    There’s lots of deals getting done in Seattle. Geoff Entress’s portfolio includes dozens of early stage companies. Boris Wertz in Canada has done a number of deals here recently and is actively hunting for more. And the Founders’ Co-op “family” (I’m not sure if I mean it in the nepotism or mafia sense) hasn’t been shy with their dollars either.

    It would sure be nice to see more of this, though.

    • Danielle Morrill

      I want to read the stories of each and every small deal here on Geek Wire! If no one knows about these deals… Then no one knows!

      • johnhcook

        Because of the way startup deals now get reported with the SEC, these financing deals oftentimes get reported publicly here. Some startups do fly under the radar, and for those please send me an email at: john@geekwire.com. :)

        Also, we are planning some new editorial features here at GeekWire to spotlight promising startup companies in Seattle. Let me know if you have good suggestions. Thanks for tuning in.

        • http://www.daniellemorrill.com Danielle Morrill

          Love the new publication, I will continue tuning in and tip you off if I hear any exciting news. Thanks!

  • Bill Bryant

    I am in agreement with the other Bill’s comment, that we have a chicken & egg issue with Seattle. Angels don’t materialize from thin air; they have wealth to invest because they were involved early on with a startup that ended up generating enormous wealth. Angel investing is geographic (Bay Area angels typicallydon’t find their way into Seattle deals and vice versa); active angels are necessarily relegated to investing in the deals that are presented to them. Over the past decade here in the Pacific Northwest, there simply haven’t been “hundreds” or even “high tens” of awesome startups led by amazing founders that generated this kind of wealth.

    We’ve all seen the various lists of Top N startups, and unfortunately they aren’t here – can anyone point to an actual example startup that didn’t get angel backing that WOULD have been our Facebook/Twitter but DIDN’T get backing and then went away (to another geography or out of business)? (I can think of three quality startups, Twilio, DocVerse and Box.net, which got a start here and then left for the Bay Area, but even had these deals been done locally, would that change the underlying point?)

    Part of the problem is that (in my humble opinion) there are too many startups being created by the likes of Founders Institute, YCombinator, TechStars, DogPatch, Plug n Play, 500 Startups, etc – if Founders Institute is creating 600 startups, it would suggest that the collection of incubator like programs that are proliferating nationally will be creating some number of thousands of startups. Unless we believe that the future is going to be radically different from the past (the evidence is that in any given year in tech, there are under 20 startups that in retrospect were “worthwhile” backing because they become very successful) that in my mind is just too many; there aren’t that many quality ideas and quality founders to support that kind of startup rate.

    Founders Institute says it wants to create 50 startups in Seattle alone. I’m sure a few of these will result in significant companies that create wealth for their founders, employees and investors. But only a few. Remember that there are two words in “angel investor” – the investor part wants to generate a return on their capital. If Founders Institute can guarantee which 5 of the 50 startups they are supporting will provide substantive returns to the angels that back them, I’m sure these companies will find more than enough angel support.

    Btw, I consider myself to be an active angel investor with over a dozen active investments in local startups.

    Let the flames begin !

    • S.

      I can’t think of anyone in the Seattle angel or VC community who would have backed Twitter or Facebook at an early stage. Who would you point to that actually DOES those sorts of deals? I see tons of stuff dismissed as “pfff, social” or “don’t see how you would monetize” or “come back once you have revenue traction” or “oh it’s just too early for us” (from folks who claim to do seed deals).

      • johnhcook

        That may be true, but Seattle angels did take a gamble on Cheezburger,
        a completely off-the-wall concept. The company didn’t get VC backed
        until later, from Seattle’s Madrona.

        • S.

          That is a good notable exception that occasionally sheer traffic and user base gets recognized as valuable. I confess I’m still somewhat askance at that one myself, but hey, seems to work for them.

  • S.

    Seattle tech wealth isn’t mostly from small company success, though. It’s from Amazon and Microsoft. People don’t bet on small firms because that’s not how they made their money – they made their money being part of a giant firm that mostly crushed the small ones.

  • Anonymous

    I think the #1 thing Seattle misses out on is quick activity – either substantial exits (acquisitions by large companies), or next funding round. The Valley is packed with Angels who put in $50k to see it quadruple in 6 months because the company closed an A, or got acqu-hired by Facebook, et al.

    The #2 thing we’re missing is the super heated buzz network – TechCrunch/Mashable/RWW/etc are the start (hopefully Geekwire helps fill that void), but there’s a natural buzz that occurs that keeps the excitement going. I meet a guy at a party who’s talking about doing foo, next day at lunch I talk to three guys about foo, and on and on. Maybe it gets picked up, or maybe it’s just sourced to a VC or two, but the sense of networking, activity and attention are far higher. If you’re not actively listening, you’re missing out.

    I think money starts the process going, and there’s far too much of it in Seattle going into strip mall investments in Renton, but that’s not enough.

  • Danielle Morrill

    I’d really like to see more Seattle angels and VCs on Angel List, or maybe an Angel List competitor will emerge? Maybe Seattle angels don’t want to reveal the terms at which they are investing in first time entrepreneurs… Rumor has it Seattle terms are not at all competitive with the Bay Area. I think that accusation deserves some investigation, but if it is true and startups without funding know-how are being preyed on (as has been insinuated) that might explain why a breakout hit is not emerging in Seattle. This is all speculation, but it would be interesting to have more visibility into the deals getting down in the Emerald City (and I’m ready to head home when it starts looking promising).

    • johnhcook

      Agreed, Danielle. And this isn’t the first time I’ve heard that Seattle’s presence on AngelList is lacking. I think more transparency around deals also would be a good thing, and I certainly would love to dig into the issue you raise here. It would probably take a few entrepreneurs stepping forward who’d like to share the terms they got here in Seattle versus down in the Valley.

      Anyone? Anyone? Anyone?

      BTW, we’d love to see you come back.

      • http://www.daniellemorrill.com Danielle Morrill

        I’ll pass it on that you’re looking into this story, and see what we can dig up. I can’t believe its been 2 years already, but I’m still holding onto my place. Hope to see you at Seattle 2.0 Awards!

  • Brian Hansford

    Ahh yes, 1999 all over again. Brilliant.

    What is the saying? Buy fear, sell greed?

    The hype building around the current hype is interesting. The only ingredient keeping behavior from getting completely out of control is a painfully slow recovery. And that may be a good thing.

    -Brian Hansford
    CMO
    http://www.Zephyr47.com

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