Are Seattle VCs heading south?

Seattle venture capitalists are spreading their wings. And while that may prove to be a smart financial decision for the individual firms, it also may be bad news for the Northwest entrepreneurial community. Consider this: Nearly all of the major Seattle venture capital firms have placed at least one new bet on a technology company located in another state in the past six months.

The latest example is Ignition Partners, which today led a $6 million investment in San Francisco photography startup DailyBooth.

And this isn’t the first time that Ignition — a Bellevue-based firm led by former Microsoft and McCaw Cellular vets — has looked outside Seattle for deals. In the past three weeks, Ignition has made two other investments in San Francisco Bay Area companies: Hipmunk and SocialEyes.

Ignition is not alone.

Madrona Venture Group earlier this month backed MaxPoint Interactive, an online advertising company located in Cary, North Carolina. Meanwhile, Maveron last month made a high-profile investment in Chicago-based Groupon. OVP Venture Partners also has made a number of investments over the past 18 months in startup companies located in other states.

Is this a crisis? Probably not.

But it is a trend certainly worth noting, one that was mentioned in passing by a corporate attorney I was chatting with the other day.

The concern is that VCs — chasing hot deals in other locations of the country — miss out on bankrolling the next-generation of entrepreneurial stars in Seattle.

The recent activity must be especially painful for those Seattle entrepreneurs — and I know there are many of them — who’ve been passed over by Seattle VCs.

Venture capital dollars are precious. Losing even one buck to another state could mean missing out on the opportunity of finding the next Groupon, Twitter or Zynga.

Of course, the venture capitalists are seeking those type of big payoffs, and that’s one of the reasons why they are willing to jump on a plane to find them.

In fact, as I’ve noted before, some of the best financial outcomes for Seattle VCs last year involved companies headquartered outside the region. Adding salt to the wound, the pipeline for IPO candidates out of Seattle is pretty weak right now.

VCs will tell you that they’d prefer to do all of their deals within a 50 mile radius. That’s probably true.

But duty often calls, and hot deals now can be sourced nearly anywhere. (Perhaps the rise of advanced communications technologies is playing a part in the connections that VCs can have with entrepreneurs, no matter where they are located.)

It is not uncommon for venture capitalists to look elsewhere for deals, but the pace seems to have accelerated.

This isn’t to say that Seattle VCs are completely ignoring their backyard. After all, in the past few months, Madrona invested in Cheezburger; OVP backed Datasphere and Ignition bankrolled Korrio. The support of the VC community of TechStars, the startup incubator program which hatched its first batch of startups last fall, was truly unprecedented.

Nonetheless, the trend of Seattle firms doing deals in San Fran and Boston should be enough to snap the startup community to attention.

And it begs the question: Are VCs missing good deals around here? Or, are we simply lacking high-quality entrepreneurial ventures?

I am sure the answer to those questions will vary widely depending upon who you ask.

UPDATE: Maybe the VCs were listening.  On Wednesday, Ignition Partners and Madrona Venture Group announced an $8.5 million investment in Seattle-base Tier 3. See our story here.

John Cook is co-founder of GeekWire, a technology news site in Seattle. Follow on Twitter @geekwirenews.

[Flickr photo via mikebaird]

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  • Anonymous

    In regards to your text above:

    VCs don’t go “chasing hot deals in other locations” and “miss out on bankrolling local ones” – the local ones have to compete for VC dollars. Those dollars are not an entitlement based on location, or industry, or stage, or anything. VC dollars are earned in the competitive marketplace. Those local start-ups who have been “passed over” didn’t make the cut in that marketplace. The VCs may be wrong (and often are) – but it’s time to focus the spotlight on why more local deals aren’t measuring up as well as local folks would like.

    VC’s would love to drive rather than fly to deals – and so in the case of a “tie” – the winner is the local deal. But VCs duty ALWAYS calls – and that duty is to make as much of a return as possible for their investors (and themselves). If it’s not a tie, the money goes to the best deal regardless of location (within limits).

    To answer your question at the end. VCs are doing deals locally (as you called out) when they do measure up to national or world standards. They aren’t doing marginal deals locally just because they happen to be local. We have high quality local deals, and by and large they all get money. It’s the “almost high quality” deals that don’t make the cut – as it should be.

    If a start-up produces a product that doesn’t sell, they don’t blame it on “those stupid customers just don’t get it.” They look at what they have to do to improve the product so it sells.

    It’s time for the local entrepreneurs who do not get money to look hard at their idea, their technology, their team, their potential market and ask themselves the hard questions on how to make themselves more competitive for VC cash – not blame their stupid customers. (VCs are customers for the company’s stock).

  • Anonymous

    Not sure where to start with the previous comment, except to say that investing isn’t necessarily rational, and it’s hard to compare investment opportunities in private markets. Also, Seattle investors aren’t desirable compared to valley money, so often the only deals they can do in certain spaces are ones that might look “marginal”.

    I agree that the Seattle ecosystem should be a lot stronger. I don’t know if it’s weak because of the overwhelming dominance of the bureaucratic behemoths of Microsoft and Amazon, a blend of arrogance, ignorance, and conservatism in the investment community, a lack of experienced, successful entrepreneurs who mentor and support new companies without shoving them into emasculating incubators where the investors have all the leverage. (Seriously, didn’t we go through this with CMGI before? Wasn’t that the original strategy for Ignition? )

    The idea that startups blame customers when their product or service doesn’t get traction is ridiculous, and I hope that no readers take that statement seriously. It should be obvious that startups work like crazy to get traction and go after opportunities. It happens to be really hard to do.

    We need to spawn a new generation of entrepreneurs in Seattle. We need more smart, driven people to take the plunge, and we need more technology leaders to support the folks that are in the trenches, doing the work.

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