Madrona’s Matt McIlwain: Silicon Valley has a bad case of indigestion and may be ready for a correction

Madrona Venture Group's Matt McIlwain speaking at the University of Washington. Photo via UW CSE

On Tuesday, we caught up with Madrona’s Matt McIlwain to talk about his firm’s new $300 million venture fund and why he’s so bullish about the Pacific Northwest startup community.

Today, we’re back with the second part of the interview in which the veteran venture capitalist discusses everything from heated valuations to the effect of the Facebook IPO on the startup market.

McIlwain is generally upbeat about what’s occurring in the tech industry, seeing opportunities in various “points of intersection in innovation.” Madrona plans to make more than 30 investments out of the new fund in the next four years, so McIlwain and his colleagues are certainly planning to hit the streets of Seattle, Portland and Vancouver, B.C. in the coming months and years as they look to find the next great entrepreneurial success stories.

PART TWO

Could Silicon Valley use some Pepto?

Where are things headed in the tech industry. Is it a good time or are there warning clouds ahead: “I think there are two things that we should separate, which is the pace of innovation and our enthusiasm for that and what happens with valuations. As we well know in the public markets, oftentimes companies are in the middle of doing great things and they miss a quarter and take a pretty significant valuation hit. And so their stock price goes down. Sometimes valuations are based on psychology more than anything else. On the valuation side, I think there may well be in the Valley some indigestion around a variety of factors, but I think that’s partly due to the fact that there’s been such an amazing hype cycle in the last 12 to 18 months in the Valley that maybe they are due for a correction. In contrast, I think on the valuation side in Seattle — we have not experienced that as much. Have we seen some uptick in valuations over the past 12 to 18 months? Yeah, I think we’ve seen some modest uptick. But certainly not anything to the extremes of some of the things that I’ve heard about in the Valley. We are not victim to those sorts of ebbs and flows of valuations quite so much.”

What’s getting you excited about venture investing right now: “We are incredibly energized by the innovation and the points of intersection in innovation, whether that’s mobility and enterprise security; or mobility and analytics; the next-generation storage in cloud computing… There are really disruptive developments and exciting trends that are going on, and I think the Pacific Northwest is incredibly well positioned for those things. Cloud computing is an example, and between what Amazon is going and what Microsoft is doing … we’ve now got a very big and important part of what EMC is doing, at least from a scale-out storage perspective, plus this is still the hometown of Paul Maritz, who is the CEO of VMware…. Then you add to that the Parallels team and all of the Citrix folks … and all of the things Amazon is doing in cloud. It is an incredibly exciting time, and we are still quite early in the whole transformation to cloud computing. And then I can talk about all of our companies, but you don’t want me to be a commercial for them. And then you see some of the things in mobility. Five years ago, mobility was a much harder space because the carriers and handset manufacturers had a lot of control of innovation and any software that ended up on a handset, and that’s been radically changed. Software-as-a-service. Almost anyone with a little capital can start a new software-as-a-service offering in the cloud or directly on top of someone like AWS or other architectures. This is a really energizing time, and we think the Pacific Northwest with some of the open source stuff and social innovation going on down in Portland with companies like ours such as ShopIgniter, but there are others too … it is just a really good time.”

On the pricing of the Facebook IPO: “My quick view on that is that they priced that IPO just about right. The media fundamentally understands what IPOs are, they are a fundraising opportunity for a company. Generally speaking, a company wants to raise money at the highest share price that they can, support in the market. A better IPO from the company’s perspective is if the stock ends up slightly above the IPO price. Clearly, in this case, the stock has not traded above the first day of the close of the IPO price. My opinion, I think the tactical mistake that was made is that the company with the strong pricing decided to sell too many shares, and I am sure there are a lots of people who can diagnose why that happened and how that happened. I am not an expert on that. But I think they upped the number of shares into the IPO right at the end, and they couldn’t actually support that price given the additional number of shares, and that’s why we’ve seen that stock go down. Even where the stock ended up today …. it is still at a healthy valuation. Because IPOs have an element of psychology to them, is there going to be some self examination going on in the Valley for a while? I am sure there is. My hunch is that … a couple weeks from now or a month from now, the next tech IPOs, let’s say ServiceNow gets out in the next couple of weeks or there are others that get out, if they get priced well and are supported and do well, people will move on from the Facebook issue.”

Could the Facebook IPO hurt the startup market? “I don’t think at all. Valuations being a little softer is a possibility, but I don’t think that means the startup market takes a hit. I just think it means that people need to evaluate how much money they want to raise and how much price they can command. But truly, the only thing that matters is people starting companies and building great products to solve problems better than other products…. I think we are in an incredible time for that. In fact, frankly, Facebook now as a public company with the capital they have, will be an even more dynamic platform going forward.”

How will Madrona compete in a world of tech incubators such as Y Combinator and TechStars: “We continue to make seed investments like we always have. We do those selectively and often with people that we’ve worked with before, not always, but often. And then we also encourage (those firms). We are the largest investor in TechStars Seattle. We are partners with the Alliance of Angels, and we are investors in the Alliance of Angels fund. We are supporting the W Fund. That is all goodness from our perspective, and hopefully we will earn our opportunity to pitch some of those companies that have the potential to break out and become bigger companies and be larger investors and company builders with them. That’s our strategy.”

PART ONEMadrona’s Matt McIlwain on their new fund and why he’s pumped to invest it in Seattle

JOIN THE GEEKWIRE DISCUSSIONMadrona Venture Group raises $300 million fund, largest in firm’s history