Tom Alberg did not have grand ambitions when he co-founded Madrona Venture Group with a few high-powered business buddies 20 years ago.
But he did have a love of a technology, and a keen interest in seeing new startup companies take root in his hometown of Seattle.
A former lawyer at Perkins Coie who’d dabbled in angel investing, Alberg knew that he would not fit in at AT&T, the telecommunications giant that had just acquired the entrepreneurial company where he worked, McCaw Cellular.
So Alberg — along with former EPA and FBI director Bill Ruckelshaus, ex-Burlington Northern CEO Jerry Grinstein and attorney Paul Goodrich —decided to start making small investments in tech companies.
It was 1995 — a few years before the dot-com frenzy set off a maniacal wave of startup investing.
Alberg called the firm Madrona after the beautiful trees that dot his property in the San Juan Islands.
“Madrona trees grow well in the Northwest but must fight to take root in rocky soil and each tree grows into its own unique shape,” Alberg says.
No investment group has made as big of an impact on the Seattle startup ecosystem as Madrona, which over the past 20 years has pumped $700 million into more than 100 companies.
Some of Madrona’s investments completely bombed —to be expected in the high-risk, high-reward game of venture capital.
But others blossomed.
Isilon Systems. Nordstrom.com. Sharebuilder. Redfin.
Madrona’s Alberg, now 75, also was one of the first angel investors in Seattle to bankroll a young entrepreneur by the name of Jeff Bezos who was struggling to raise $1 million for an online bookstore.
Alberg took the gamble, and to this day remains on the board of Amazon.com.
Madrona has certainly encountered peaks and valleys over the years. And as the firm celebrates its 20th anniversary, the venture capital landscape is once again changing.
But Madrona is stronger than ever. It raised a $300 million venture fund this past June — turning down investors who wanted to participate in the firm’s sixth fund. Its outsized impact on Seattle’s startup ecosystem ripples through the community, with many startup watchers wondering if Madrona has too much weight.
We caught up with Alberg — who moved to Seattle from San Francisco at 10 months old and graduated from Ballard High School in 1958 — to talk about startup investing, Amazon and whether another bubble is forming in tech.
Here’s more form our conversation:
GeekWire: Talk about why you started Madrona and how you brought everyone together to do it?
Tom Alberg: “I had just (left) McCaw Cellular after having been there five years and just negotiated the sale of McCaw and Lin Broadcasting to AT&T. I had no interest in working for AT&T. I think they had no interest in me after I had been a hard negotiator — and so I left.
I was fascinated with technology and had been involved as a lawyer, representing some really interesting technology companies and McCaw was a technology company in a lot of ways and so the idea was to — and I had done a little bit of angel investing going back even into the ’80s — … set up shop on my own and start doing some investing.
Then, I realized that Bill Ruckelshaus was coming back from being CEO at Browning Ferris and Jerry Grinstein was coming back from running Burlington Northern Railroad in Texas, and Paul Goodrich was available. All of whom I’ve known in the past.
We decided to open an office together in ’95 — and just to invest our own money, both in private equity deals … and startups….Somebody would walk in the door and we would pool our money and invest in them. And that was the beginning of a really hot era — 1995 to 2000 — so suddenly we were doing all kinds of startups.
GeekWire: It was good timing really when you think about it.
Alberg: It was a boom.
GeekWire: How long did you kind of last as the confederation of folks doing angel investing and when did it transition to the more formal Madrona fund?
Alberg: That was in 1999. We had invested in — I don’t know — thirty companies in different ways. We were going on boards and you know, a lot of our investments were pretty small. Some of them had gone public and we brought in Greg Gottesman, and he was a young guy at that point in 1998 or so. We were paying Greg, but he wanted to make investments, but didn’t have any money, so we started loaning Greg money. After a while Greg said: “Hey, how about these loans, I’m getting nervous about it. Some of these companies are failing … and there hasn’t been much liquidity. These loans are building up.” We said: ‘Don’t worry Greg, don’t worry.’
Then we were kind of being overwhelmed with deals and Greg was our only young person, and it didn’t look like a great model to keep hiring people like Greg and loaning them money. So in ’99 — and we were very fortuitous — so we decided to bite the bullet and raise a public fund…. We went to institutions and individuals and you know, that was a very hot era. Lot’s of venture funds were being formed around the country. Surprisingly to us, we very quickly raised $250 million dollars in the fall of ’99. We ended up having to turn away investors. A lot of it was actually from technology individuals. People at Microsoft, McCaw and so forth. We also had some very nice institutional investors.
Then as you know, March of 2000 the stock market collapsed. Nasdaq hit a high and we went into a big recession. We’d been making quite a few investments at that point, and a number of the companies … were not making progress in the face of a recession. It was hard to raise from other investors. So we, in effect, triaged a bunch of our companies and doubled down on companies like Isilon and others. We came out of that. We had a lot of fortuitous things over time.
That fund turned out to be, compared to most funds around the country, sort of a 2X fund. In that era for that generation of funds it was one of the best performing funds in the country.
GeekWire: Going back to ’95 obviously, coming out of McCaw, you could have done a lot of things. What was it about a venture firm in Seattle or doing angel investing in Seattle that attracted you, or that’s where you decided you were going to spend some of your time?
Alberg: Things were really starting to happen. Compared to today, it was, you know, I had been on the board of Visio, for example. It was spin-out of Aldus — and I had been an investor in a couple of things — so things were…. We were never investors in RealNetworks, but I think that’s kind of when RealNetworks started. Things were starting to happen and, as I said, I was very interested in technology and the Internet seemed to be changing the game, although I didn’t foresee how much it has changed the game. Rather than retire and go to Arizona, it seemed more interesting to invest in things.
I was reasonably comfortable with risk. I mean McCaw was a reasonably risky venture. Yeah. I don’t know. I think it’s a little bit sort of genetic. Not really genetic, but some people love to work for big companies. I didn’t really want to work for a big company. If there had been another McCaw, I might have done something like that. But I looked around (and decided) to try some investing.
GeekWire: You ended up playing a role in the formation of a very, very big company. A company even bigger than McCaw, so tell the story of the Amazon investment and meeting Jeff Bezos.
Alberg: There was a well-known lawyer in Seattle, Tom Foster. Really a great guy that I’ve known through the years and he was part of a little investment group and he called me up and said: “Tom, you’ve been at McCaw. You know all about the Internet stuff.” Which wasn’t quite true. But I was interested in a fair amount that was going on and Netscape was starting at that point so he said, would you meet this guy and then give us your view as to whether this would be a good investment. It was Jeff (Bezos).
In 1995, he was raising $1 million. This was in April or May of ’95. He hadn’t launched the site yet. He had a good business plan that was solely focused on books. It was going to break even in year two. Sounded attractive. (laughs)
The other thing, I loved bookstores…. I met with him, and I thought he was a very smart guy and intrigued. I said: Well, I am potentially interested but let me think about it.
The next week I went to Barnes & Noble bookstore. I was trying to buy a book for my son, who was starting a business. And I had that sort of bookstore frustration where the salespeople didn’t know. I finally figured out the book I wanted and they didn’t have it. So, I said maybe there is room for online.
Then, every month for the next couple months, they launched it in June, I think, Jeff would send me an email and say: ‘Gee, we’ve now sold books in eleven states.’ And then I get an email and it said: ‘Revenues are up to $70,000 a week.’ And: ‘We just sold our first book to a European customer.’ I met with him a couple more times, and invested. He was just very smart. He had a good business plan. I liked the Internet. Did I realize it was going to grow like crazy? No.
GeekWire: So did you make the investment in ’95 then?
Alberg: Yeah. The very end of ’95.
GeekWire: Were you part of the first round?
Alberg: Right. That was the very first round. He raised $1 million. Well, I talked to him, in you know, April or May, and he’d already been raising money. It took him about 10 months to raise a million dollars. That’s when Nick (Hanauer) invested. I invested. It was Jeff’s parents and angels in Seattle. Some venture firms passed on it, and some thought the roughly $6 million dollar valuation was too high. And they passed on it.
GeekWire: What are your impressions now on Amazon and how that might be changing the Seattle tech ecosystem?
Alberg: Well, you know, I’m very pro-Seattle and pro Amazon. I think Amazon and the literally hundreds of tech companies have, overall had a great impact, creating jobs. The whole South Lake Union thing is phenomenal. Microsoft for forty years has been recruiting talent from all over the world, bringing them it into the greater Seattle area. Amazon has now for 20 years had a huge talent inflow, which I think has benefited Seattle in all kinds of ways.
It’s making Seattle a very rich city… We’ve got traffic problems, we need to solve housing problems. We have homeless issues. And we have big quality public school issues that need fixing.
But Seattle’s in a position where they’ll be able to afford to do this. The $15 dollar wage…. Seattle’s a wealthy city that can afford to do that and to have that. The Mayor’s housing proposal is … made possible by taxing developers of office buildings and apartments…. I think there’s a lot more work to do. There’s other parts of the economy, but I don’t think there’s any doubt that the tech economy is the driving force at the moment in Seattle’s economic growth.
GeekWire: Not everyone that is a believer in that to be either pro-tech and pro-Seattle. There are people in the Seattle community that are raising the pitchforks and blaming Amazon and blaming the tech community generally about the change that is happening. How do you view that and what sort of things do you say to maybe counter those folks?
Alberg: Well, I do think that these tech companies have attracted all of these creative people. And it takes a while for people to get involved. It is a lot of new people.
It took Microsoft a long time before they got all their roots into supporting all kinds of charitable activities.
You know, Bill Gates, it took years before he really did what he is doing now. I think that’s half of it. The new chair of the Chamber of Commerce is an Amazon person and Andy Jassy (of Amazon We Services) is a big backer of Rainier Scholars. That’s starting to happen and I think that’s hopeful….
A lot of wealth is being created and I think that will go back into the community…. Would I like to see more tech people get involved in helping fix the public schools? Absolutely.
GeekWire: What’s changed the most in the past twenty years when it comes to venture capital?
Alberg: Angels, or professional angels. That has really grown. Angels play a much bigger role. I remember ten years ago sort of thinking: we just don’t have the angel investors that Silicon Valley has. In terms of numbers, we don’t…. It takes people who have made money in technology, for the most part, to become angel investors. People out of the timber industry tend not to become angel technology investors, so I think that’s been a real plus.
I do think there’s some shortage of capital up here — debatable by people. But, at the very early stage.
A lot of our deals are brought to us by angels or we are co-investing with angels. I actually think it would be good to have a couple more venture firms here, but I don’t know if everybody agrees with that in the community.
Alberg: I think it’s very difficult to start and grow a venture firm into adequate scale. It’s just a challenging thing to do. You need really good people and to hire very good people, you have to have money to pay those people and there’s a little bit of a chicken and egg challenge. We were fortunate to have the era that it happened, and we had some very good investments, so we could attract investors.
GeekWire: Over the years, you’ve talked to thousands of entrepreneurs. What makes a good entrepreneur in your mind? How do you identify those folks?
Alberg: Well, they have to be very, you know dedicated, focused, a believer in what they’re doing. And what they’re doing is significant. It’s a little grandiose to say every entrepreneur thinks he’s going to change the world, but in some small ways, that’s true.
They’re going to do something that people, individuals, consumers or enterprises are going to find valuable and they have to be a real believer in that and run up the flag and say: “This is what I’m going to do.”
And they have to be pretty thick-skinned because they’ve got a bunch of people saying: “That’s a dumb idea. There’s no way you can do that. Who do you think you are?” It takes a fairly strong character and will. There are a lot of traits. They don’t have to be a technologist, but there are some very good technologists who are entrepreneurs.
To really be successful, I think they do have to have leadership qualities where they can get people to work for them, follow them and basically the job of convincing others that your dream is legitimate and worthwhile.
GeekWire: How have you been able to identify those folks?
Alberg: Well, I think that’s challenging. We’ve made mistakes on that…. There’s also a lot more entrepreneurs now than there was in ’95. For years, our view was there weren’t enough entrepreneurs… Now, I don’t think it’s the shortage I don’t think at all. There’s a lot of good people, and a lot of them have cut their teeth on startups. Like Sunny Gupta who is CEO of Apptio. I think this is his third company. His second as a CEO. We really liked him the first couple times we backed him and so we really liked him and so he was tested. It’s much more difficult when someone shows up for the first time and your trying to assess these things. But, as I say, sometimes you make mistakes.
GeekWire: You’ve seen a lot of ups and downs over the years, so what do you make of the period we’re in now and are you worried about a bubble?
Alberg: I do think valuations are often excessive. I think it’s a bigger problem at the high end, and I just don’t believe that there are 168 private tech companies that can be worth that… There’s like three or more food delivery companies that are worth more than $1 billion dollars. Instacart may well survive and be great, but it is kind of hard to believe they’re all going to be.
But that creeps all the way down. Valuations are a little more more realistic in the startup phase.
On the other hand, you know, we don’t want to stop investing and say: “Your valuations are high, so we’re just going to sit on the sidelines.” I think there may be lower returns for a while.
There’s a lot of good companies starting so, as I say, like on Amazon you could have passed on it, because you thought it should have been a $4 million evaluation instead of $6 million….
There’s always going to be a good story that’s going to be worth hundreds of millions of dollars.
I think it’s something to be concerned about and I also think that we could go into an economic difficult times so. We’ve been through two of these now in 2000 and then 2007 — so this is a moment we say to our companies: Well, make sure you’re adequately funded. Don’t wait until the last minute to raise money. You’ve got to start thinking about conserving cost. I don’t think we’re quite there.
These bubbles tend to be two years after everybody thinks they’ve happened. It may not be, you know it may be a slow down as opposed to..
A lot of the companies, they have real revenues. It’s hard to look at Uber even at $50 billion and say, they don’t have a successful business model. They do. They have a very successful business model and they’re not going to go bankrupt probably. But they may not be worth you know, what Apple’s worth….I think in 2000 there were more companies where they really didn’t have real revenues.
I think in this era, more of these companies — and the local ones pretty much included — they have real customers, they have real revenues, and they need to be careful not to get over extended.
GeekWire: I think this is apropos given the history piece but are there two or three investments you wish you would have made over the past twenty years? What were they and why?
Alberg: Oh, I don’t know. We make errors in both directions. We don’t invest in things, which we should have. And we invest in some things that we shouldn’t have. You never know at the beginning. I don’t know, if I could pick things out of a hat, I don’t know what I would pick: Expedia. We sold a little company, Vacationspot.com, to Expedia long ago and we promptly sold our Expedia stock. That was a mistake.
GeekWire: On the flip side of that, the most successful companies that you’ve participated in the last 20 years? I guess obviously, Amazon is one.
Alberg: I’d say more in recent years you know, Isilon, clearly. It’s not well known, but you know we helped start Nordstrom.com. We wrote the business plan for Nordstrom.com in our conference room…. They were willing to consider taking some outside money to get the expertise and so we wrote it with Dan Nordstrom and then we invested and got Benchmark to invest with us for a couple years. Then, everybody thought those were going to go public. But, instead of taking them public, Nordstrom bought back our shares so that was a highly successful investment.
GeekWire: Anything else you want to touch on or add to as you look back over the 20 years of Madrona?
Alberg: I just think that this economic engine based on technology and creative people puts us in good shape for going forward…. And just one last thought. I think the future is going to be based on cloud computing, mobile and the Internet and Seattle is so greatly positioned. The two leading cloud companies, Amazon and Microsoft, we’ve got a rich history of mobile, and a lot of Internet companies, so I think that’s going to be the future technology platform. And the cloud in particular. The Internet’s been around for a while and it is super powerful, but the cloud is a new thing and it’s going to be the combination of those three things are going to be incredibly important.