Look across Seattle’s startup landscape, and you’ll see a commonality.
Like the tree it takes its name from, Madrona Venture Group’s roots are everywhere.
Partners teach entrepreneurial classes at the University of Washington. Organizations such as Techstars and UP Global rely on its support. And countless entrepreneurs have walked through the doors of the firm’s offices at 999 3rd Avenue hoping to add fuel and muscle to their startups.
Founded 20 years ago as a network of influential angel investors, including co-founder Tom Alberg who made an early bet on Amazon.com, Madrona has morphed into the region’s preeminent venture capital firm. As many Seattle venture firms have faded away — OVP Venture Partners, Fluke Venture Partners, Frazier Technology Ventures — Madrona’s might has multiplied.
And its importance continues to grow, perhaps to the point now where it is almost too critical.
If Sequoia or Kleiner Perkins disappeared from Silicon Valley, the money train would likely continue unabated. Other firms — whether Accel, Greylock or Andreessen Horowitz — would pick up the slack. But that’s not necessarily the case in Seattle.
When it comes to early-stage venture capital, Seattle is almost the equivalent of a one-sports-team town. And that’s not really a good thing.
Ask yourself: What would happen to Seattle’s startup scene if Madrona disappeared?
Madrona’s outsized impact can be seen in recent data compiled through Pitchbook. In 2014, Madrona invested about $100 million in 35 Pacific Northwest companies — roughly 10 percent of the entire haul.
While that’s a significant percentage, the numbers are even more staggering when you consider the multiplier effect. For each dollar invested by Madrona in early-stage companies in the Northwest, another 3.5 dollars flow to those portfolio companies. In 2014, Madrona and its syndicate partners — typically larger Silicon Valley venture firms that last year included 26 new major investors — sunk $463 million into the region. Madrona co-invested alongside firms such as Kleiner Perkins, Highland Capital, Insight Venture Partners, OpenView Venture Partners and others, helping to attract capital from deep pockets with key Silicon Valley connections.
That means Madrona-backed companies represented about 40 percent of all dollars invested in the region last year.
That’s impressive, but also a little scary when you think about it.
And it begs the question: Could Seattle’s startup community have too many eggs in one basket?
Partners at Madrona even recognize this issue, repeatedly noting that they’d like to see more home-grown capital flowing in the Northwest. That would mean more competition for Madrona.
But as in all industries — including the venture business — competition is good. It raises the game of everyone.
Madrona’s Matt McIlwain admits that they can’t invest in as many startups as the region needs, noting that Seattle would benefit if more people rolled up their sleeves to build companies. He also asked the question himself whether Madrona has too much concentration.
“We’d be delighted to see more total capital going into the region,” said McIlwain. “We’d be completely comfortable if our capital was a smaller percentage. I don’t know what the right number is.”
As McIlwain sees it, the region needs more “company builders” — people who will not only provide capital but the expertise to make sure small businesses grow into big ones.
“The capital is the tail wagging the dog here,” said McIlwain, adding that many venture capitalists provide operational expertise and business contacts that go well beyond the money. “That’s more of the thing that we need.” Having more indigenous capital and company builders would help entrepreneurs in the Seattle area, allowing more timely resources if an entrepreneur encountered business problems or strategic questions, McIlwain said.
Seattle venture capitalist Bill Bryant, a partner at DFJ, said the region certainly benefits from having Madrona investing in so many early-stage startup companies.
Bryant pointed specifically to companies such as Apptio, ExtraHop and Redfin. But Bryant also noted the importance of having a mix of investors deploying capital.
After all, for every 100 entrepreneurs that Madrona meets, it ends up backing just one.
“Like any ecosystem, the region requires diversity in its investor base to thrive: investors with different strategies and stage focus, interested in different sectors, technologies and markets, as well as enough strong investors to syndicate locally as happens in the Bay Area, Boston and now NYC,” said Bryant. “There are lessons to be learned from Austin’s dependence on the now defunct Austin Ventures, Denver’s reliance on the defunct Centennial Ventures or Vancouver which was dominated by Ventures West until they too went away.”
Madrona isn’t likely going away anytime soon. It raised a $300 million fund — the firm’s largest — in 2012.
The firm also added more heft earlier this month when it announced that three of the heaviest hitters in Seattle technology circles joined as strategic partners: F5 Networks CEO John McAdam; Concur CEO Steve Singh; and Isilon co-founder Sujal Patel.
Those leading tech founders and CEOs will help Madrona find new deals, and help existing portfolio companies grow.
Building the next generation of big companies in the region is something that everyone should care about. After all, Seattle needs a deep bench of startup companies that are turning into the next Tableaus, Zillows, F5s or Concurs. This regeneration of the ecosystem is something that drives a tech hubs forward. McIlwain, for one, said he’d welcome “roll up their sleeves teams” to build new early-stage companies in the region.
“We are not entrepreneurially constrained,” says McIlwain. “We are capital and company-builder constrained.”