Madrona Venture Group is tapping into one of the most powerful and secretive trends in venture capital — recruiting a group of elite angel investors to join a “scout program” to help find early-stage startups that might otherwise go unnoticed and unfunded.
The Seattle-based venture capital firm quietly launched its “Madrona Pioneers” program last year, assembling a small army of angel investors in the region that essentially operates as a feeder system to Madrona, GeekWire has learned.
Led by Madrona Managing Director S. “Soma” Somasegar, the Pioneers group is still in its early stages of development, according to the firm. About a dozen companies in the Seattle region have been backed through the program so far, and Somasegar is hopeful more will come.
“We set this program up in a way that enables the pioneer to tap into Madrona’s funds when they find a company that they believe will benefit from more investment than the pioneer can provide alone,” Somasegar said in an interview with GeekWire.
Madrona did not disclose any of the angel investors who are involved in the Pioneers group or the amount of money that the firm has allocated to the program. But GeekWire has learned that several well known angel investors are participating, including Flying Fish Venture Partners co-founder Heather Redman; Algorithmia CEO Diego Oppenheimer; Isilon co-founder Sujal Patel; and former 23andMe COO Sarah Imbach.
Somasegar said he had been thinking of ways to help establish stronger relationships with the broader startup community after joining the firm in 2015, following a nearly three-decade career at Microsoft.
“We were talking about how we could build a stronger relationship with a group of entrepreneurs and a group of angel investors for an opportunity to both have them be ambassadors for us, but also more importantly, for us to be able to cast a wider net and see a lot of startups in the region,” Somasegar told GeekWire.
Founded in 1995 and one of the most active firms in the Pacific Northwest, Madrona already held angel investor meetups a few times a year to help nurture connections with entrepreneurs and investors in the local community. Somasegar and his colleagues saw an opportunity to further these relationships and use them as a way to potentially find and invest in new startups that Madrona otherwise wouldn’t typically support at such an early stage.
Each angel investor in the Pioneers group has a certain dollar allocation from Madrona that they can use at their discretion. Investors have the option to suggest the extra funds be applied to select investments as part of the Pioneer program. However, not all entrepreneurs accept the dollars — knowing that Madrona could have a competitive company in their own portfolio or simply because they want to keep investment options open for later funding rounds.
The Pioneers financing model between Madrona and the investors is flexible, but it is typically a 50/50 split, according to those familiar with the program. For example, if an angel investor plans to make a $25,000 investment in a startup, the angel could also draw $25,000 from his/her Pioneers money allocation.
Over the past few years, several VC firms have launched similar groups — in 2012, Sequoia Capital was the first to confirmed the existence of its scout program. But most are secretive, as this Wall Street Journal story from July noted.
Jeremy Liew, a partner at Lightspeed, told the Journal that it launched its own scout program “to get companies on our radar early because there’s only so many companies we can see, so having more companies helps widen our aperture.”
Startup funding website AngelList launched something along the same lines in May with Angel Funds, a new initiative designed to let “founders back founders,” as Quartz noted. In July, First Round Capital launched Product Co-op, a small group of “product leaders” that invest in new startups with the firm.
“Our goal is to enable a new wave of angels who are organized around skill set and passion, who are able to offer themselves as a resource — right when they can make the biggest impact for founders,” First Round Capital wrote.
Madrona has a similar thesis with its Pioneers program, which was created to invest in “pre-seed stage” companies, as Somasegar described.
“There’s only so much we can do,” he said of Madrona’s bandwidth.
Madrona raised $300 million for its sixth fund two years ago, and while it has put some of that money to work across a range of early-stage startups, the firm can’t see every deal. The Pioneers group, which meets regularly, is designed to make sure that more early-stage deals are finding sufficient capital, while also creating a pipeline of future opportunities for Madrona.
Somasegar said it’s too early to analyze the long-term impact of the group, but noted that there’s been a “steady flow of activity.”
“I think it’s been good for the community; good for entrepreneurs; good for angel investors; and hopefully for Madrona as well,” he added.
Somasegar said the firm tells its “Pioneers” to be transparent with entrepreneurs so that they know part of a potential investment is coming indirectly from Madrona. He also said entrepreneurs aren’t expected to continue working with Madrona as their companies grow.
“There is no sense of obligation or constraints that we want to put an an entrepreneur because there is some investment from Madrona coming through this program,” he noted. “If entrepreneurs want to work with us later on, and we are excited to work with them, we will evaluate it like anything else.”
But this is certainly a way for Madrona to get its foot in the door with startups at their earliest stages, with the potential to invest more in the future — especially for companies that the firm might traditionally not spend time thinking about until later on. CrunchBase News noted today that there are an increasing number of “pre-seed” firms and funds created in part because the median size of a traditional “seed” round has increased over the past decade.
The Pioneers program could also help inject more early-stage funding dollars into the robust Seattle tech ecosystem, which has exploded over the past few decades but is still often called out for a lack of available early-stage capital for new startups.
Somasegar said the program can help encourage angel investors to think about investing in more companies given that they can get additional help from Madrona through the Pioneers group.
T.A. McCann, who joined the Pioneers group last year, told GeekWire that he was drawn to the idea because it gave him a chance to work with more early-stage companies and extend his “co-investor network.” McCann, founder of companies like Gist and Rival IQ, also said he wanted to work more closely with Somasegar, “who I really like and respect.”
“It gets more angels involved in more deals with a premier VC that can continue to fund and lead,” McCann said in an email. “It also aligns angels around core themes (e.g. healthcare) that should further amplify the companies.”
Madrona’s investments have had an outsized impact on the Seattle startup market, starting with co-founder Tom Alberg’s early investment in Amazon.com, and extending to companies such as Redfin, Apptio, Impinj, Qumulo, Smartsheet, Amperity, and many others. In 2014 the firm launched a “startup studio” in 2014 called Madrona Labs to help incubate startup ideas and turn them into successful companies. Pioneer Square Labs, also based in Seattle and co-founded by former Madrona managing director Greg Gottesman, follows a similar strategy.