Trending: Company backed by Bill Gates claims solar breakthrough, looks to replace fossil fuels in industrial plants
The downtown Seattle skyline. (GeekWire Photo / Kevin Lisota)

[Editor’s note: This guest post was co-written by Oren Etzioni and Jacob Colker of the Allen Institute for Artificial Intelligence (AI2) in Seattle.]

We’ve reached a tipping point for our startup ecosystem.

The Seattle area is home to several of the world’s most iconic companies including Amazon, Boeing, Microsoft, and Starbucks. We have also had nine $1 billion-plus startup companies created over the last 10 years.

But what’s next?

Oren Etzioni, CEO of AI2, and Jacob Colker, managing director of the AI2 Incubator. (AI2 Photos)

This analysis examines leading indicators that point to an unprecedented acceleration in high-tech startup creation over the next few years.

Let’s begin with a story that captures some of the key motifs. In 2012, Professor Carlos Guestrin moved from Carnegie Mellon University in Pittsburgh to the University of Washington. Guestrin then founded Turi in 2013, a machine learning and A.I. startup with pre-revenue seed funding from Madrona Venture Group and local angels. Guestrin worked closely with Matt McIlwain of Madrona to grow Turi quickly and to attract a highly technical workforce with expertise in machine learning. In 2016, Apple acquired the company for a reported purchase price of $200 million.

Apple’s acquisition of Turi became the basis of an Apple engineering center in Seattle. Over the next three years, Apple’s Seattle area workforce grew to 500 people. In 2019, Apple doubled down in Seattle again, this time leasing a 630,000 square-foot building that can hold 4,500 workers.

The acquisition of Turi sets the stage for more company creation over time. The financial windfall from the exit begets angel investors who invest in new startups. The successful exit also whets the appetite for Turi employees to become startup founders of their own. The concentration of talent brought together by Apple creates a talent pool that become early hires of those new startups. And the cycle repeats.

All the components are now in place for this story to repeat and accelerate.

Component No. 1: A critical mass of talent

The Seattle area talent pool is hitting critical mass. Beyond Apple, more than 130 other engineering centers now populate our landscape, which will seed the next startups. Forgive the protracted list, but we find it eye-opening to read the names of the many recognizable brands that are now setting up shop in our region: Adobe, Airbnb, Alibaba, ARM, Baidu, Cisco, Dropbox, eBay, Facebook, Google, HBO, Honeywell, HP, HTC, Hulu, Intel, JPMorgan Chase, Lyft, McGraw-Hill, Mercedes-Benz, Mitsubishi, Motorola, New Relic, Novo Nordisk, NVIDIA, Oracle, Palantir, Pinterest, Salesforce, SAP, ServiceNow, Snapchat, SpaceX, Square, Stripe, Tencent, Ticketmaster, Twitter, Uber, VMware, Walt Disney, and more.

Those engineering centers — along with our numerous hometown heroes including Amazon, Microsoft, Expedia, Redfin, Zillow, Rover, Auth0, Tableau, Concur, Avalara, Convoy, OfferUp, Pitchbook, Payscale, Zipwhip, Avvo, Big Fish Games, Cray, F5 Networks, Zulily, Smartsheet, Docusign, Starbucks, Boeing, and more — have brought the technical headcount up to a new record of 120,000 engineers in the Seattle area.

And growth isn’t slowing. As of the time of this writing, there are 19,838 engineering job openings on Linkedin within a 50-mile radius of Seattle.

All of those engineers — plus hundreds of thousands of related roles including design, sales, marketing, operations, customer service, finance, legal, and office support — need a lot of desks from which to work. In the last 12 months, more than 50 percent of all new leases in the Seattle area were for technology companies.

Those new leases are being added to an expansive existing technology sector footprint. Google now occupies more than 2 million square feet of office space in the Seattle area. Facebook is fast closing in on 3 million square feet. Salesforce now occupies 650,000 square feet and is now officially referring to the Seattle area as its HQ2 following its $15.7 billion acquisition of Tableau. Microsoft and Amazon each occupy approximately 15 million square-feet. And let’s not forget Apple’s new 630,000 square-foot building that we mentioned earlier.

The new Google Cloud campus in Seattle’s South Lake Union neighborhood. (GeekWire Photo / Kurt Schlosser)

There are also now close to 100 different coworking spaces in the Seattle area, totalling 2.6 million square feet of flex office space.

And construction doesn’t show signs of slowing. Unsurprising to those that live here, the Seattle area leads the U.S. in the number of cranes looming over the city’s skyline, with 59 cranes as of January.

Further — as the lines between technology and biology continue to blur — the strength of the Seattle area biopharma and medical communities will become a real asset to our startup ecosystem as well. More than 30,000 people work for 700-plus life science companies or organizations in the Seattle area, including juggernauts such as Adaptive Biotechnologies, Juno Therapeutics, University of Washington Medical Network, Seattle Cancer Care Alliance, Fred Hutchinson Cancer Research Center, and the Allen Institute for Brain Science.

Those organizations were awarded $912 million in NIH funding in 2016, $952 million in 2017, $992 million in 2018, and over $1 billion so far in 2019 — not to mention the hundreds of millions of dollars in life science venture funding. The Seattle area is also on the frontlines of fighting childhood cancer, led by organizations including Seattle Children’s Hospital, which just opened a new 540,000 square-foot “Cure Factory” to expand clinical trials. Moreover, the Seattle area is also at the forefront of the fight to improve global health, led by organizations such PATH, Intellectual Ventures’ Global Good Division, and the Bill & Melinda Gates Foundation with its $47 billion dollar endowment.

Our region is also one of the most popular migration destinations, particularly for people leaving the Bay Area. And real estate developers continue to build housing to accommodate all of these new residents. In Seattle alone, more than 46,000 new rental units were added since 2015. And as of the second quarter of this year, an additional 19,500 units are still in the pipeline and under development.

With all of this incredible talent, it’s no wonder that the Seattle area was recently ranked the No. 1 most-educated big city in America. 63 percent of people in the Seattle area over the age of 25 hold a college degree.

Component No. 2: World-class STEM education

Cherry blossoms in full bloom at the University of Washington. (GeekWire Photo / Taylor Soper)

Speaking of education, Seattle area universities are rapidly expanding STEM programs.

The University of Washington (UW) — one of the nation’s premier research universities — now has 48,000 students (32,500 undergraduate and 15,500 graduate) supported by more than 2,000 full-time instructional faculty. There are now 286 specialized research centers at the UW, and the school receives more than $1 billion in total research grants and contracts each year. In fact, more than 2 percent of all federal research funding now goes to UW.

There has also been tremendous private investment into UW over just the last few years, which will pay huge dividends to our ecosystem for decades to come. In 2017, the late Microsoft co-founder Paul Allen gave $40 million to the UW School of Computer Science & Engineering, a school that now carries the Allen name, and a program that is now widely regarded as among the most distinguished in the nation.

Further, in 2018, more than 500 individual donors, along with Microsoft, Amazon, Zillow, Google, and Madrona Venture Group, donated $75 million to double the program’s space through the addition of the Bill & Melinda Gates Center. The expanded capacity now allows the Allen School to support 80 full-time faculty, 100 technical and administrative staff members, 500 graduate students (330 in the full-time program and 170 in the Professional Masters Program), and more than 1,500 undergraduate majors.

More than 20 companies have been founded by Allen School faculty in recent years in areas as diverse as machine learning, m-health, backscatter communication, wireless power, computer security, educational technology, and surgical imaging — and many more companies have been founded by alums. Allen School faculty also have deep engagements with Seattle companies and engineering offices including AI2, Amazon, Apple, Facebook, Google, Madrona Venture Group, Microsoft, and Nvidia.

Inside the Bill & Melinda Gates Center at the UW. (GeekWire Photo / Taylor Soper)

In the last three years, Bill Gates also gave the UW a total of $489 million to expand global health programs and use big data to produce comprehensive analyses of global health issues.

In 2017, UW opened a new 100,000 square-foot Global Innovation Exchange (GIX) building in nearby Bellevue, in partnership with Tsinghua University and a $40 million grant from Microsoft. This effort is notable because it marks the first time that a Chinese research institution has established a U.S. location, and because students have an opportunity to study in both Bellevue and China. Efforts are also underway to add a new $70 million building to house the Foster Business School PhD program and a new $159 million building to house the Center for Advanced Materials and Clean Energy Technologies.

But it doesn’t stop with the UW. Seattle University recently broke ground on a new $100 million Center for Science and Innovation, which can carry an enrollment of 1,600 STEM students. Northeastern University’s Seattle campus now has 500-plus students in mostly STEM degrees.

The Seattle area also remains a top destination for STEM graduates coming from other universities in Washington, Oregon, and British Columbia. And there are now numerous coding bootcamps in the area including Flatiron School, Code Fellows, General Assembly, Galvanize, and the Ada Developer Academy.

All of this STEM training capacity sets the stage for more global companies to open new offices in the Seattle area, or expand their existing Seattle area engineering operations, as Apple, Facebook, Google, and others have already done. In turn, that will draw in more talent, which will increase demand for more STEM training. Our universities will then expand STEM programs even further, and the cycle will repeat itself again and again.

Component No. 3: Increasing early stage venture capital

Venture funding is the lifeblood of any early stage company, and it is becoming increasingly more accessible to Seattle area entrepreneurs. VC dollars are flowing with new funds, new firms, and new satellite operations from VCs located outside of the region.

In the last two years alone, established Seattle area venture capital firms have raised more than $1 billion for their next round of early stage funds including Madrona VII ($300M), West River Group ($150M), Maveron VII ($180M), Frazier Healthcare IX ($419M), Voyager V ($100M), and Founders’ Co-op IV ($25M). Those new funds add to an existing set of funds that are still investing some dry powder including Ignition VI ($200M), Tola Capital II ($300M), Arch Venture Partners ($400M), and more.

Many new early stage venture funds have also launched operations in the Seattle area in the last two years including PSL Ventures ($80M), Unlock Partners ($50M), Acequia Capital ($50M), Flying Fish ($30M), Seven Peaks Ventures ($28M), Illuminate Ventures ($27M), Ascend Venture Capital ($10M), Cascade Seed Fund ($5M), and more. Corporate venture capital is also getting more active in the Seattle area, with new early stage funding in the last two years from organizations including Providence Ventures II ($150M), Amazon Alexa Fund ($200M), and Microsoft’s M12.

Further, the multibillion dollar venture capital arms of leading family offices in the Seattle area continue to make many early stage bets in the region, including Vulcan Capital (Paul Allen), Bezos Expeditions (Jeff Bezos), Gates Ventures (Bill Gates), Trilogy Equity (John Stanton and partners), Second Avenue Partners (Nick Hanauer), Intellectual Ventures (Nathan Myhrvold), and more.

Moreover, our region is also working to help more female entrepreneurs succeed. There is a direct correlation between the number of leading female VCs, and the number of women getting funded. The Seattle area is lucky to have numerous early stage venture leaders including Hope Cochran and Maria Karaivanova at Madrona Venture Group; Diane Fraiman at Voyager Capital; Loretta Little at WRF Capital; Amy McCullough at Trilogy Equity; Heather Redman at Flying Fish Ventures; Julie Sandler at PSL Ventures; Sheila Gulati and Stacey Giard at Tola Capital; Martina Welkhoff at the WXR Fund; and so many more.

But perhaps the most exciting statistic is the increasing number of VC firms that are investing in the Seattle area — whom are headquartered outside of the region. In the last 22 months, more than $1.1 billion was invested into the seed and Series A rounds of Seattle area startups, and a very large percentage of that investment came from outside of the Seattle area.

In fact, it was just a few years ago that Seattle entrepreneurs had to make the trek to the Bay Area to hunt for funding. Today, Silicon Valley VC firms are the ones that are flying up to the Seattle area to meet with local entrepreneurs. Like Apple and Turi, it will only take one or two successes for those out-of-town VCs to decide to setup permanent offices here.

To be fair, all of this capital is not exclusively allocated to the Seattle area, as many VCs have broad themes that expand across multiple geographies. That said, having access to these VC dollars — via the funds in our own backyard, or via the many venture capital associates now flying into our region on a regular basis — will be a boon to Seattle area startups as the ecosystem continues to accelerate over the coming few years.

Component No. 4: More angel investors with dry powder

Well before a startup has the traction to pitch a venture capitalist, startups often make the leap from whiteboard to a v1 product with the help of a few hundred thousand dollars of angel investment. It doesn’t take more than a handful of active angels to galvanize a region, and in the Seattle area, there are now dozens of active angels that are having a big impact on new company creation. These include Oren Etzioni; Serena Glover; Hadi Partovi; Sarah Imbach; Charles Fitzgerald; Forest Key; Shelley Whelan; Jonathan Sposato; Mike Miller; Andy Sack; Rich Barton; and many more. While we highlight only a handful of people here, we aren’t even scratching the surface.

There are also several active angel groups that are now helping to bundle together syndicates of angels, including the Alliance of Angels; Seattle Angel Conference; E8 Angels; Keiretsu; the Puget Sound Venture Club; TiE Seattle; SeaChange Fund; Grubstakes; Fledge’s new Angel Accelerator; and more. These forums are particularly helpful and safe spaces for new angel investors to find mentorship, investment education, and platform-style support for key elements such as deal sourcing, legal, accounting, and due diligence research.

We are also particularly excited about the volume of new angel investors that we believe will enter into our ecosystem over the next few years. In the ten years since the Great Recession, the bull market that began in 2009 ranks among the greatest rallies in stock-market history, a rise that generated more than $30 trillion in wealth. In the Seattle area, the ramifications of that growth are particularly important.

Amazon’s stock price (average of each year), compared to the company’s
Seattle area headcount. (Source: Seattle Times and Yahoo Finance)

Amazon compensation packages tend to be light on salary and heavy on stock-based compensation. If an employee joined Amazon as recently as 2014, that employee would have still participated in 500 percent growth or more in the value of their stock options. Given that stock options were likely a high portion of their total compensation, and given the tremendous performance of Amazon’s stock over the last several years, there are now thousands of millionaires walking the streets of South Lake Union, dangling blue badges and all.

But the Seattle area is not a one company region. Since 2014, Microsoft’s stock appreciated 337 percent, Starbucks 243 percent, Boeing 301 percent, and so on. In fact, if you look at the market cap differentials between 2009 and today, Seattle area public companies have grown in value by approximately $2.2 trillion in the last 10 years, or more than 7 percent of the entire value of America’s recent bull market run. Many employees of those companies have significant stock-based compensation, and they live here.

Moreover, it is not just established public company employees. Smartsheet, Avalara, DocuSign, Redfin, Adaptive Biotechnologies, and more had IPOs in the last three years. Further, according to PitchBook data, more than 80 Seattle area startups have been acquired in the last three years including Heptio, Cray, Avvo, Alder Biopharmaceuticals, and more. The lockup periods and exit retention packages from those deals have a limited shelf life and it will only be a matter of time before many of those early stage employees become flush with cash.

Looking holistically at the region, as of 2017, there are thousands of potential angel investors in the region. There are estimated to be at least 8,500 individuals or families in the city of Seattle whom met the SEC’s definition of accredited investor, meaning that they are eligible to make angel investments. That estimate is likely well north of 10,000 if we include the regions outside of Seattle city limits. And the estimate would be even higher if 2019 data were available, as the last two years were an exceptional growth period for our region.

As Founders’ Co-op General Partner Chris DeVore recently pointed out, the misallocation of capital by geography continues to create unique investment opportunities in the Seattle area. Over the next few years as our startup ecosystem heats up even further, there will be increasingly more and more startups for those accredited individuals to invest in.

Component No. 5: Maturing company-building support

Team members from the third Alexa Accelerator cohort gather on stage after Demo Night at Amazon HQ in Seattle on Tuesday evening. (GeekWire Photo / Taylor Soper)

Getting a startup off the ground is hard work, but there are now numerous pathways in the Seattle area to make that process easier. For entrepreneurs that need help with their first startup, or for experienced founders who need help with some other axis of their effort, there are now over a dozen accelerators, incubators, or startup studios in the region.

For accelerators — a crash course on startup creation — the Seattle area is now home the most successful Techstars city in terms of dollars raised by its graduates ($1.187B) and counts three different graduates as unicorns: Zipline ($1.2B), Outreach ($1.1B), and Remitly ($1B). Seattle is also the location of Amazon’s Alexa Accelerator, a program that helps to connect entrepreneurs who are building voice-first products to the resources of Amazon’s Alexa team.

There are now three leading incubators in the Seattle area, which help entrepreneurs turn technologies into large and important companies. The Allen Institute for Artificial Intelligence (AI2) (our employer) formalized its AI2 Incubator three years ago, to help world-class A.I. talent and successful entrepreneurs build AI-first startups, supported in part by a team of 120 A.I. PhDs, researchers, engineers, and operations staff. CoMotion is the technology transfer arm of the UW, where they help connect entrepreneurs and companies to the technologies being created by university researchers. And the ISF Incubator is the technology transfer arm of Intellectual Ventures, where they work to connect entrepreneurs with their vast patent portfolio and with the resources of their laboratory.

Additionally, Seattle now counts three different startup studios, whose core teams of people can build multiple companies in parallel. Pioneer Square Labs has now raised $27.5 million and has graduated close to 20 companies, which are valued at more than $200 million. Madrona Venture Labs has now raised more than $20 million to fund company creation and their portfolio company Mighty AI recently sold to Uber. And Kernel Labs has launched six companies of its own and recently sold TrustedKey to Workday.

The Seattle area is also expanding the number of support programs that directly focus on helping diverse founders to have support that is uniquely tailored to their needs, including Female Founders Alliance, the Ada Developer Academy, and the Riveter’s female-centric workspaces.

But in the end, we have to want it. And we have to be doers, not talkers.

No doubt, there are some key challenges that our ecosystem still needs to overcome. Our community needs to develop more of an angel culture, and help the thousands of people that we mentioned above to start investing. We need local press to spotlight local angels and all of us need to make it a thing that people do and are known for. We also need more growth capital in the area, though that is starting to change, as Madrona just launched a $100 million dollar acceleration fund to invest in Series B and C startups.

But as you can see, the Seattle area is booming, and we are reaching a tipping point for our startup ecosystem. There are numerous leading indicators that paint a picture of extraordinary acceleration of startup creation over the next few years. When those 120,000 engineers that we mentioned earlier start leaving BigCo to found their own startups — and this is coming — the Seattle area will be ready for them. We have all of the ingredients and all of the components are in place. So let’s do it.


Thanks to Kirby Winfield, Ed Lazowska, Bryan Hale, Shauna Causey, and GeekWire for comments on earlier drafts.

Dr. Oren Etzioni has served as the Chief Executive Officer of the Allen Institute for Artificial Intelligence since its inception in 2014. He has been a professor at the University of Washington computer science department since 1991, and a venture partner at Madrona Venture Group since 2000. Dr. Etzioni also co-founded five successful startups including Farecast (acquired by Microsoft in 2008) and Decide.com (acquired by Ebay in 2013).

Jacob Colker is a managing director of the AI2 Incubator in Seattle, a program of the Allen Institute for Artificial Intelligence. The AI2 Incubator has successfully incubated numerous AI-first startups including XNOR.ai, KITT.ai, BlueCanoe, WellSaid, and Lexion.ai. Prior to AI2, Jacob taught MBA-level entrepreneurship at the UW Foster Business School and was a co-founder or senior executive at four startups.

Like what you're reading? Subscribe to GeekWire's free newsletters to catch every headline

Comments

Job Listings on GeekWork

Find more jobs on GeekWork. Employers, post a job here.