Call it the “ones we missed” fund.
Madrona Venture Group has raised $100 million for what it calls an “acceleration fund” — an investment vehicle for later stage companies, including more mature startups that slipped through the cracks in its hometown of Seattle.
One of Seattle’s most successful early-stage startup investors, Madrona struck gold with early bets on Apptio, Impinj, Smartsheet and Redfin. But even so, Madrona Managing Director Matt McIlwain admits that the firm missed some big opportunities, pointing to fast-growing Seattle startups such as Outreach, Auth0, Icertis, and Textio.
“It’s fair to say that there are some great Seattle companies that we didn’t get right early on,” McIlwain said.
The new fund frees up Madrona to participate in later rounds for more mature companies both in and out of the Pacific Northwest.
Madrona began thinking about this new strategy last fall, just after it raised $300 million for its seventh fund. The venture capital firm had dabbled with later-stage deals, investing in more established companies based outside of Seattle such as Snowflake, Tigera, and UIPath over the past few years.
“We’ve done some of those, but very selectively,” McIlwain told GeekWire. “We wanted to have a dedicated fund and a dedicated focus on that acceleration stage.” He described that stage as when a company has already found product market fit and is “really starting to accelerate the growth of the business.”
Best known as an early-stage investor — including an insightful gamble on Amazon in the 1990s by managing director Tom Alberg, who just stepped off the Amazon board — the acceleration fund represents a new play in the 24-year-old firm’s playbook.
It’s a strategy that other firms have experimented with over the years, though the approach of investing across startup stages has not always worked in the topsy turvy world of venture capital.
Madrona will be “super selective” with the acceleration fund, with plans to make six-to-nine investments over a three-year span, McIlwain said. The average check size will range from $7 million to $10 million.
If all goes to plan, Madrona could raise another acceleration fund when it starts planning for its eighth traditional “core fund.” Madrona’s existing investors provided the capital for the acceleration fund.
The firm remains committed to making early-stage investments in Pacific Northwest startups via its traditional fund. Madrona prides itself on planting seeds in companies from “Day 1” and sticking with them throughout a journey to acquisition or an IPO — Smartsheet, Impinj, and Redfin are examples of those investments.
“We love our core strategy,” McIlwain said. “Nothing is changing there.”
In fact, cash from the acceleration fund could very well go toward additional Seattle companies, he said.
“We are more committed to this region than ever,” McIlwain said. He noted Madrona’s partnerships with organizations including Techstars Seattle and the University of Washington, and said the firm’s new founder center, Create 33, has been “incredibly successful.”
Madrona employs 30 people at the firm and has been bulking up its lineup, adding new partners and directors over the past year. The same team will be working with both funds — this could help Madrona avoid issues that plagued Kleiner Perkins Caufield & Byers, which dealt with internal rifts after establishing a “growth” fund in 2010 to compliment its early-stage fund.
“Our approach is very different,” McIlwain said when asked about a story in Fortune last month titled How the Kleiner Perkins Empire Fell.
As McIlwain sees it, Madrona can keep from getting stretched too thin through a unified team, consistent process and collaborative approach.
Madrona is facing increased competition from Silicon Valley firms that are investing more frequently in Seattle-area companies. Recent investors in later stage rounds for companies such as Outreach and Auth0 include Mayfield, Spark Capital, Trinity Ventures, and Meritech Capital.
Historically, Seattle entrepreneurs have headed south to Silicon Valley or east to New York for later stage capital. So, Madrona’s acceleration fund does present a new well of cash that entrepreneurs could draw upon. But even so, there are no guarantees that entrepreneurs — some of whom may have been passed on by Madrona in the early stages — will choose the firm in the later stages of financing.
Madrona has proven its ability to back nascent startups that become huge companies. Its track record for investing in later-stage companies for the first time, especially those outside of its backyard, is not as clear.
The firm hopes to use its hometown as an advantage. “And, we believe, it is essential to have the ‘Seattle Perspective’ as part of your team to accelerate growth and maximize long-term value,” it wrote in a blog post today.
McIlwain said that perspective includes proximity to homegrown companies such as Amazon and Microsoft, and the cutting-edge technologies being developed across the city in industries such as cloud computing, machine learning, and artificial intelligence. Madrona believes it can make a difference for companies not familiar with the Seattle tech scene.
“It’s the access to the insights from those domains; access to the innovators both in small and big companies we’ve had the opportunity to work with; and this whole area of a cultural approach that really values taking a trust-based, long-term style to company building,” McIlwain said.
In addition to Create 33, other Madrona-related initiatives include Madrona Venture Labs, the “startup studio” backed by Madrona. Recent investments made by the firm include deals backing Igneous, Ovation, Knock, Polly, Pro.com, and Clusterone.