Madrona managing directors, from left to right: Tom Alberg, S. “Soma” Somasegar, Scott Jacobson, Matt McIlwain, Tim Porter, Hope Cochran, and Len Jordan. (Paul Goodrich is Madrona’s other managing director) (Madrona Photo)
Call it the “ones we missed” fund.
Madrona Venture Group has raised $100 million for what it calls an “acceleration fund.” The Seattle firm, which has focused on early-stage deals across the Pacific Northwest throughout its 24-year history, will target later-stage companies based across the country with the new investing vehicle.
But it is also targeting deals in its Seattle backyard that slipped through the cracks. Madrona is one of Seattle’s most successful early-stage startup investors — with recent successes such as Apptio, Smartsheet and Redfin under its belt. But even so, Madrona’s Matt McIlwain admits that the firm missed some 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.
Matt McIlwain. (Madrona Photo)
“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 partner Tom Alberg — the acceleration fund represents a new strategy for the firm.
But it is one that other firms have experimented with, though the approach of investing across stages of company formation 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 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 are more committed to this region than ever.
“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.
“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 last month’s Kleiner Perkins story in Fortune. “A unified team, unified process and consistent fund economics across the firm along with our collaborative approach will allow us to bring the full Madrona team’s value-add to all our companies across all our funds.”
A staircase connects Madrona Venture Group’s existing office to Create33, a new founder center that aims to be an epicenter for Seattle startups. (GeekWire Photo / Taylor Soper)
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.
McIlwain said he welcomes the new entrants in the Seattle market.
“It is great for the Seattle ecosystem to have more investors partnering with great entrepreneurs and investors like Madrona to build global-leading companies,” he said.
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.