Madrona Venture Group closed $167 million for its third fund, attracting the majority of its commitments from institutional LPs for the first time in the Seattle-based firm’s 11-year history.
Institutional investors counted for only about 20% of the firm’s $250 million second fund, with individual investors picking up the rest of the tab. But institutions were bullish on Madrona this time around. They put down about $130 million or 80% of fund III.
Big backers bought into the fund to take advantage of Seattle’s burgeoning local economy for tech startups. James Clark, the head of private equity for the Kauffman Foundation, says that the firm’s investment in Madrona was “…a smart way for us to access some of the nation’s most talented technology entrepreneurs outside of Silicon Valley.”
What’s got Clark excited is that the Pacific Northwest is becoming a more interesting place to look for startups as local giants Microsoft Corp., Amazon.com, and T-Mobile USA mature.
“Microsoft has more opportunity to spin things off,” says John Jenks, the chief investment officer and treasurer of The James Irvine Foundation, a new Madrona backer.
But it’s not just promising startups that are coming out of the big tech companies. “If they have stagnant stock prices, you’re seeing very good people flow out of those companies that you wouldn’t have had during the past,” says Madrona Managing Director Greg Gottesman.
Gottesman says that he’s currently evaluating a software startup spawned by Microsoft. It wouldn’t be a first for Madrona. In January 2005, the firm backed online marketing startup Mercent, which is run by former Amazon.com executive Eric Best, who brokered the online bookseller’s deal with Toys “R” Us. Madrona also was one of the original investors in Amazon.com.
Talent is coming from more than just the big tech players. Seattle is widening its base of battle-tested executives as successful entrepreneurs launch their second and third startups. Gottesman points to Michael Smith, CEO of Bag Borrow or Steal, an online service that rents handbags. Smith was previously CEO of Madrona-backed Classmates.com, an online directory service bought for $100 million in 2004. Before joining Classmates.com, Smith was president of Nordstrom.com, another Madrona-funded startup.
Of course Madrona isn’t the only venture firm looking to capitalize on growth in the Northwest. Bellevue, Wash.-based Ignition Partners invests about half of its funds in local startups and has close ties to Microsoft, where seven of the company’s nine partners once worked, including former Microsoft CFO John Connors, now an Ignition partner.
Ironically, even though Madrona gained some new institutional investors, it lost a major corporate backer – Microsoft. The company dropped out of Madrona’s third fund as part of a strategic change driven by personnel changes, Gottesman says. But the fund still counts several senior Microsoft executives among its individual investors, though neither Bill Gates nor Steve Ballmer are involved.