Ties to Microsoft help Madrona raise fund

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 economy for tech startups. James Clark, head of private equity for the Kauffman Foundation, says the foundation’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 such as 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 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 in 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, it backed online marketing startup Mercent, which is run by Eric Best, a former Amazon.com exec who brokered the online bookseller’s deal with Toys “R” Us.

Even though Madrona gained new institutional investors, it lost a major corporate backer—Microsoft. The company dropped out of the 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.