In downtown Seattle, places of work are solely 42% as full as they had been earlier than the pandemic, in accordance with knowledge cited late final month by The Seattle Occasions. It’s an issue, suggests Matt McIlwain, who has been a managing director on the early-stage enterprise agency Madrona Enterprise Group in Seattle for 22 of its 27 years. “No person has found out hybrid work but, which suggests all of the startups and all of the VCs try to determine it out, too,” he says.
What McIlwain does know is that “in-person human interplay is important to trust-based relationships.” That’s partly why Madrona’s companions have themselves been assembly within the workplace each Monday and Thursday for almost a yr. It’s why 80% of the agency’s investments are funneled into startups within the Pacific Northwest, the place Madrona’s workforce can go to with founders head to head. It’s additionally why, for the primary time in its historical past, Madrona opened an workplace this previous summer season in Palo Alto, the place others of its offers are getting finished. (To steer that new workplace, Madrona introduced aboard veteran VC Karan Mehandru, who has household in each areas and who co-invested in quite a few offers with Madrona beforehand.)
We talked extra with McIlwain yesterday in regards to the significance of being current, amongst different issues. It appeared a very good time, on condition that Madrona has simply closed on $690 million in capital commitments throughout two new funds — a document quantity for the agency regardless of shaky market situations. As we realized, a 2020 funding within the knowledge storage firm Snowflake forward of its IPO later that very same yr absolutely helped, alongside with different exits. Extra from our chat follows, edited for size.
TC: It is a step up out of your final units of funds, totaling $500 million and $350 million, respectively. How is that this new capital being damaged out throughout the 2 funds, and what are Madrona’s whole property beneath administration at this level?
MM: We now have $3 billion in property beneath administration. We raised $430 million for our early-stage fund and $260 million for our latest acceleration fund. We had been delighted to have 100% of our longstanding buyers come again to this fund, together with well-known college endowments and foundations and household places of work that you simply may guess [at] given [they are based in] Seattle.
Any international funding sources like sovereign wealth funds? I preserve questioning how institutional buyers within the U.S. have capital allocation to spare proper now, with their public market portfolios up to now down.
Efficiency issues, and for those who’re a long-term investor and also you’re getting vital returns and also you consider a workforce can navigate up and down cycles, [you commit]. However there may be fact to this so-called denominator impact. [I think limited partners are] prioritizing their long-term relationships and never searching for a bunch of latest relationships presently. We do all the time like so as to add a few new LPs with every fund and we had been in a position to do that, however no, none had been international or sovereign wealth funds.
Whilst you’ve raised a document quantity, tech startups in Seattle and the Pacific Northwest are elevating much less, in accordance with GeekWire. It estimates native startups garnered 20% much less within the first half of this yr in contrast with 2021.
When you’ve got such a document yr as 2021, you’ll probably have some sort of correction. Final yr, VCs invested greater than $300 billion, I believe, up from $150 billion within the prior few years, that means you’d must see a decline of fifty% simply to get again to that time. So down 20% suggests extra resilience [despite] that there was a lot adjustment in combination valuations.
I additionally suppose entrepreneurs are elevating smaller rounds. Some are saying, ‘Okay, let’s be extra disciplined about [fundraising] and the milestones I accomplish.’
Do they actually have a alternative?
A few of it’s capital market pushed. Some VCs say the trade did get forward of itself [last year]. As a result of folks had been elevating larger rounds, you had been placing extra capital in hoping different parts can be de-risked, however the actuality is [the opposite happened in some cases].
Your acceleration fund is just not a typical alternative fund. You aren’t utilizing it to put money into portfolio firms however relatively firms you haven’t funded but.
Sure, it’s centered on firms which have discovered product-market match, usually Collection B or C stage [across the country].
Snowflake was amongst these. Its shares traded so excessive after it went public within the fall of 2020 and zoomed larger nonetheless, however they’ve actually bumped round since. Did you promote your stake? Do you’ve got a philosophy about how lengthy to hold on to shares earlier than you distribute these to your buyers?
A accomplice who isn’t the lead on the board of an organization and a few of our workforce do an evaluation. We attempt to say, ‘Let’s have a look at this objectively.’ We do take our time, so we aren’t [exiting] early however we’re not holding on eternally, both. Because the market was in a really beneficiant temper final yr, we had thresholds and Snowflake was [trading at such heights] that we distributed 75% of our stake at properly north of $300 a share. We’re massive believers within the firm and we’ll take a considerate strategy with the remaining.
Madrona invests throughout quite a lot of areas: DevOps, clever functions, fintech, web3, the intersection of life and knowledge sciences. Are the companions at Madrona specialists or generalists? How ought to founders take into consideration approaching the agency?
Madrona is mostly generalists. Our long-term strategic focus has been actually early stage, seed and Collection A-stage Pacific Northwest firms as we do suppose VC is native enterprise and that founders want people who find themselves able to roll up their sleeves with them to construct firms.