In downtown Seattle, offices are only 42% as full as they were before the pandemic, according to data cited late last month by the Seattle Times. It’s a problem, suggests Matt McIlwain, who has been a managing director at the early-stage venture firm Madrona Venture Group in Seattle for 22 of its 27 years. “Nobody has figured out hybrid work yet, which means all the startups and all the VCs are trying to figure it out, too,” he says.
What McIllwain does know is that “in-person human interaction is essential to trust-based relationships.” That’s partly why Madrona’s partners have themselves been meeting in the office every Monday and Thursday for nearly a year. It’s why 80% of the firm’s investments are funneled into startups in the Pacific Northwest, where Madrona’s team can visit with founders face to face. It’s also why, for the first time in its history, Madrona opened an office this past summer in Palo Alto, where others of its deals are getting done. (To lead that new office, Madrona brought aboard veteran VC Karan Mehandru, who has family in both regions and who co-invested in numerous deals with Madrona previously.)
We talked more with McIllwain yesterday about the importance of being present among other things. It seemed a good time given that Madrona has just closed on $690 million in capital commitments across two new funds — a record amount for the firm despite shaky market conditions. As we learned, a 2020 investment in the data storage company Snowflake ahead of its IPO later that same year surely helped, along with other exits. More from our chat follows, edited for length.
TC: This is a step up from your last sets of funds, totaling $500 million and $350 million, respectively. How is this new capital being broken out across the two funds, and what are Madrona’s total assets under management at this point?
MI: We now have $3 billion in assets under management. We raised $430 million for our early-stage fund and $260 million for our newest acceleration fund. We were delighted to have 100% of our longstanding investors come back to this fund, including well-known university endowments and foundations and family offices that you might guess [at] given [they are based in] Seattle.
Any foreign funding sources like sovereign wealth funds? I keep wondering how institutional investors in the U.S. have capital allocation to spare right now, with their public market portfolios so far down.
Performance matters, and if you’re a long-term investor and you’re getting significant returns and you believe a team can navigate up and down cycles, [you commit]. But there is truth to this so-called denominator effect. [I think limited partners are] prioritizing their long-term relationships and not looking for a bunch of new relationships at this time. We do always like to add a couple of new LPs with each fund and we were able to do this, but no, none were foreign or sovereign wealth funds.
While you’ve raised a record amount, tech startups in Seattle and the Pacific Northwest are raising less, according to GeekWire. It estimates local startups garnered 20% less in the first half of this year compared with 2021.
When you have such a record year as 2021, you’ll likely have some kind of correction. Last year, VCs invested more than $300 billion, I think, up from $150 billion in the prior few years, meaning you’d have to see a decline of 50% just to get back to that point. So down 20% suggests more resilience [despite] that there has been so much adjustment in aggregate valuations.
I also think entrepreneurs are raising smaller rounds. Some are saying, ‘Okay, let’s be more disciplined about [fundraising] and the milestones I accomplish.’
Do they really have a choice?
Some of it is capital market driven. Some VCs say the industry did get ahead of itself [last year]. Because people were raising bigger rounds, you were putting more capital in hoping other elements would be de-risked, but the reality is [the opposite happened in some cases].
Your acceleration fund is not a typical opportunity fund. You aren’t using it to invest in portfolio companies but rather companies you haven’t funded yet.
Yes, it’s focused on companies that have found product-market fit, generally Series B or C stage [across the country].
Snowflake was among these. Its shares traded so high after it went public in the fall of 2020 and zoomed higher still, but they’ve really bumped around since. Did you sell your stake? Do you have a philosophy about how long to hang on to shares before you distribute these to your investors?
A partner who isn’t the lead on the board of a company and some of our team do an analysis. We try to say, ‘Let’s look at this objectively.’ We do take our time, so we aren’t [exiting] early but we’re not holding on forever, either. As the market was in a very generous mood last year, we had thresholds and Snowflake was [trading at such heights] that we distributed 75% of our stake at nicely north of $300 a share. We’re big believers in the company and we’ll take a thoughtful approach with the rest.
Madrona invests across a lot of areas: DevOps, intelligent applications, fintech, web3, the intersection of life and data sciences. Are the partners at Madrona specialists or generalists? How should founders think about approaching the firm?
Madrona is generally generalists. Our long-term strategic focus has been really early stage, seed and Series A-stage Pacific Northwest companies as we do think VC is local business and that founders need people who are ready to roll up their sleeves with them to build companies.