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VC shines in the Emerald City

Madrona’s recent closing of a $167 million fund is only the latest in a flurry of VC activity in Seattle. Is the Pacific Northwest emerging as a VC powerhouse? By Dave Keating.

When Madrona Venture Group launched its second early stage tech fund in 1999, the $250 million fund was poised to invest in a red-hot startup environment: the height of the dotcom boom; the home of Microsoft. However the boom quickly turned to bust, and Madrona was left with a technology startup fund with few opportunities for investment.

Greg Gottesman says opportunites in Seattle have “never been more robust”

“There’s no question we slowed our investment pace and stretched it out longer than might be normally expected,” says Greg Gottesman, Managing Director at Madrona. “A lot of folks did that.”

This week, seven years after the launch of their last fund, Madrona announced it has raised a $167 million new fund that the firm says will invest in 20 to 25 early-stage technology companies.

Madrona isn’t the only firm jumping back into fundraising after a long hiatus. Numerous other VCs in the Pacific Northwest have recently closed funds or are actively raising new ones. Seattle’s Voyager Capital is raising a $200 million fund after a six-year break. Kirkland, Washington-based OVP Venture Partners is reportedly also raising a $200 million fund. Seattle’s Frazier Healthcare recently closed a $475 million fund.

“There has been renewed activity,” said Gottesman. “But we think that the Seattle area is still under-funded relative to the opportunity.”

Much of that opportunity comes from two of the area’s giant institutions that regularly spawn technology startups – Microsoft and the University of Washington. Microsoft executives regularly leave the software giant to start their own companies in the area. The University of Washington, which is considered one of the best universities in the country with regard to technology transfer, has also produced the seeds of many now-thriving companies. Madrona, for example, recently invested in a technology developed at the university that predicts when airline tickets will rise or fall. Farecast.com was created around the technology, and is currently testing in a beta version.

“So many VCs are mulling over what’s going on at Stanford and Berkeley,” said Gottesman, referring to two prominent research universities in close proximity to Silicon Valley. “At Washington there’s not so many VC firms walking up and down the halls. We want to get to know the professors, because there are world-class academics there.”

Seattle entrepreneurs have long complained that the city has been ignored by venture capitalists. With a lack of substantial, locally headquartered seed-stage VCs, technology start-ups in Seattle have often had to rely on wealthy individuals to provide their budding businesses with the cash they need to attract other investors.

However National Venture Capital Association president Mark Heesen thinks the recent fundraising activity in the area is a sign that this will soon change, as VCs increasingly look outside of the frothy Silicon Valley market.

“You have all the building blocks for the creation of a very vibrant venture capital environment,” Heesen says of the Seattle area. “You’re going to see a lot more interest from West Coast VCs in going outside of the Valley, and when they do, they have two potent areas nearby, Southern California and Seattle. Why should they go across the country to Boston?”