Fewer Firms, but Plenty of Deals

 

Seattle’s Venture Capital Community Is Shrinking

After 30 years in operation, OVP Venture Partners last fall announced it would no longer seek new funding and will wind down its existing $250 million fund in four to five years. Frazier Technology Ventures also is winding down. The Phoenix Partners is gone. Out-of-town firms Atlas Venture and Mohr Davidow Ventures closed their Seattle offices.

The loss of VC was unavoidable, said Michael Butler, CEO of Cascadia Capital, a Seattle mergers and acquisitions firm.

“I’d say probably 75 to 80 percent of the VC money has gone away. I would argue though that they’ve gone away for the right reasons. They didn’t invest well and they didn’t provide good returns for their partners,” he said. “I think the reason a lot of these funds closed down was because there weren’t enough good deals available to Seattle VCs to sustain them. I think the very, very best deals in Seattle go to the VCs from New York or Silicon Valley, not necessarily to the Seattle VCs.”

Last year, Seattle serial entrepreneur Tony Wright moved to Silicon Valley to start a new company. In a blog post, he wrote that he expected to raise money there faster, easier and on better terms.

“The best Seattle terms I’ve heard of are merely adequate in the Valley . . . and terms that are good in the Valley are virtually unheard of in Seattle,” he wrote.

A focus on early stage   

Seattle VC firms were shut out of the city’s biggest deal last year. Domain name startup Donuts, launched by local entrepreneurs, landed $100 million in funding from firms in Silicon Valley, Chicago, Austin and Connecticut. No Seattle funds were involved.

An examination of the top 10 VC deals in Seattle last year found that:

  • Seattle VC firms were only eight of the 48 investors disclosed.
  • Seattle VCs were entirely absent from three deals.
  • Six deals included only one Seattle VC fund.
  • Only one deal included two Seattle VC funds.

Of the Seattle VC firms, Madrona was the most active with four deals, followed by Maveron, ARCH, Ignition and WRF Capital with one deal apiece.

Out-of-town firms in the Seattle deals are based in Silicon Valley, Boston, Austin, NYC, Vancouver, Washington D.C., Cleveland, Boulder, Princeton and San Francisco.

Geoff Entress, a longtime Seattle angel investor and venture partner with Voyager Capital, was unfazed by the limited participation. Seattle VC focuses on early-stage investment and is unlikely to have a strong presence in larger, later-stage rounds, he said.

The local VC environment is as strong as it’s been in years, he said: “I feel I’m seeing as many quality deals as I’ve ever seen. I don’t think there is any lack of money.”

In fact, Madrona Venture Group just raised a new $300 million fund and Ignition Partners is raising a new $150 million fund.

Scott Jacobson, a managing director with Madrona, (full disclosure: the Kauffman Foundation is an investor), said the tightening of capital is not as meaningful as it used to be, at least for tech startups. It’s less expensive than ever to launch a software company, making it easier for companies to bootstrap or get by solely on angel money, he said.

Despite that, Gregg Bennett, a director at Alliance of Angels, a Seattle group of angel investors, is worried that the A series funding is drying up.

“That middle round where you’re looking for $1 million, $2 million, $3 million, that is increasingly hard to get,” he said, adding that the worsening prospects for later-stage funding can make angels wary about investing early.

Active angels

On the face of it, Seattle’s startup scene ought to be as crowded with angels as a Renaissance painting.

After all, Microsoft, Amazon, RealNetworks and other Seattle successes have created thousands of entrepreneurially minded multimillionaires. According to research firm WealthInsight, Seattle saw a 27% increase in the number of multimillionaires from 2007-2011.

“The best entrepreneurs – they’re not happy being retired, playing golf and sailing their boats,” said Voyager’s Entress.

But Jacobson said the number of angels is lower than might be expected. The wealthy who still have their day jobs might have the money, but not the time to invest while others are from out of town and don’t have a deep connection with Seattle, he said. Still others pour their energy and money into their own startups.

“If I could wave a magic wand and make every early Amazon employee a prolific angel investor I would probably do that,” Jacobson said.

Cascadia’s Butler said Seattle’s startup community could use fewer do-gooders and more serial entrepreneurs and investors.

“You’re not rewarded socially for starting a second or third company; you’re rewarded for going and doing some type of nonprofit activity,” he said. “A lot of the very best entrepreneurs would sell their company and then go do a nonprofit company. And they were rewarded socially for that. I think that’s starting to change a little bit. It definitely kept the very best entrepreneurs on the sidelines.”

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