Investors in Seattle Need to Up Their Game... For the Children

By Trevor Gilbert , written on May 9, 2012

From The News Desk

Seattle has a problem. It’s a good place to build a company, it has a deep talent pool, and it has a deep well of potential capital from historical exits. But the money isn’t being used effectively, and the entrepreneurs who have seen exits are keeping it close to their chests.

In the last two years, Seattle’s biggest exits for startups were PopCap Games, which sold to EA for $1.3 billion, and real-estate company Zillow, which went public on NASDAQ, valued at more than $1 billion. Aside from being technology companies, the two shared a defining characteristic: Neither was funded by Seattle-based venture capitalists.

According to Zillow’s co-founder Rich Barton, who also co-founded Expedia, the venture capital market in Seattle simply isn’t as developed as competing markets. It is, he says, a “different world” from the Valley. Because of Seattle’s unwillingness to take risks and Barton’s existing relationships in the Valley, Seattle missed out on investing in Zillow, one of the city’s biggest exits of the decade.

One company, however, doesn’t make a rule. So looking across the board, who did the companies with the largest exits receive funding from? Zillow was funded by Benchmark Capital, PAR, and Legg Mason (not in Seattle). PopCap was funded by Meritech (not in Seattle). Seeing a trend?

That’s not to say that funding doesn’t happen in Seattle, and that the firms there aren’t good. They are. Madrona Ventures, for instance, has solid credentials and a history of mid-size exits. According to managing director Greg Gottesman, Madrona has been working to become a more “full-service firm," helping companies to find talent and grow. The firm has also invested in some of Seattle's most promising companies, including Cheezburger, Redfin, and Mobilisafe. Madrona was also the first investor in Isilon, which sold for $2.4 billion.

That’s fantastic for the firm and others like it, but even these investments won’t end up as revolutionarily disruptions. That’s what is needed to push Seattle from its nascent and promising stage into the city that by all rights it should be.

The reality is that, right now, Seattle’s venture capitalists don’t have the best track record. They invest money, but they don’t seem to see the largest exits coming. They invest money, but they don’t take the giant risks. They invest money, but they haven’t seen a Facebook, or even an Instagram, appear from their efforts. The money is there, but as history proves, it just isn’t being used effectively.

But venture capitalists are only one part of the problem. The other half of the venture capital problem that Seattle faces is a lack of angel investors.

Considering Seattle’s massive exits in the past, an outside observer might expect that someone would have come along and reinvested the earnings back into the community. So far, that hasn’t been the case, and there haven’t been many exceptions to the rule.

Interested observers have taken note. John Cook, co-founder of local startup voice Geekwire, says the lack of investment from wealthy individuals who win big is confounding. “It's a bit perplexing that Seattle – which has created enormous wealth over the years via companies such as Expedia, Microsoft, and – doesn't have a stronger venture capital and angel ecosystem,” he tells me via email. And that’s only looking at the larger exits. Even with smaller exits, angel investors could come out of the woodwork and invest earnings from an exit back into the community.

Seattle is well aware of its investment shortages. In fact, just in the last week a group of entrepreneurs pledged to take 5 percent of their earnings from possible future exits and invest the money back into the local startup community. Of course, that’s a pretty minor step – 25 people pledging 5 percent of their hypothetical wealth is not the same thing as billionaires pledging existing wealth. But things, says Cook, are slowly “changing for the better.”

Then there’s TechStars and Founder’s Co-op, which are bringing additional seed stage revenue to Seattle. And for later-stage investing, there’s always the fact that firms in Seattle are more than willing to pair up with firms in Silicon Valley (as with the recent investment in Apptio), similar to the strategy that Lightbank is pursuing in Chicago. That strategy won’t rectify the problem for Seattle’s firms, but it does help entrepreneurs.

There are some funds and investors in Seattle that have been actively investing in the community for a number of years without fanfare. They have been taking risks that do see some returns. There’s Paul Allen, for instance, a co-founder of Microsoft, who invests through Vulcan Capital. Then there’s Howard Schultz, who invests his personal wealth from Starbucks back into the community. And to round it off, there is Jeff Bezos’ expeditionary fund, which invests in startups.

However, the test shouldn’t be that it’s possible to easily name the few large and successful firms. Seattle’s technology community has been around for decades. There have been many local successes, and investors should have been able to capitalize on this trend by now. From Microsoft to Amazon to Isilon to Zillow, there should have emerged a swarm of angel investors, far more than exist today.

Whether this is because of a risk-averse attitude, a selfishness with the money, or a fear of losing the money – none of which are palatable ideas – it is a serious problem that Seattle needs to rectify. The visionaries of the past can’t carry a city forever.