SEATTLE – Tom Alberg and his colleagues at Madrona Investment Group reached a first close in late October on their first fund, Madrona Venture Partners, which is expected to wrap in December.
The vehicle targets $150 million to $200 million and will invest in early-stage information-technology and communications companies, including Internet, software and wireless enterprises, Alberg said. The vehicle notched more than $120 million in the first close, he added.
Madrona Investment Group was formed in 1995 to invest its managers’ capital. The group made some 50 investments in Northwest companies including Amazon.com Inc., LiveBid and HomeGrocer.com Inc.
But the team decided in September to raise a traditional venture fund with money from institutional investors after feeling financially constrained when portfolio companies raised larger, later-stage rounds of financing, Alberg said. The group also wanted to attract talented, young investment professionals by creating a venture firm that did not exist merely to invest the personal wealth of its general partners.
Madrona Investment Group’s general partners include: Paul Goodrich, a venture capitalist who worked in Seattle for a Chicago-based fund sponsored by First Analysis, which wound down in 1996; Greg Gottesman, who joined the firm about 18 months ago out of Harvard Business School; and Alberg, who left Seattle’s McCaw Cellular after it was purchased in 1995 by AT&T. Bill Ruckelshaus, formerly of Browning Ferris in Texas, and Jerry Grinstein, former chief executive of Western Airlines, which was sold to Delta Air Lines, are the firm’s strategic partners. The group is looking for another partner and, at press time, was talking to candidates from Microsoft Corp., Alberg said.
The founders initially formed their firm with the intention of investing in a broader range of companies, but they ended up backing technology companies almost exclusively because those were the kinds of deals they found in Seattle, said Alberg, who expects at least four-fifths of the new fund to be invested in the Northwest, mostly in the greater Seattle area.
In raising its first vehicle, Madrona targeted regional players, primarily financial, corporate and individual investors, along with a few pension funds. The group also will solicit capital from a few strategic investors in New York and the San Francisco Bay Area. The firm’s general and founding strategic partners together will invest at least $20 million in the fund, Alberg said.
Madrona Venture Partners will make investments of as little as $200,000, but the firm will make larger single-round commitments of $2 million to $5 million, Alberg said. He expects the new vehicle to back some 30 to 40 companies, with an average of $5 million each over time. The vehicle will be invested over three to five years.
The fund features a 2.5% management fee and a carried interest of 20% unless the fund achieves a 50% net IRR for its L.P.s, in which case, the carry would rise to 30%.
Alberg declined to specify returns generated by the group’s earlier investments, but he noted Madrona was a first-round investor in Amazon.com Inc. He said Madrona’s performance from previous investments produced a “terrific IRR.”