Seattle Reaches Critical Mass –

Seattle venture capitalists might not agree about exactly when it happened, but they do concur that the city has reached critical mass in the last few years when it comes to receiving venture capital and hosting entrepreneurial activity.

Seattle can’t match Silicon Valley in terms of the sheer number of high-tech companies and venture capitalists – no place in the world comes close, despite catchy knock-off names such as Silicon Alley (New York), Silicon Prairie (Chicago and the Midwest) and Silicon Forest (the Pacific Northwest, dominated by Seattle). Nevertheless, the Emerald City has arrived.

The evidence is abundant. Big companies such as Microsoft Corp., AT&T Wireless Services and even Boeing Co. are spawning entrepreneurial offspring such as Inc. Local success stories – from Starbucks Corp. to Inc. to Immunex Corp. and RealNetworks Inc. – serve as role models for the next generation of start-ups. And entrepreneurs who already have established companies in Seattle are starting subsequent ventures.

On the funding side, high-tech angel investors wanting in on the action also are playing a significant role. Venture firms such as Maveron, Polaris Venture Capital, Voyager Capital and Guide Ventures have opened offices in Seattle to back young companies, and they’ve been joined by big-name law firms, accounting organizations and technology-oriented banks.

And suburban Kirkland’s Carillon Point is trying to become the Northwest’s version of Sand Hill Road. The modern complex, which butts up against picturesque Lake Washington, is home to Olympic Venture Partners, Cooley Godward L.L.P., Wilson Sonsini Goodrich & Rosati, Venture Law Group, Silicon Valley Bank and Imperial Bank.

But the most telling sign of the city’s development as a technology hub is the increase in venture dollars flowing into the greater Seattle area.

VC Investment Up Sharply

As of late October, Washington companies had raised $1.32 billion in venture funding in 1999, according to Venture Economics Investor Services (VEIS), a sister company to VCJ. That’s more than twice the $575.5 million invested in Washington companies in all of 1998. The vast majority of venture capital that floods into the state goes to the greater Seattle area, Washington’s only major metropolitan region.

Washington has been gaining venture ground steadily since 1993, when 22 companies took in $80.36 million. Of course, the gains must be viewed in light of the incredible growth in venture investing nationwide since the mid-1990s. Venture investments totaled $18.85 billion in 1998, meaning 3.05% of the VC pie went to Washington, according to VEIS. By late October, VCs had put $29.30 billion to work this year, of which 4.49% went to Washington.

Seattle’s development as a technology center owes much to Microsoft, the 30,000-employee software giant in nearby Redmond, Wash. While Microsoft employees have been suppliers of angel money for a while, the company did not produce many entrepreneurs until the last few years.

Tony Audino is a managing director of venture firm Voyager Capital as well as the chairman of Microsoft AlumNet, a philanthropic and entrepreneurial organization made up of former Microsoft employees. When Voyager was formed in 1996, the firm expected to see a lot of interesting opportunities spawned by Microsoft, but there were few. Rob Glaser, however, was one of the earlier and most notable exceptions, founding streaming audio and video company RealNetworks in 1994.

Microsoft Slow to Spawn

Workers at Microsoft remained there because they sensed an opportunity to change the world through their work. Also keeping them there was the repeated, extraordinary increases in Microsoft’s stock price, which made employees’ holdings increasingly valuable. With the rise of Microsoft’s stock price slowing down, particularly this year, employees now are more likely to consider striking out on their own, Audino says.

Like Audino, Microsoft alumnus Bill Miller switched to venture capital, joining health-care and IT-oriented Olympic General Partners, about a year ago. He, too, reflects on the recent increase of entrepreneurs emerging from Microsoft.

Previously, few people left the software giant, and those who departed quit for lifestyle reasons: the retirees wanted a slower pace rather than the pressures of starting a new company, Miller says. In the last couple of years, however, a different breed of Microsoft employee has emerged – those who leave after putting in three years and making enough money to feel financially secure to form or join a start-up.

Guide Ventures Managing Director Jim Thornton, however, says he doesn’t see many promising deals emerging from Microsoft’s departing staff because its employees emerged from a monopolistic company and therefore often lack the mindset to become entrepreneurs.

Although Microsoft leaves a strong imprint on Seattle’s technology landscape, the software company is not the area’s only big high-tech operation. Seattle also is home to McCaw Cellular Communications Inc., now part of AT&T Wireless Services, and Adobe Systems Inc., which purchased local software maker Aldus in 1994. It’s not just the older guard of companies that produce spinoffs, however. Guide’s Thornton has seen companies founded by employees of enterprises such as Inc. and Excite Inc. (now Excite@Home), companies not that many years removed from their own start-up days.

While IT enterprises garner much of the glory, the Seattle area also hosts a biotechnology and medical-device community anchored by mature companies such as Immunex and ICOS Corp. In addition to funding spin-offs, Seattle health-care investors also look to the University of Washington and the Fred Hutchinson Cancer Research Center for deal flow.

Alan Frazier of Seattle’s Frazier & Co., a health-care only VC fund, formed his venture firm after a stint at Immunex, where he had been an executive vice president and chief financial officer. He noted that sales of companies, including life-sciences concerns, lead to eventual spinoffs because of the turmoil created by sales and the difficult of melding two companies together. Physio-Control, now Medtronic Physio-Control Inc., is an example of a Seattle area health-care company that was sold, Frazier says.

Mayfield’s Deals of the Heart

Seattle’s health-care opportunities have caught the attention of Menlo Park, Calif.’s Mayfield Fund, whose investment professionals have been shuttling north since 1990 to invest in the state’s companies, says General Partner Wende Hutton. The venture firm first backed InControl Inc., which developed implantable defibrillators for atrial fibrillation. Mayfield then backed HeartStream Inc., a company founded in 1993 by entrepreneurs known to InControl’s founders. HeartStream created defibrillators that weigh only four pounds, compared with the standard model’s 16 pounds, which can be used by lay people.

When those two companies were getting started in the early 1990s, Seattle didn’t have the entrepreneurial culture that exists today, Hutton recalls, and potential employees were worried about job security at start-ups. Washingtonians are more willing to take that risk now, in part because it’s common to know someone who made it big at a start-up, or alternatively, someone who failed, but landed safely after finding another job, the Mayfield G.P. says.

Mayfield has four active portfolio companies in Seattle, two in information technology and two in health care – including a HeartStream spinoff.

“We think it’s a fabulous market,” Hutton says. “We’ve identified great executives, the infrastructure is strong, the deal flow is not like it is down here [in the Bay Area], so it’s more opportunistic.”

Hutton says Mayfield’s Seattle-based portfolio companies can hire many of their managers from the region, and she has not found it difficult to recruit outsiders to fill posts. It is easier to attract East Coast candidates to San Franciso, however.

Repeat Entrepreneurs

Kirsten Morbeck, an associate at Fluke Venture Capital who also has worked for Seattle-based Kirlan Ventures, says she sees more entrepreneurs seeking venture backing for their second or even third start-ups than in the past.

Polaris founding General Partner Steve Arnold echoes Morbeck’s thoughts and points to Ken Williams, the chief executive of electronic communication platform company, WorldStream Communications Inc., as an example. He previously founded Sierra On-line Inc., a consumer software company that he later sold.

VCs offer different estimations of when Seattle actually became a venture capital and entrepreneurial hotbed. Mayfield’s Hutton puts Seattle’s achievement of critical mass in the 1995-96 timeframe, while Olympic Ventures Partners’ George Clute says the bull’s eye was five years ago – the point at which entrepreneurs stopped coming into his office asking what venture capitalists do. Still other VCs, however, think of critical mass as a more recent phenomenon, taking place roughly over the last two years.

Frazier says he’s seen VC activity really develop over the last year, but cautions that critical mass cannot be pinpointed to a single moment. Entrepreneurial activity sped up two years ago, with an increase in Microsoft departures and with greater activity among angels, he says.

Eddie Chung knows about the latter. He is the program director for the Alliance of Angels, a group of accredited high-net-worth individual investors who formed the organization two years ago. The group hears pitches from four prospective companies each month, and angels decide individually whether to write checks and for what amount. The Alliance has 130 members, 19 of which joined between June and late October, Chung says. Members made their wealth at Microsoft or in the telecommunications, aerospace, media or sports industries, although the group counts no athletes among its members.

Angels’ Influence

Alliance members have backed companies such as, which was purchased by and Home Grocer. com Inc.

John Carlton says it’s not unusual for Seattle companies to raise $3 million to $4 million from angels before approaching VCs. Carlton’s firm, Benaroya Capital, invests money for the Benaroya family, whose wealth came from real estate. The group invests about $10 million a year in early-stage information-technology and communications companies.

The significance of angel money is apparent in the numbers: VEIS lists “individuals” as the ninth largest source of venture capital in Seattle this year as of late October.

Although he hasn’t calculated the averages, Cooley Godward’s Washington-based attorney Greg Abbott says he routinely sees clients who’ve raised $1 million to $2 million from high-net-worth individuals before approaching VCs. Cooley established its Kirkland, Wash. presence about a year ago, roughly the same time Wilson Sonsini set up shop in the same complex. Venture Law Group came to Kirkland about a year earlier.

Out-of-state law firms aren’t the only professional organizations now interested in Seattle. A large portion of Washington’s venture money comes from out-of-state firms, including California’s Brentwood Venture Capital, Accel Partners and Benchmark Capital. Oak Investment Partners, with offices in Silicon Valley, Connecticut and Minnesota, is one of Seattle’s biggest investors, along with Boston’s T.A. Associates and Advent International.

Outside VCs Mostly Welcome

Emerald City venture capitalists have mixed, but mostly positive, feelings about outside money, which largely comes from California. Not surprisingly, feelings often depend upon which firm and which individual venture capitalist is being discussed, and the quality of skills and networks that would accompany outside capital.

Many Seattle-based VCs invest much, if not most, of their money out of state, making them especially cautious about criticizing outside firms that invest in Washington.

Alex Knight, a Seattle-based managing director of ARCH Venture Partners notes that an entrepreneur “can raise a ton of money in the Northwest without talking to anyone outside the Northwest,” marking an end to the days when Seattle needed a Bay Area VC to validate a deal. As a seed- and early-stage investor, ARCH has invited both local and outside investors into all but one of its deals, says Managing Director Robert Nelson.

Knight adds that portfolio companies tend to have more extreme views of Bay Area VCs: either entrepreneurs are dead set against dealing with a Sand Hill Road firm, or they think Silicon Valley firms are the answer to all problems. Mayfield’s Hutton, however, says no Washington entrepreneur has raised the geography issue with her.

Olympic’s Clute says Bay Area firms have sometimes looked at their Seattle-based brethren as babysitters for Washington deals. Northern California’s VCs, with their bulging checkbooks, want to take the largest part of a deal, leaving Seattle firms with a small piece – and much of the work, Olympic’s Miller says.

Voyager’s Audino doesn’t view his firm as a babysitter, although he acknowledges that nearby entrepreneurs will turn to his firm for hands-on time and attention, while also tapping the deep pockets of non-local firms such as Oak, with which Voyager has co-invested in four companies.

Outside VCs are attracted to Seattle’s success in reaching critical mass, notes Zack Herlick, a partner at Maveron, a consumer-oriented venture firm based in Seattle that includes Starbucks’ founder Howard Schultz among its founders.

With and Starbucks based in Seattle – plus the headquarters of high-end department store chain Nordstrom Inc. – Seattle is a center of consumer activity, as well as life sciences and IT, Herlick says. His firm backed local e-commerce company Inc. – Maveron’s only Seattle deal to date. The firm expects to launch a second fund, which at press time did not have a target size, probably in the first quarter of 2000, he says. Maveron presently has $75 million under management.

Looking Ahead

Thinking about Seattle’s future over the next few years, Guide’s Thornton and Olympic’s Miller say they expect the area’s venture community to become more competitive and less collegial, similar to what happened to the Bay Area when its market matured earlier this decade. Thornton doesn’t see the change far off: he expects the shift to take place in 2000.

ARCH’s Nelson expects Seattle to continue attracting capital, both from local sources and other areas. He also expects a handful of local firms to emerge as big players, a process he already sees beginning to take shape. “There will be three or four … or maybe five very large Seattle firms with multiple hundreds of millions of dollars in active money that are willing to lead [deals],” he says. “That’s what’s changing. That was not the case a couple of years ago.”

Nelson and other VCs such as Madrona Investment Group Principal Tom Alberg are keeping an eye on other locales in the Northwest for deal flow such as Portland, Ore. and Vancouver, British Columbia.

“I think Portland is becoming a bigger player,” says ARCH’s Nelson. “We haven’t done a lot there, but it’s clearly in our sites. It’s a few years behind Seattle.”

Mayfield’s Hutton expects to see more business-to-business e-commerce companies growing out of the wealth of business-to-consumer companies already in Seattle, such as She also expects to see a continuation of new medical device and biotechnology companies there, although she doesn’t see that market growing significantly because VCs are not that interested in backing those industries these days. Meanwhile, Polaris’ Arnold expects more Microsoft spinouts and incubators to spring up.

Wilson Sonsini’s Seattle-based Partner Patrick Schultheis foresees more spinouts from, especially in light of the company’s appetite for acquisitions. The question remains, however, whether employees of companies acquired by Amazon will launch their own companies in Seattle.

Several Washington VCs, including Olympic’s George Clute, expect to see more new faces as venture firms based in other states open satellite offices in the Seattle area to take advantage of Northwest opportunities.

Washington’s Biggest Venture Investors in 1999

(through 10/27/99)

$ Millions

Rank Firm Name Invested

1 Oak Investment Partners 117.93

2 Corporate Investors 74.79

3 Brentwood Venture Capital 39.35

4 TA Associates Inc. 29.20

5 Accel Partners 22.35

6 Advent International Corp. 20.22

7 Benchmark Capital 20.00

8 Inc. 19.94

9 Individuals 19.92

10 Vulcan Ventures Inc. 18.32

11 Olympic Venture Partners 17.97

12 Highland Capital Partners 17.50

13 Trinity Ventures 16.70

14 U.S. Venture Partners 16.21

15 Columbia Ventures Inc. 15.90

16 Chartwell Capital Management Co. Inc. 15.70

17 Worldview Technology Partners 15.56

18 ARCH Venture Partners 15.33

19 Crosspoint Venture Partners 15.33

20 Polaris Venture Partners 14.92

21 Integral Capital Management L.P. 14.52

22 Deutsche Bank AG 14.42

23 Venrock Associates 14.32

24 Bessemer Venture Partners 13.99

25 Sevin Rosen Management Co. 12.99

Source: Venture Economics/NVCA