Timing is Everything: A Guide for When to Raise Early-Stage Investment

For all the articles on how to raise funding, timing comes up a lot less often. Yet, the question of when to raise is arguably just as — if not more important — than the question of how. It is also more of an art than a science. At Madrona we mostly invest very early in a company’s lifecycle – at the seed and A stage. And we usually start talking to companies well before the stage they are approaching.

(If you are later stage and reading this – check out our Acceleration Fund here )

Sometimes this is a quick decision: product, team, and market are in alignment, but sometimes those pieces aren’t enough in alignment to give us confidence that the funds entrusted to us by our investors should be invested at that moment in the company’s lifecycle. If there are elements we really like such as the team, we continue to work with the entrepreneur and be helpful where we can with intros and advice. Sometimes not raising at that moment in time was a good decision for everyone involved.

A great example from the last couple of years of a company that benefited from NOT raising early is Unearth. The company’s founders initially came to us very early in their life cycle — about a year prior to when we actually funded them. Venture is not about just financing but involves a strong partnership around company building and scaling and at its core is a relationship business. The investors you choose will be with you throughout your journey – at least if you work with Madrona, they will be – so you want to choose wisely.

And that’s how we started with founder, Brian Saab. We have had a working relationship with Brian for over a decade. Brian and Soma worked together at Microsoft. Brian had been a co-founder at another startup where we worked with him called buuteeq, which was acquired by Priceline back in 2014.

According to Brian: “Our early idea was very focused on how to use drones in a new way to map. We went to Madrona while we were doing a friends and family raise around this idea. At that point there were a lot of open questions. We had good conversations with Tim and Soma, but they didn’t think the business was ready for VC funding yet. Not raising from Madrona led to more discipline around the business as I dove into pulling the angel round together, which I liken to herding angel cats. This smaller round kept us capital efficient and we didn’t overbuild during the early time period.

“Not raising from Madrona led to more discipline around the business as I dove into pulling the angel round together, which I liken to herding angel cats.”

As we progressed, we kept Madrona apprised of where we were throughout the whole process of market and customer exploration. We had started with a focus on drones and IOT and had chosen the construction sector, but we were still mostly focused on using drones versus creating the platform of work management we have today. We went back to Madrona as we went to market with a deeper product for construction and at first Madrona didn’t want to lead but then they got closer to the business and saw what was happening at a deeper level. Soma pulled in senior associate, Chris Picardo, and then they led the seed round of $4.5 million. And today our business is strong – we have expanded our focus and it’s great to have Soma and the team supporting our journey.

Unearth raised a Series A of $7 million following a successful seed stage.

Why Timing is Important
As Unearth shows, there can be real costs for miscalculating timing of your first institutional round. Raise too early and you could put yourself ahead of what your company can feasibly accomplish. This can put a huge amount of unnecessary pressure on you and your team to live up to the raise. The pressure can lead to unwise spending, high burn and a cash out date that arrives before achieving the milestones you set in place when you raised the round.

Conversely, if you bootstrap for too long, beyond the obvious (running out of money) you could allow competitors to outpace you and miss the ideal window for scaling your business. Keep in mind the fundraising process takes time. Be sure to mentally prepare yourself to devote at least a 3-6 months to the process, potentially more.

Determining the Right Time for Your Company
A good rule of thumb is to start fundraising when you have six months of cash left. While every company is different, here’s a general guide for where your business should be by then so you’re well-positioned for early-stage financing:

We (and Pitchbook) took a look at data of technology companies that raised a series A in the past 5 years in the US and found that on average companies close seed rounds 1 year and 9.6 months after their founding date and A rounds after 1 year and 10.5 months after their seed financing. However, these are just averages and every business is unique. What’s most important is you are keeping an eye on your cash balance and have a clear vision of what milestones you want to reach before hitting the market.

On a final note since we’re talking timing, contrary to what some people say about VCs and the summer and winter holidays there is never a wrong time of the year to raise! We can’t remember a year in recent memory where we weren’t closing a deal in August or over the winter holidays, for instance.

If you have a great idea, come see us! It’s never too early to talk!

Chris Picardo greatly contributed to this post.

Announcing $300 Million for Technology Entrepreneurs and Founders

Today the Madrona Team is gratified to announce our latest $300 million fund, Madrona Fund VII, for investing in exceptional technology entrepreneurs and founders in the Pacific Northwest from Day One. Our longstanding endowment, foundation and family office investors see a huge amount of opportunity for growth in our market. We agree – we think the next big technology trends of cloud computing, intelligent applications powered by AI/ML, multi-sense user interfaces and solutions combining the digital and physical world will drive the next decade of innovation are all happening in greater Seattle better than anywhere else in the world.

We look forward to working with great entrepreneurs, co-investors, and partners as we build the next big companies for the future. Here are the details: we raised $300 million from which we will make initial investments over the next 3-4 years and use to continue to support those companies over the long run – often for 10+ years. Four of our companies have IPO’d in the last two years (Smartsheet, Redfin, Apptio and Impinj) and they exemplify how we work. We were there at day one through the ups and downs for every one of those companies. The average time from inception to IPO for those companies was 12 years. We believe whole heartedly in the innovation of people in the Northwest and we are excited every day to get up and work with you to build success.

Thank you!

Below is our press release on the new fund.

Madrona Venture Group Expands Capital for Entrepreneurs in the Pacific Northwest – Announces a New $300 Million Fund for Early-Stage Technology Companies

Fresh from Four IPOs, Madrona’s Fund VII was Over-Subscribed with Investors Interested in Participating in the Growing Innovation Ecosystem in the Pacific Northwest

Seattle, WA – May 22, 2018 – Madrona Venture Group (www.madrona.com) today announced the closing of a $300 million investment fund, Madrona’s seventh. Madrona’s strategy is to partner with the most promising technology entrepreneurs and their teams from day one through the long term. Madrona primarily focuses on great founders based in the Pacific Northwest, which is home to two of the world’s four largest technology companies, Microsoft and Amazon, as well as a thriving technology and startup ecosystem.

In the past two years, four of Madrona’s portfolio companies have gone public. With each of these companies – Smartsheet, Redfin, Apptio and Impinj – Madrona was there at day one and partnered with the team every step of the way. The average time from initial investment to IPO for these companies was 12 years, exemplifying the firm’s long-term commitment to entrepreneurs.

“The entrepreneurs in our region continue to build exceptional companies on the leading edge of major customer, technology and business model changes. We believe cloud computing, intelligent applications powered by AI/ML, multi-sense user interfaces and solutions combining the digital and physical world will drive the next decade of innovation,” said Matt McIlwain, managing director, Madrona Venture Group. “On behalf of the entire Madrona team, we are proud to have the trust of our many limited partners and outstanding founders.”

Madrona Venture Group Managing Directors

Fund VII is Madrona’s seventh fund over the last 23 years and brings funds under management to nearly $1.6 billion. The oversubscribed fund is supported by a diverse set of repeat and long-term investors including the nation’s premier endowments, foundations, family offices, Outsourced Chief Investment Offices (OCIOs) and entrepreneurs.

Madrona’s philosophy of supporting technology entrepreneurs and startups in their earliest days continues with this fund, and the firm will deploy capital to lead and participate in seed and Series A investment rounds. In addition, the entire Madrona team will continue to roll up their sleeves to help with recruiting great talent, making strategic business decisions, amplifying company stories, connecting them with partners and customers and raising follow-on financings.

Mark Mader, long-time CEO of newly public Smartsheet (NYSE: SMAR) commented, “Madrona understood Smartsheet’s vision and the value of our innovation from our earliest days, even when some others did not. In the eleven years since, our partnership has yielded significant growth, supported by Madrona’s valued counsel on market trends, buyer needs, funding, executive talent, and ability to collaborate with other growth investors. As I reflect on the early decisions that made a positive difference for Smartsheet’s business, our decision to partner with Madrona is one that delivered in the short, medium, and long term.”

Madrona has been committed to supporting, spurring and fostering the innovation ecosystem in the Pacific Northwest over its history, ranging from creating Seattle’s first startup studio, Madrona Venture Labs, five years ago; launching and supporting Seattle TechStars; partnering with the University of Washington Allen School of Computer Science; and working with the angel investor community. This year, Madrona will open Floor 33, a Seattle innovation community co-located with Madrona that will house an expanded Madrona Venture Labs and a curated co-working space for founders and their teams featuring programming for residents and the entire community. This 22,000 square foot location will open later this summer.

Current and new portfolio companies will benefit from an expanded group of Managing Directors, investment professionals, Venture Partners and professionals dedicated to helping our companies succeed. Recent additions include: Managing Director, S. Somasegar; Venture Partners, Ted Kummert, Hope Cochran, and Luis Ceze; Strategic Director, Betsy Sutter; investment professionals Maria Karaivanova, Sudip Chakrabarti and Chris Picardo; Talent Director, Shannon Anderson; and Business Development and Investor Relations Director, Alice Ryder.

About Madrona

Madrona is an early stage venture capital firm in the Pacific Northwest. The firm invests in technology entrepreneurs and companies, and works with them to build their businesses. Madrona manages nearly $1.6 billion and was an early investor in companies such as Amazon.com, Apptio, Smartsheet, Rover.com, and Redfin.

Contact: Erika Shaffer [email protected] 206-972-5514