Introducing Madrona’s Acceleration Fund

Today we are introducing a new Madrona fund, the $100 million Madrona Acceleration Fund. This new fund expands our ability to work with entrepreneurs around the country as their companies move from product-market fit to accelerating business growth.

Over nearly 25 years, Madrona’s main passion has been working with exceptional entrepreneurs from the earliest stages by rolling up our sleeves to help them build successful companies. We believe that getting involved at an early stage (seed and Series A) is primarily a local business. Our focus has been on the Seattle/Pacific Northwest region which is one of the leading centers of innovation in the world. It can take more than a decade to build a great and lasting company and we have been there for all the ups and downs of the journey. Amazon, Apptio, Isilon, Impinj, Redfin and Smartsheet are just some examples of Madrona’s strategy in action.

As other companies find product-market fit, we believe there are investment opportunities where Madrona can add value in a complimentary way to existing investors and help this additional set of companies succeed. So, today we are announcing our first $100 million Acceleration Fund to make initial Madrona investments at a Series B or C stage in leading companies in both the Pacific Northwest and beyond. For us, Acceleration Stage means the company has strong evidence of product-market fit, has demonstrated customer value and product differentiation, and has complimented exceptional founders with key executives to help build AND sell those products. Additionally, we look for market signals that indicate the company has a clear path to become a lasting and significant company. With this new fund, we will lead rounds or partner with other investors on a few select Acceleration Stage companies each year.


Some folks have asked us why we are creating the Acceleration Fund and why now? We wanted to share with the innovation ecosystem, and especially entrepreneurs, how we are thinking about this opportunity:

  • Madrona has nearly 25 years of experience and success adding value at every stage of a company journey – from Day One for the long run. This includes the acceleration stage of growth that is often marked with a B or C funding round, and then the ongoing progress that lead to IPO’s or M&A outcomes.
  • Our hometown, greater Seattle, has emerged as a global leader in cloud computing, AI/ML, new retail and much more. Madrona has been an early leader and investor in these sectors leveraging our longstanding relationships with outstanding research organizations like the Paul Allen School of Computer Science at the University of Washington and Allen Institute for Artificial Intelligence and outstanding entrepreneurs.
  • Seattle is home to two of the top three largest market cap companies in the world (Microsoft, Amazon) and a thriving ecosystem. Madrona has a proven ability to help companies navigate and partner with these companies as well as the over 100 global technology companies that have a significant presence in our region.
  • We have built deep relationships with entrepreneurs, co-investors and strategic partners who increasingly encourage us to evaluate new Madrona investments at the acceleration stage (examples include Accolade, Jama, Snowflake, Tigera, and UIPath) in our region and beyond it.
  • Being self-aware, we have also missed out on investing in some high potential, Seattle area acceleration stage companies. Quality companies like Outreach, iCertis, Textio and Auth0 come to mind. We are excited to be considered by both best-in-class acceleration stage companies around the country and in Pacific NW companies where management teams believe we can add complimentary value for their next stages of growth.

We believe our understanding of building value from an acceleration stage forward is differentiated and high impact. But, the real validation comes from what entrepreneurs believe and the results their companies produce.

Mark Mader, CEO of Smartsheet

“Madrona invested in Smartsheet in the Series A and then two years later during the depth of the recession with a product revamp in front of us – they invested further. As product-market fit was achieved and we scaled 20x, they also effectively partnered with other investors — all the way through to our IPO in 2018. Madrona delivered value across hiring, partnering, go to market strategy, capital raising, and more. High quality companies poised for growth will clearly benefit from the new Acceleration Fund.”

Daniel Dines, founder and CEO of UIPath

“UiPath has been on a long journey of growth and when we first started talking about building an R&D center in the Seattle area, I immediately knew we needed a local partner with experience building products, teams and go to market partnerships. We found that in Madrona. The team has helped us accelerate some key product strategy objectives, recruit important team members to help scale the team and also connect with local technology and business leaders at Microsoft who are very important to fulfill on our partnership goals together.”

Raj Singh, CEO of Accolade

“When I joined Accolade almost four years ago – the mission was to accelerate the company’s growth by finding the best talent to build a world class product and distribution team. To do that, you need world class partners. Having worked with Matt McIlwain and Madrona on both the Apptio and Amperity board of directors, reaching out to Madrona was high on my priority list on day one. And they have lived up to my expectations – helping with customer acquisition, critical hires, key partnerships, and invaluable counsel.”

Let’s talk!

Madrona has been adding to our team so that we can continue to partner with our Day One investments over the long term and selectively make a few acceleration stage investments each year. Hope Cochran, with over two decades of scaling, taking public and guiding exceptional companies, recently became a Managing Director. Sudip Chakrabarti, with extensive experience investing in Silicon Valley, moved up last year to join us as a Partner. Katie Drucker became our Head of Business Development and Partnerships. And, we continue to add to our network of Venture Partners and Strategic Directors with a set of highly accomplished leaders including Terry Myerson, Luis Ceze, Betsy Sutter, Ted Kummert and Mark Britton.

We look forward to investing with companies that are approaching the “acceleration stage” of their company life and are interested in exploring a fit with Madrona. We are looking to lead rounds, partner with your existing investors and roll up our sleeves as a team to have a positive impact on your company’s trajectory. So, please reach out to one of us directly or feel free to send a note to [email protected].

There has never been a better time to be an entrepreneur and innovator. And, we believe, it is essential to have the “Seattle Perspective” as part of your team to accelerate growth and maximize long-term value. We encourage you to talk to the entrepreneurs, co-investors and partners we have had the honor to work with for almost 25 years. And, we look forward to being a resource to you in the months ahead.

How VC-to-PE Buyouts Can Change Market Dynamics for Later-Stage, VC-backed Companies

Every VC-backed company board gets to evaluate company exits from time to time and often these decisions occur when there is an opportunity to raise more capital. If you have been in the industry for a while, you have experienced various forms of the three main types of late-stage capital raises or exits: Late-stage rounds, IPO, and strategic M&A. Late-stage rounds are an interim step for raising capital and forging a path to profitability. M&A is usually appealing to all shareholders only when the company is being “bought and not sold.” Finally, IPO’s are expensive and hard to prepare, and public capital market timing and attractiveness are out of any board’s control. So boards are sometimes unsatisfied with the alternatives available for capital raising and/or transfer of some or all corporate control.

In the private equity world, a fourth option has existed for many years where one PE firm buys out the majority stake of another PE firm that is ready to sell. Increasingly, PE firms are making this “secondary buyout” option available to VC-backed companies and their boards. These “VC-to-PE buyouts” are a helpful liquidity alternative for both employees and investors in later-stage VC-backed companies and are changing the dynamics when boards consider strategic options. Specifically, we have seen software-focused private equity firms like Vista Equity Partners (Ping Identity, Marketo) and Thoma Bravo (Digicert, Qlik) in the market, looking to acquire both private and public software-driven companies.

Capital and Control Matrix

Capital raising strategies and corporate control questions are among the most momentous ones for a company board. These are often areas where the collective experience of the board can provide great value to an entrepreneurial team. At times, the capital raising and control questions can become conflated. Below is a high-level summary of the options available to later-stage, venture-backed companies arranged by percentage of capital raised/transferred and percentage of control/ownerships transferred. A more detailed matrix is included at the end of this piece.

CapControl Matrix

How Did We Get Here?

For the last several years, late-stage capital for private companies has been plentiful, relatively inexpensive and light on control provisions and investor protections. While there have been occasions of sudden and sharp pullbacks, including February 2016 and April 2014, this capital has generally been available for high-growth companies. An increase in the size and variety of sources of capital, from larger venture funds, public institutional investors and hedge funds, have fueled these “company-friendly” trends. These capital sources have allowed companies to remain private later and longer than historically possible, and have given rise to the so-called “unicorns”, or private companies with valuations above $1 billion.

Two main groups of investors look to lead late-stage private rounds. One group consistes of late-stage venture firms like Insight and TCV who prefer to take market execution risk over the product market fit and market timing risks taken by early stage VC’s. The second group is mostly made up of public stock investors like T. Rowe Price, Fidelity and Janus, along with some hedge funds. For rapidly growing, technology companies, these private rounds are often attractive. Companies sell a small portion of their business in exchange for growth capital and the later stage company-building expertise of new investors. These rounds sometimes have a secondary component to provide some liquidity to longstanding employees and early investors. With these private rounds, companies are somewhat sheltered from the quarterly expectations of the public market, which is especially helpful for companies who have customer concentration, lower sales productivity and lumpy sales cycles.

A different path for raising capital and creating liquidity over time is the IPO. A company sells shares (typically 15 to 20% of the company at pricing) to raise capital to fuel growth. The IPO process is expensive and time consuming, generally costing over $3 million to prepare and taking 9 to 12 months. And, being public subjects a less established company to the spotlight and expectations of public company investors. That said, for companies that are taking a long-term perspective and are increasingly mature in their processes and predictability, an IPO has several advantages. It creates a public currency that can be used to buy other companies or leveraged to raise more cash by taking on low-cost debt. An IPO provides a path to liquidity for existing employees and investors, as well as a path for transitioning ownership from early-stage to public company investors. The IPO also has some other advantages; it creates a branding opportunity for the company and a stamp of approval in attracting customers, partners and new employees.

In a world of Software-as-a-Service (SaaS) and subscription-based businesses, companies are stronger candidates for being public. They have greater visibility into key metrics like revenue, product usage, customer renewals/upsells, customer acquisition cost and lifetime value than was ever possible in a world of on-premises and licensed software. And, they can typically drive toward free cash flow and positive operating margins as they get to scale and continue to invest in growth. For these reasons, we expect more of the mature SaaS and subscription-based technology companies to go public if the IPO market stabilizes in the later portion of 2016. But, the demands of being public, the volatility in capital markets, and the leverage of gatekeepers in the IPO process have led many boards to choose other paths.

M&A and the new VC-to-PE Buyout Trend

Selling a company in an M&A process is another path. But, according to Pitchbook, full-year 2016 transaction value is projected to be well below the $83.9 billion dollar of M&A reported in 2014. This trend is especially surprising given that five of the largest technology companies (Apple, Microsoft, Alphabet, Oracle, and Cisco) had $504 billion dollars of total cash in May 2016 and, financial sponsors have over $1 trillion of “dry powder” available to invest. Notwithstanding the recent acquisition of LinkedIn by Microsoft, NetSuite by Oracle, and EMC by Dell, larger technology companies have been relatively cautious to make medium to large acquisitions.

What we have seen emerge over the past few years, is a group of discerning private equity firms including Vista Equity, Thoma Bravo and Warburg Pincus who have sensed opportunity and increasingly led the way on initiating M&A discussions and acquiring VC-backed, software companies. For the same reasons that mature SaaS companies are less risky to take public, they are better able to fit within a leveraged buyout model. Boards of later-stage private companies are evaluating these VC-to-PE buyouts as an alternative to strategic buyer acquisitions or raising capital in IPO’s or private rounds.

Several broader factors, that may not persist, are contributing to these current VC-to-PE buyouts. Valuations for SaaS companies growing 20%+ on an “enterprise value to next twelve-months sales” (EV/NTM) basis have recovered, according to Goldman Sachs; but are still modestly below the 5.5x EV/NTM 12-year average. The cost of debt remains low, and more innovative debt structures are available. Finally, in some cases like Marketo (a public company example where more data is available), the EV/NTM multiples paid by private equity buyers outbid potential strategic buyers. The Marketo deal was done at a 64% premium to prior stock price with a 5.8X EV/NTM multiple. The company grew roughly 40% in revenue and billings in 2015, and generated $2.3 million of cash. In Madrona’s portfolio, the purchase of PayScale a few years ago was a leading indicator of this trend. With SaaS companies growing and maturing, other VC-to-PE buyout deals are expected.

But why would a VC-to-PE buyout be attractive to the management and board of a later stage private company? Management has the opportunity to continue fulfilling their dream as an independent and private company. New PE owners offer a high degree of autonomy and flexibility to executives who are meeting or exceeding agreed-to milestones (admittedly with greater EBITDA emphasis over growth), as well as additional capital to take advantage of strategic opportunities. These deals create immediate liquidity for long-standing shareholders. Typically, executives remain in their leadership roles and receive new equity in the new entity. The opportunity cost of a VC-to-PE buyout is the promise of holding out to build even greater value through an IPO or strategic exit. However, this new form of buyout could be considered the “best of both worlds” for a management team that is committed to continuing to build business and equity value.

A force as significant as VC-to-PE buyouts will likely have ramifications across the capital and control matrix. A few we anticipate are:

  1. Strategic buyers will be motivated to move more quickly and aggressively on acquisitions – and be pressured on pricing and terms as they look to acquire later stage private companies.
  2. We may see a loosening of the burden of the IPO process. Investment bankers, public equity investors and other gatekeepers will become more flexible on IPO pricing and processes in taking companies public.
  3. Later-stage rounds, for 20%+ growth companies that can demonstrate compelling unit economics and a path to cash-flow breakeven, will enjoy a rebound in company-friendly pricing and terms and will continue to offer partial liquidity for employees/investors.
  4. PE buyout firms will increasingly emphasize the “best of both worlds” value proposition to CEOs and their executive teams as a reason to choose the VC-to-PE buyout route.

Boards are responsible for helping guide management teams to maximize long-term shareholder value in the context of balancing risk and reward. The increasing opportunity for later-stage companies to evaluate VC-to-PE buyouts as a change of control option improves the menu of possibilities boards can consider. Thinking about it in matrix form can help clarify the real trade-offs between options leading to better capital raising and control decisions.

CapControl Matrix Detail

This post first appeared on Venturebeat in shortened format.