$70M richer: Cash flows to Madrona

The Madrona Venture Group, which funded high-profile Internet successes such as Amazon.com Inc. and Classmates.com, is well on its way to raising its third investment fund, called Madrona Venture Fund III.

According to an internal document circulated by Madrona's managing directors to its limited partners dated June 29, Madrona has raised "more than $70 million" and has "a strong pipeline of additional investors for (its) second close and looks forward to completing the fund-raising process in the near future."

It's not clear how large the fund will turn out to be because the fund-raising process isn't yet complete. Oftentimes, when new venture funds are raised, the money arrives in phases, marked by separate "closings."

When reached by telephone on July 1, Madrona managing director Greg Gottesman declined to comment.

Madrona is one of several venture firms in the Puget Sound region to raise large new funds in the last year or so. In October 2004, Ignition Partners of Bellevue raised a $300 million fund. A month later, Maveron LLC, an early backer of Internet giant eBay, raised a $200 million fund. In May, Seattle-based Frazier & Co. raised a $475 million fund for investment in the health-care sector.

Creation of the new fund likely means entrepreneurs in the Pacific Northwest's early-stage technology sector will continue to receive local attention from one of the best-connected venture firms in the region.

According to the June 29 document, the mix of limited partners in Madrona Venture Fund III is a combination of "individuals and strategic investors, along with several new institutional investors."

Robert Nelsen, a managing director at Arch Venture Partners and an investor in Madrona's second fund, said Madrona should be able to attract new institutional investors.

"It's widely known that they have a bunch of very well-placed high-net worth individuals and some institutions," Nelsen said. "In this fund, I'd guess they'll be expanding into more institutions. That's generally how it works in venture capital. That's how it worked here at Arch."

Dan Levitan, a co-founder and managing member at Maveron, said many venture firms that raised funds in 1999 and 2000 are out in the market looking for more cash.

He expects more local venture firms will raise new funds as the year progresses.

"The environment is clearly much better than it was in 2001 and 2002 for raising money," Levitan said. "I think the interest in venture capital is really driven by watching some of these companies, a la Google. We invested in eBay. These are not easy companies to find, but they're out there."

Over the last 10 years, Madrona has forged strong alliances with Fortune 500 companies and top-notch research institutions such as the University of Washington's computer science and engineering department.

Patrick Ennis, a managing director with Seattle-based Arch Venture Partners, has worked closely with Madrona for several years. He sits on the board of Seattle-based semiconductor startup Impinj Inc. with Madrona Managing Director Tom Alberg, an early investor in Amazon.

"One of the things that sets Madrona apart is their deep Rolodex of Fortune 500 directors and CEOs," Ennis said.

A quick look at Madrona's list of strategic directors shows just how much reach into a variety of industries and companies the venture firm has.

Among Madrona's strategic directors are Jack Creighton, former president and CEO of Weyerhaeuser Co. and United Airlines Corp.; Jerry Grinstein, CEO of Delta Airlines; Bill Owens, CEO of Canadian telecom equipment giant Nortel Networks; and Bill Ruckelshaus, former CEO of Browning-Ferris Industries and the first administrator of the U.S. Environmental Protection Agency back in 1970.

"Having those kinds of connections are important for startups because their early customers are often from the ranks of the Fortune 500," Ennis said.

Madrona maintains a tight relationship with two departments at the UW -- the school of computer science and engineering and the office of intellectual property and technology transfer, which is run by James Severson.

Severson is responsible for the protection, licensing and commercialization of all technologies developed at the university. He works closest with two managing directors at Madrona -- Matt McIlwaine and Chuck Hirsch.

"They're on campus frequently, and they're well tuned into the research going on at the department of computer science," Severson said of McIlwaine and Hirsch.

Madrona has helped commercialize a number of UW technologies, Severson said. One of the firm's more recent projects is a new data mining startup called Hamlet.

Hamlet's technology looks at databases of airline ticket prices and searches for low-cost alternatives. Severson describes the company, which has been held tightly under wraps, as a "next-generation Expedia or Travelocity."

Hamlet's underlying technology was developed by a professor at the UW's computer science department, Dr. Oren Etzione, who is also a venture partner at Madrona.

Severson said the initial contact between Etzione and Madrona happened about 18 months ago. Madrona helped Etzione form Hamlet and funded the licensing of the intellectual property from the university, he said.

"(The relationship) with Madrona is very important for us," Severson said. "So many of the discoveries we make here are very early-stage, and not many venture firms want to work with such early-stage ideas and concepts."

Madrona's prominence in the venture capital industry have served at least one of its portfolio companies well -- Impinj.

Bill Colleran, the 85-employee startup's CEO, said Madrona's Alberg was instrumental in helping Impinj to win the 2005 Venture All-Stars "Venture of the Year" award by acting as the company's advocate.

Impinj was selected from a group of 150 private companies based in the Pacific Northwest by a consortium of venture capitalists from Arch Venture Partners, OVP Venture Partners of Kirkland, Voyager Capital Inc. of Seattle and Yaletown Partners of Vancouver, British Columbia.

Winning such recognition "really helps with recruiting and customer interactions," Colleran said. "Building a reputation with customers is really important, especially for an early-stage company like Impinj. It's your No. 1 calling card."