Matt McIlwain, Madrona | Cube Conversation, September 2022

Matt McIlwain of Madrona Venture Group raised a record $690 million across two funds focused on early-stage cloud and AI companies. The Seattle-based firm leverages relationships with Amazon and Microsoft to help founders, and emphasizes geographic proximity and hands-on advising over spray-and-pray investing.
Chapters
Hi everyone, welcome to thisCUBE Conversation here in Palo Alto, California. I'm John Furrier, host of theCUBE here at our headquarters on the West Coast in Palo Alto, California. Got a great news guest here, Matt McIlwain, Managing Director of Madrona Venture Group is here with me on the big news, Madrona raising their record $690 million fund. And partnering with their innovative founders. Matt, thanks for coming on and talking about the news, and congratulations on the dry powder.
Well, hey, thanks so much, John. Appreciate you having me on the show.
Well, great news here. Obviously validation. We're in a new market. Everyone's talking about the new normal. We're talking about a recession, inflation, but yet we've been reporting that this is kind of the first generation that cloud hyperscale economic scale and technical benefits have kind of hit any kind of economic downturn. If you go back to 2008, our last downturn, the cloud really hasn't hit that tipping point. Now the innovation, as we've been reporting with our startup showcases and looking at the results from the hyperscalers, this funding news is kind of validation that the tech-society intersection is working. You guys just get to the news, $430 million in the Madrona Fund 9 and $260 million Acceleration Fund 3, which means You're gonna go stay with your roots with seed, early stage, and then have some rocket fuel for kind of the accelerated expansion growth side of it. Not like late stage growth, but like scaling growth. This is kind of the news. Is that right?
That's right. You know, we, we've had a long time strategy over 25 years here in Seattle of being early, early stage. You know, it's like our friends at Amazon like to say as well, we're there at day one. And we want to help build companies for the long run. For over 25 years, we've been doing that in Seattle. And I think one of the things we've realized, I mean, this is— these funds are the largest funds ever raised by a Seattle-based venture capital firm. And that's notable in and of itself. But we think that's the reason is because Seattle has continued to innovate in areas like consumer internet, software, cloud. Of course, we're the cloud capital of the world and increasingly the applications of machine learning. And so with all that combination, we believe there's a ton more companies to be built here in the Pacific Northwest and in Seattle in particular. And then through our acceleration fund where we're investing in companies anywhere in the country, in fact, anywhere in the world, those are the kinds of companies that want to have the Seattle point of view. They don't understand how to work with Amazon and AWS. They don't understand how to work with Microsoft. And we have some unique relationships in those places and we think we can help them. Succeed in doing that.
You know, it's notable that you guys in particular have been very close with Jeff Bezos and Andy Jassy and the success of AWS as well as Microsoft. So, you know, Seattle has become cloud city. Everyone kind of knows that from a cloud perspective. Obviously Microsoft's roots have been there for a long, long time. You go back to, I mean, August Capital, early days funding Microsoft. You remember those days, not to date myself, but you know, Microsoft kind of went up there and kind of established it. Amazon there as well. Now you got Google here, you got Facebook in the Valley. You guys are now also coming down. This funding comes on the heels of you appointing a new managing director here in Palo Alto. This is now the migration of Madrona coming into the Valley. Is that right? Is that what we're seeing?
Well, I think what we're trying to do is bring the things that we know uniquely from Seattle and the companies here down to Silicon Valley. We've got a terrific partner in Karam Mahendru. He's somebody that we have worked together with over the years, co-investing in companies. So we knew him really well. It was a bit opportunistic for us. But what we're hearing over and over again is a lot of these companies based in the Valley, based in other parts of the country, they don't know really how to best work with the Microsofts and Amazons or understand the services that they offer. And, you know, we have that capability. We have those relationships. We want to bring that to bear in helping build great companies.
What is your expectation on the Silicon Valley presence here. You kind of give a hint here, kind of a gateway to Seattle, but you got a lot of developers here. We just reported this morning that Meta just open-sourced PyTorch to the Linux Foundation. Again, a very material kind of trend we are seeing. Open source now has become— there's no debate anymore— has become the software industry. There's no more issue around that. This is real.
I think that's right. I mean, you know, once, you know, Satya became CEO of Microsoft and they started embracing open source, you know, that was going to be the last big tech holdout. We think open source is very interesting in terms of what it can produce and create in terms of next generation innovative innovation. It's great to see companies like Facebook, like Uber and others that have had a long track record of open source capabilities. But what we're also seeing is you need to build businesses around that, that a lot of enterprises don't want to buy just the open source and stitch it together themselves. They want somebody to do it with them. And whether that's the way that, you know, companies like MongoDB have built that out over time or that's, you know, or Elastic or, you know, companies like OctoML in our portfolio or even the big cloud, you know, hyperscalers, you know, they are increasingly embracing open source and building finished services, managed services on top of it. So that's a big wave that we've been investing in for a number of years now and are highly confident is going to continue.
You know, I've been a big fan of Pacific Northwest for a while. You know, love going up there. And talking to the folks at Microsoft and Amazon and AWS. But there's been a big trend in venture capital where a lot of the later stage folks, including private equity, have come in. You've seen Tiger Global, even Tiger Global alumni, the Cubs, they call them. You know, they're coming down and playing in the early stage and the results haven't been that good. You guys have had a track record in your success. Again, 100% of your institutional investors have ponied up with you on this to fund strategy of close to $700 million. What's this formula? Why aren't they winning? What is it? They don't have the ecosystem. Is it they're spraying and praying without a lot of discipline? What's the dynamic between the folks like Madrona, the NEAs of the world who kind of come in, Sequoias, who kind of do it right, come in and they get it done in the right way, early stage versus, say, the private equity folks?
You know, I think that early stage venture is a local business. It is a geographically proximate business. When you're helping incredible founders try to really dial in that early founder market fit, this is before you even get to product market fit. And so the team building that goes on, the talking to potential customers, the iterate— iterating on business strategy. This is a roll-up-your-sleeves kind of thing. It's not a financial transaction. And so what you're trying to do is have a presence and an understanding, a prepared mind of what are the big themes and the kinds of founders that with our encouragement and our help can go build lasting companies. And when you get to a later stage, you know, you get to that growth stage, it is generally more of a financial, you know, kind of engineering sort of proposition. And There's some folks that are great at that. What we do is we support these companies all the way through. We reserve enough capital to be with them at the seed stage, the Series B stage, the, you know, the crossover round before you go public, all of those sorts of things. And we love partnering with some of these other people, but there's a lot of heavy lifting at the early, early stages of a business. And it's not, I think, a model that everybody's architected to do well.
You know, trust becomes a big factor in all this. You kind of, when you talk about like that, I hear you speaking, it makes me think of like trusted advisor meets money, not so much telling people what to do. You guys have had a good track record in being added value, not value subtract. And sometimes that value subtract is getting in the way of the entrepreneur by running certain meetings, driving board meetings and driving the agenda. You seem to see that trend where people try too hard and force function the entrepreneur. We're living in a world now where everyone's talking to each other. You got, there's no more glass door. It's everyone's on Twitter. So you can see some moves, someone trying to control the supply chain of talent by term sheet, overvaluing evaluating them. You guys have a different strategy. You guys have a network. I've noticed that Medrona has attracted some high-end talent coming out of Microsoft, out of AWS, seasoned senior talent. I won't say senior citizens, but you know, people have done things, scaled up businesses, as well as attract young talent. Can you share with our audience that dynamic of the seasoned veterans, the systems thinkers, the ones who have been there, done that, built software, built teams, to the new young entrepreneurs coming in? What's the dynamic like? How do you guys look at those networks? How do you nurture them? Could you share your, your strategy on how you're going to pull all this together going forward?
You know, we, we think a lot about building the innovation ecosystem. Like a phrase around here that you hear a lot is the bigger pie theory. How do we build the bigger pie? If we're focusing on building the bigger pie, there'll be plenty of that pie for Medrona, Medrona companies. And that mindset says, okay, how are we going to invest in the innovation ecosystem? And then actually, to use a term, you know, one of our founders who unfortunately passed away this year, Tom Ahlberg, he had just written a book called Flywheels. I think it embodies this mindset that we have of how do you create that flywheel within a community? And of course, interestingly enough, I think Tom both learned and contributed to that. He was on the board of Amazon for almost 20 years and helping build some of the flywheels at Amazon. So that's what we carry forward. And we know that there's a lot of value in experiential learning. And so we've been fortunate to have some folks that have worked at some of those iconic companies join us and find that they really love this company building journey. We've also got some terrific younger folks that have some very fresh perspectives and a lot of creativity. And they're bringing that together with our team overall. And what we really are trying to do at the end of the day is find incredible founders who want to build something lasting and significant and provide our kind of our time, our best ideas, our perspective, and of course, our capital to help them be successful.
I love the ecosystem play. I think that's a human capital game, too. I like the way you guys are thinking about that. I do want to get your reaction. I know you're close to Amazon and Microsoft, but mainly Jeff Bezos as well. You mentioned your partner who passed away was on the board. A lot of great props and tributes online. I saw that. I didn't know him at all, so I really can't comment. But I did notice that Bezos and Jassy in particular were complimentary. And recently I just saw Bezos comment on Twitter about the Lord of the Rings movie they're putting out, the series. And he says, you gotta have a team that's kind of like rebels. I'm paraphrasing, 'cause these folks never done a movie like this before, so they're getting good props from reviews. In this new world order where entrepreneurs gotta do things different, what's the one thing that you think entrepreneurs need to do different to make make this next startup journey different and successful because the world is different. There's not a lot of press to relate to. Andy Jassy, even on stage last week in LA, was kind of— he's not really revealing, he's on his talking points message. The press aren't out there in big numbers anymore and you got a lot of different go-to-market strategies, omnichannel, social, different ways to communicate to customers. So product market fit is becomes big. So how do you see this new flywheel emerging for those entrepreneurs that have to go out there, roll up their sleeves and make it happen? And what kind of resources do you think they need to be successful? What are you guys advocating?
Well, you know, what's really interesting about that question is I've heard Jeff say many times that when people ask him what's gotta be different, he reminds them to think about what's not gonna change. And he usually starts to then talk about things like, price, convenience, and selection. The customer is never going to want a higher price, less convenience, smaller selection. And so when you build on some of those principles of what's not going to change, it's easier for you to understand what could be changing as it relates to the differences. One of the biggest differences I don't think any of us have fully figured out yet is what does it mean to be productive in a hybrid work mode? We happen to believe that it's still going to have a kernel of people that are geographically close, that are part of the founding and building in the early stages of a company. And, and it's an and equation that they're going to also have people that are distributed around the country, perhaps around the world, that are some of the best talent that they attract to their team. The other thing that I think, coming back to what remains the same, is being hyperfocused on a certain customer and a certain problem that you're passionate about solving. And that's really what we look for when we look for this founder market fit. And it can be a lot of different things from the next generation water bottle to a better way to handle deep learning models and get them deployed in the cloud. If you've got that passion and you've got some inkling of the skill of how to build a better solution, that's never going to go away. That's going to be enduring. But exactly how you do that as a team in a hybrid world, I think that's going to be different.
And one thing that's not changing is that your investor makeup's not changing. 100% of your existing institutional investors have signed back on with you guys and you're oversubscribed, a lot of demand. What is your flywheel success formula? Why is Medtronic so successful? Can you share some feedback from your investors? What are they saying? Why are they re-upping? Share some inside baseball or anecdotal praise.
Well, I think it's very kind of you to frame it that way. I mean, you know, it does for investors come back to performance. You know, these are university endowments and foundations that have a responsibility to generate great returns. And we understand that and we're very aligned with that. I think to be specific, in the last couple of years, they appreciated that we were also not holding on to our, our stocks forever, that we actually made some thoughtful decisions to sell some shares of companies like Smartsheet and Snowflake and Accolade and others and actually distribute capital back to them when things were looking really, really good. But I think the other thing that's very important here is that we've created a flywheel with our core strategy of being Seattle-based, And then going out from there to try to find the best founders, build great companies with them, roll up our sleeves in a productive way and help them for the long term, which now leads to multiple generations of people at those companies and beyond that we want to partner with and back again. And so you create this flywheel by having success with people and doing it in a respectful and, as you said earlier, a trusted way.
What's the message for the Silicon Valley crowd? Obviously, Bay Area. Silicon Valley, Palo Alto office in the center of it. So you got the hybrid workforce, hybrid venture model developing. What's the goals? What's the message for Silicon Valley?
Well, our message for folks in Silicon Valley is the same it's always been. We're excited to partner with them largely up here again, because this is still our home base. But there'll be a select number of opportunities where we'll get a chance to partner together down in Silicon Valley. And we think we bring something different with that deep understanding of cloud computing, that deep understanding of applied machine learning. And of course, some of our unique relationships up here that can be additive to what they've already done. And some of them are just great partners and have built, you know, helped build some really incredible companies over the years.
Matt, I really appreciate you taking the time for this interview, given the big news. I guess the question on everyone's mind, certainly the entrepreneur's mind, is how do I get some of that cash you have and put it into work for my opportunity? One, what's the investment thesis? Can you take a minute to put the plug in for the firm? What are you looking to invest in? What's the thesis? What kind of entrepreneurs you're looking for? I know Fund 1 is seed, Fund 9 is seed to A and B, and the second one is beyond B and beyond for growth. What's the pitch? What's the pitch?
Well, you can, you can think of us as, you know, any stage from pre-seed to Series C, you know, we'll make a new investment in companies in all of those stages. You know, I think that, you know, the core pitch, you know, to us is, you know, your passion for the, for the problem that you're trying to, trying to get solved. And we're, of course, very excited about that. And, you know, at the end of the day, you know, if you want somebody that has a distinct point of view on the market that is based up here and can roll up their sleeves and work alongside you, we're, we're the ones that are more than happy to do that. Proven track record of doing that for 25+ years. And there's so much innovation ahead. There's so many opportunities to disrupt, to pioneer. And we're excited to be a part of working with great founders to do that.
Well, great stuff. We'll see you at AWS re:Invent coming up shortly and your annual get-together. You always have your crew down there and team engaging with some of the cloud players as well. And looking forward to seeing how the Palo Alto team expands out. And Matt, thanks for coming on theCUBE. Appreciate your time.
Thanks very much, John. Appreciate you having me. Look forward to seeing you at re:Invent.
Okay, Matt here with Medrona Venture Group. He's the partner, managing partner, Medrona Group raises $690 million to Fund 9 and big funds for accelerated growth, Fund 3, a lot of dry powder. Again, entrepreneurship in technology is scaling. It's not going down. It's continuing to accelerate into this next generation super cloud, multi-cloud, hybrid cloud world steady state. This is TheCUBE's coverage. I'm John Furrier with SiliconANGLE, host of TheCUBE. Thanks for watching. Mm-hmm.
More from Matt

Rising tide is lifting all hyperscaler boats right now, says Madrona's Matt McIlwain

Launchable: Foundation Models - Matt McIlwain on "The Intelligent & Generative Apps Phenomena"

The Mix -- Venture Capitalist Matt McIlwain Interviewed by Mixpo CEO Jeff Lanctot



