The Rise of Seattle’s High-Tech Cluster, As Told By Madrona’s Tom Alberg (Part 1)

5/7/09Follow @gthuang

One of the great pleasures of being a journalist is listening to influential leaders discuss where they come from and how it affects their strategy. Luke and I recently sat down with Tom Alberg, co-founder and managing director of Seattle-based Madrona Venture Group. In addition to sharing his thoughts on the future of newspapers and online media, Alberg spoke extensively about his career and how he has witnessed, and participated in, the rise of the technology industry in Seattle.

Let’s take a big step back here. At Xconomy, we’re about delivering the most important breaking news and in-depth analysis of tech and life sciences innovation. But it’s hard to fully appreciate all the latest trends unless you understand the perspectives of the top players. In our interview, Alberg touched on the early days of his career as a lawyer at Perkins Coie in the late ’60s, his later stints as president of LIN Broadcasting and executive vice president of McCaw Cellular, and the birth of Madrona in the mid ’90s. Along the way, he built notable relationships with leaders in wireless, medical devices, and e-commerce—people like Craig McCaw, Jeff Bezos, and Gordon Kuenster of ATL (and more recently, Asemblon).

Maybe you know all the history already, maybe you don’t. Certainly the story of Madrona’s involvement with Amazon has been told many times. But I bet the broader story of Alberg’s career and his observations from the local scene will give people a deeper understanding of Seattle-area innovation and Madrona’s role in the business community.

Here is an edited account of our conversation:

Xconomy: So tell us about your early days in Seattle.

Tom Alberg: My career has paralleled, a little bit, the growth of the technology industry. I started off as a young lawyer in 1967. In those days, there were a few high-tech companies. There was Fluke Manufacturing, and Physio-Control was about to start. There wasn’t much. Seattle had Boeing, and it would go through phases of being less about airplanes, more about computer services and other things. But there were little companies, and there was starting to be more entrepreneurship. When I joined Perkins, I’d been in New York a couple of years, so I was an expert, I thought, in securities law and raising money. But I’d been dealing with hundreds-of-millions-of-dollar deals, not startups. For some reason, I always had a technology interest.

One of the early things that happened was a guy came in named Gordon Kuenster. He’d been a Boeing executive and had been hired to run this startup called ATL [Advanced Technology Laboratories], an ultrasound company out of the University of Washington. He comes into Perkins because Perkins handles The Boeing Company. I’m the low man on the totem pole, so the partner in charge of Boeing has me come and meet with this guy. The partner said, ‘I don’t know, we don’t really do startups.’ I had to plead, ‘Let’s try it!’

X: How did ATL play a role in the rise of the Seattle tech scene?

TA: ATL became a major success at the same time as Physio-Control. Physio went public, and ATL got bought by Squibb for $60 million—big money in those days [1979]. And then what happened was, Hunter Simpson at Physio-Control and Gordon Kuenster at ATL, they invested in some other companies. People who made money in those companies invested in some companies. And then the biotech thing started. I represented Immunex when it first started [in 1981]. It went public, the stock crashed, it survived all those years somehow. So on the biotech side, a bunch of stuff started happening. There was quite a bit of activity, but nothing like it is today.

And then, of course, there was Microsoft. So in 1990, I was still at Perkins. It was a good technology practice. I went over to McCaw Cellular, partly because I was interested in technology. McCaw was sort of a secret company in Seattle. It was in the cell phone business; nobody had cell phones. There was that phone in some people’s cars, sort of like a radio phone or something. Nobody knew much about it. But that was really the moment McCaw had finally put together this deal with LIN Broadcasting, so it suddenly had New York, L.A., Dallas, and Houston markets in addition to Seattle and others. I was there until we sold it in 1995 to AT&T. Craig [McCaw] left, I left, some people stayed. We didn’t really want to work for AT&T.

X: So how did Madrona get started?

TA: In 1995, I joined together with Bill Ruckelshaus, Jerry Grinstein, and Paul Goodrich, all of whom I’d known. Jerry and Bill were coming back to Seattle. Bill had been CEO of Browning-Ferris, and Jerry had been CEO of Burlington Northern Railroad. It was just coincidence that they were coming back to Seattle. Paul Goodrich had been working as a venture capitalist at an environmental fund out of Chicago, but he was in Seattle. So we opened an office and said, “Let’s figure out what to do.” We didn’t have a clear vision we were going to start a venture capital fund. We decided we were going to invest our own money, and we’d invest it in early-stage technology companies and also look for private equity—bigger deals, things that were in families that wanted to diversify, bigger traditional companies.

Between ’95 and ’99, we added Greg Gottesman. It was really the four of us plus Greg. What we found was, every day some entrepreneur would walk in with an interesting company he was trying to raise money for. The explosion kind of started just about then. Aldus existed, there was Visio, RealNetworks, and of course, Microsoft by then was a real powerhouse. And people were starting to leave Microsoft. Jeff Bezos was moving to Seattle. Things were really starting to happen. We invested in 40-some companies, usually relatively small amounts—$50,000, $100,000. We’d join together with other angels and venture capitalists from the Bay Area. We did pretty good due diligence, so I used to call us “professional angels.”

X: How did you evolve into an early-stage venture firm?

TA: At the same time, we kept working on bigger deals, and none of them ever happened—literally, never did we do a bigger deal. Either we didn’t like the deal, or we’d talk to families and they’d go the auction route. So we never did a private equity deal. In ’99, we had a partnership with Oak Investment, and the managing partner over there said, ‘You guys seem to be OK on the venture capital side, but don’t seem to be making much progress on this other [private equity] side.’ So we decided then to go raise the fund—in September ’99, we raised our first fund.

The market was very hot then. We’d invested in Avenue A, which became aQuantive. We had something like 12 companies that had gone public. We had 15 companies where we more than doubled our money. On paper we looked great, but we didn’t have a very big team. So we quickly, in three months, raised $250 million.

X: Let’s back up for a minute. Amazon was one of your most famous early investments.

TA: Back around ’95, Jeff Bezos had walked into my office. He’d been referred by somebody else in town who thought I knew about the Internet. I actually did know a little bit, but I wasn’t an expert. I’d just left McCaw. Jeff was raising a million dollars, his family put in a fair amount of that, he’d moved to Seattle, he hadn’t launched the site yet. He was about to launch the site. It took him from then until December to raise his million dollars. It was this classic, go door-to-door, one referral leads you to another, and most people wouldn’t invest. There was a good venture capital firm that looked at it, did all kinds of due diligence, and concluded they would be killed by Barnes & Noble, who hadn’t yet launched a site, but would. Eventually, it took me several months. Jeff would call me and say, ‘We’ve launched now, and we’ve got orders from 10 different states.’ Then one day, it was, ‘We got our first order from Europe.’ Gradually, I thought this thing could go someplace, so I did invest.

You can never predict things—it’s partly luck, partly being open to ideas. Don’t pick one bet, make several. But fundamentally I believed in the Internet, I thought there was going to be big opportunity, and this one presented itself. Jeff was impressive. Jeff was also going to break even in the second year—that was the other attractive thing. [It didn't quite work out that way, of course---Eds.]

A year later, we brought in Kleiner Perkins, and a few years later went public. In 2000, when everything collapsed, [Amazon] kind of turned the ship just in time. In terms of really focusing on cutting expenses, and matching up expenses and cash flow better. Following the 2000 bust, they were really a strong player coming out of that. They’ve done a remarkable job.

X: So, back to Madrona’s first venture fund, and the climate in the early 2000s…

TA: In 2000, we started investing. Everyone was overly enthusiastic in their investing. We probably invested in a few too many companies. By 2001, everyone was realizing this was going to be a serious recession. The stock market peaked in March 2000, but it took everybody a while to realize what was going on fully. We stopped funding some companies, and we concentrated our resources in other companies. Some of our best companies were Impinj, Isilon—it’s taken a long time to get to this point.

In terms of Seattle, it just created so many entrepreneurs and skilled people working in small companies that even when bankruptcies happen, they weren’t fatal to the economy. The super-charged economy probably helped get us to a new level. If you compare where Seattle is today with ’97, there’s no comparison. None.

X: It sounds like the dot-com boom did a lot of good, and the bust held some important lessons for today?

TA: We did learn something from the bust. Venture capitalists around here, when the economy recovered, people were a little more cautious. You have to weigh caution with taking risks. Risk is important for venture capitalists, entrepreneurs, and the economy. But people really developed some better attitudes about investing. There were a lot of investments made in 2000 based on just a business plan. Plus, people were investing too much money on growth and not enough on break-even. At board meetings, people would say, “If we don’t invest more money, the competition will get way ahead of us.” HomeGrocer is a classic example. I always say, if you don’t invest in a HomeGrocer, you’ll never invest in an Amazon. It wasn’t a mistake in my mind, but it got carried away. If we’d taken a slower path, it might have worked.

In the recent run-up, I think the investing was much more measured. When the downturn started here last year, Warren Buffett was saying, “We’re in a recession.” I quoted Warren Buffett at our annual meeting in April ’08. So we had to start watching this. But it wasn’t until late summer or early fall that we started meeting with entrepreneurs and saying, “Let’s talk about cutting expenses, doing some layoffs.” Every company’s different, but we need to focus on getting through this, rather than growth. So I think we’re in better shape with existing companies this time than last. People did learn some lessons about burn rates [for example]. It’s a huge difference if your monthly losses are $600,000, versus $100,000, which can be funded for a long time. There has been a lot more attention to that.

[Stay tuned for Part 2 tomorrow, in which Alberg discusses his investment philosophy and a few specific areas that Madrona is actively pursuing---Eds.]

Gregory T. Huang is Xconomy's Deputy Editor, National IT Editor, and the Editor of Xconomy Boston. You can e-mail him at gthuang@xconomy.com. Follow @gthuang

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  • Nikesh Parekh

    This is a great and very insightful article.

  • Pingback: Weekly Wisdom Roundup #27 (Links You Don’t Want To Miss) | Simoleon Sense

  • http://www.keiretsuforum.com Todd Dean

    Tom,

    Thank you for sharing you wisdom, experience, and thoughts. You have clearly made a dramatic impact with your leadership and taking risks in the Seattl/NW community. I just want to say thank you.

    Todd Dean