Big Name VCs Back Seattle ‘Startup Studio’ Pioneer Square Labs

Some of the biggest names in Northwest investing and entrepreneurship, including prolific angel investor Geoff Entress and startup founder/venture capitalist Greg Gottesman, have opened a “startup studio” to form new companies with financial backing from most of the region’s venture firms, along with notable players from Silicon Valley and beyond.

Pioneer Square Labs (PSL), based in the Seattle neighborhood from which its name is derived, is an effort to professionalize the creation and validation of new software and services businesses from whole cloth and then spin them out as stand-alone companies to be grown by experienced operators.

Leading the effort are Gottesman and Entress, along with Mike Galgon, the co-founder of aQuantive, and Ben Gilbert, who co-founded Madrona Venture Labs—essentially the same model under the auspices of Madrona Venture Group—with Gottesman last year.

They’ve raised $12.5 million from Foundry Group (which led the funding and whose managing director, Brad Feld, is on the PSL board of directors), Bezos Expeditions, Greycroft Partners, Madrona, Maveron, Menlo Ventures, MHS Capital, Sinclair Digital Ventures, Techstars Ventures, Trilogy Equity Partners, True Ventures, Voyager Capital, and Vulcan Capital, as well as a large group of angel investors.

“They’re funding us so they can fund these companies” that emerge from PSL, Gottesman said.

Here’s how the organization plans to operate, from a news release it issued Thursday:

“PSL expects to test hundreds of ideas, gathered from multiple sources, and then use its own team to launch companies around the best ones. During the company-creation process, PSL builds product, signs key customers, and actively recruits talented entrepreneurs, technologists, and designers to serve as founders of a spin-out team.”

Pioneer Square Labs“What we’re trying to do is appeal to that incredible entrepreneur that’s sitting somewhere at Amazon or Microsoft or at some other company here in Seattle and has always thought that they were put on this world to go run something, to go build something, but maybe they don’t have that perfect idea,” Gottesman said. “What we bring is a company that has traction, that has a product, that has money changing hands.”

The aim is to spin out three to four companies a year in consumer services and lightweight business applications. Several ideas are already in the works, but PSL is keeping them under wraps for competitive reasons.

The PSL model is in some respects built on the fact that some people are better at creating new businesses, and others are better at growing and operating them. It’s the rare company founder who possesses all of those skills.

The studio concept fits within some broader trends in technology startups and investing. Venture investors are betting more capital on nascent companies as they seek to get in early on the next runaway success. This has contributed to the proliferation of startup incubators and accelerators that nurture and groom new ventures before parading them in front of investors. The payoff of these approaches remains to be seen in the majority of cases.

Several venture firms have gone one step further: building and testing startups internally based on their partners’ ideas. Gottesman did just that with Madrona Venture Labs and its first spin-out company, Spare5, which earlier this year raised a $10 million Series A.

Gottesman, who has been with Madrona for 18 years, recently shifted from managing director to venture partner, handing off leadership of Madrona Venture Labs to Scott Jacobsen.

Madrona Venture Labs continues, said a spokeswoman for the venture firm, adding that news of another spin-out company and new leadership is forthcoming. “I think it’s clear there is plenty of space in the market for organizations like these,” she said via e-mail.

Many independent startup studios have sprung up in recent years, including Ivy Softworks in Seattle; The Hive in Palo Alto, CA, which earlier this year raised $22 million for a second fund; betaworks in New York City; and Blade in Boston, which recently scrapped its startup foundry model to focus on one idea.

Gottesman said PSL stands out from this crowd in large part because of the group of investors participating. In addition to the baker’s dozen venture firms, PSL says about 50 angel investors and company CEOs have invested, including Rich Barton, Bob Nelsen, Scott Dorsey, Ryan Holmes, Rudy Gadre, Bill Lee, and Jonathan Sposato.

“I have never seen this number of VCs and angels backing something like this,” said Foundry Group’s Feld in the PSL news release.

Another reason these “studio” and “labs” approaches have been taking off is the proliferation of technologies that make building software- and services-based businesses quicker and easier than ever before. Small teams can get a bare-bones offering in front of customers in a matter of months to test whether they’ve made something people will pay for—something that would justify further development and eventually investment.

Of course, individual entrepreneurs can take advantage of all of this, too, building a business based on their unique insight or passion, and seeking outside investors when they need capital to grow. Gottesman said PSL is not an effort to supplant that model.

“We do think that the traditional way of building companies still works and still will be the vast majority of startups,” he said. But the hope is that this model of company formation will yield businesses that otherwise would not be built.

“We’re going to take some real swings,” Gottesman said. “We want to build something that’s worthy of the most talented entrepreneurs in town, and worthy of this incredible set of investors that have put their faith in us.”

Benjamin Romano is editor of Xconomy Seattle. Email him at bromano [at] xconomy.com. Follow @bromano

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