Why you should care
Because taste matters for winner-picking in a crowded field.
lt’s a gray day in Seattle, and the nice folks at Madrona Venture Group are apologetic even as we step into a gorgeous glassy conference room looking out at the glistening water. One of Madrona’s top investors, Matt McIlwain, steps in to begin our interview. Time to small-talk about the city. “Seattle’s the cloud capital of the world,” he says. “In more ways than one.”
Ba doom chha.
He’s talking proudly, of course, of the birthplace of Amazon and Microsoft — the impatient younger cousin of Silicon Valley, its superstars always a little miffed that they aren’t getting the attention they need. But the hip, family-friendly city is home to a bustling tech scene, full of startups whose names you might not recognize, as well as the Dropboxes and Snapchats of the world. And McIlwain is a minor king in this under-the-radar tech city.
His crown: He’s one of the managing directors at Madrona — Seattle’s top venture firm, with over $1 billion in assets, known in part for being one of the first investors in Amazon. Madrona is one of the hubs of this early-stage world, and McIlwain’s taste is trustworthy: He’s listed on Forbes’ Midas List as one of the world’s best investors, and Madrona has a reputation of being intelligently discerning; they might, after all, pick the next Amazon. His investment foci: dataware (meaning not just big data, but also the stuff data allows, like Pandora’s ability to recommend music based on what you like), virtual reality and especially cloud computing.
McIlwain comes at investing from an interesting mindset. While many VCs are serial or one-hit-wonder entrepreneurs, McIlwain is neither. He hadn’t even worked at a tech company before this. He instead made an unlikely jump into the venture world from an Atlanta-based Fortune 500 company called the Genuine Parts Company (parent to the NAPA Auto Parts company). He worked on strategy in those days — he talks of warehouses and shipping. But of course, living through corporate America in the 1990s, even on the industrial end, was an education in rising tech.
And that perspective on big companies is often lacking in the virgin world of technology (especially among McIlwain’s portfolio companies, since Madrona focuses on early-stage ones). Much of this world is “three guys and a box of pizza,” says Paul Goodrich, another managing director at Madrona, who hired McIlwain. Those garage ops don’t often understand the big companies they’re trying to sell their software to, he says; McIlwain gets the big biz, though, and can help butter such interactions. Nontechnical large corporations often don’t understand software ins and outs, and McIlwain serves as a translator. At the same time, his expertise comes into play only when it’s time to handle a “mature business,” with tens or hundreds of millions, but in a company’s infancy, it can be slightly irrelevant.
Born to a father who worked, fittingly, for General Electric, McIlwain moved from upstate New York to Singapore at age 5, where he lived until third grade. And then, briefly, in Decatur, Illinois, and then Miami. And then Dartmouth (“I don’t know how I got in!”). He played varsity soccer, was in Kappa Sigma fraternity. (He doesn’t love that I asked about frats, likely given the Animal House rep of his alma mater. Either way, it did what frats are supposed to do: network.) Slight-framed, with dignified gray hair and a lively habit of talking with his hands, he enjoys referring knowingly to companies that made it big, e.g., “a little company named VMWare.” He drops “Satya” instead of the Microsoft CEO’s full name, and gives a cheeky grin when he refers to a company that was making “these funny things called modems.”
He says the thing all nontechnical techies are supposed to say: “I’ve always been entrepreneurial.” And though I’m skeptical in some ways, he did have one company: a board game that was a quasi-Monopoly setup, in which the board consisted of shops located around Hanover, New Hampshire, and Dartmouth’s campus. He charged stores to have a spot on the game and made about $10,000. It must have felt like a big risk at the time: The summer before his senior year, when his buddies would have been heading off for big-time internships, he waited tables on campus and built the game — which, obviously, was sold at tailgate parties.
Early-stage investing, though, can have its troubles. It’s more difficult to assess shots at success, and the spaces McIlwain chooses are incredibly clouded, er, crowded. Vasant Dhar, a professor at NYU Stern Business School who specializes in data and cloud technologies, says it’s likely to be three or four years before clear winners emerge in these worlds: “There’s a huge opportunity, but also huge amounts of uncertainty.” Oh, and then there’s the bubble, of which McIlwain is acutely aware (he arrived at Madrona within mere weeks of the most recent tech bubble burst).
Until the next implosion — he plans for it to happen in the next five years — he’s happy to keep giving away “cheap capital.” If you want some, here’s the how-to: He says his favorite investments come when founders tell good stories. The worst: When the pitch neglects to talk about a consumer problem, and when someone talks about exit strategy. But the best pitch he’s heard so far may have been from his 11-year-old son, who’s “been listening to me way too much, obviously.” Mason wanted to start his own YouTube channel, and approached his father for a couple grand to fund the equipment.
McIlwain humored the kid. “We’ll call it an investment in your company,” he recounts. Mason was savvy. “I don’t want your equity,” he told his dad. “I’ll take on your debt.”