Matt McIlwain, the Managing Director of Madrona Venture Group, talks to YourStory on why he looks for passionate entrepreneurs, product-market fit, and why it's important for investors to build deep relationships with entrepreneurs and their teams.
Madrona Venture Group is one of the top funds in the US’ Pacific Northwest region. It has exited over 37 companies and raised a total of $1.6 billion across seven funds. It is currently invested in 73 companies; the latest being Apptio, which builds data and analytics applications for technology business management.
But there’s one more reason that Madrona is significant, one that you may not know. In 1995, the founder of the venture group took a bet on a then little-known company and its founder. Twenty-three years later, there’s no stopping Amazon and Jeff Bezos.
YourStory recently caught up with Matt McIlwain, the Managing Director of Madrona Venture Group. Matt, who joined Madrona in 2000, has seen two busts and two growth cycles. The avid runner and family man says he’s currently reading Thinking in Bets: Making Smarter Decisions When You Don't Have All the Facts by Annie Duke. Matt talks on businesses that make it to the top, his logic when it comes to investing, and what he looks for in entrepreneurs. Edited excerpts of the interview:
YourStory: Tell us a little bit about yourself before you came on board Madrona. How was the transition from McKinsey to investing?
Matt McIlwain: Prior to Madrona, I had a mix of investment banking, consulting, and operating experience. All those experiences were helpful in building the skills needed to become a venture capitalist. My last role before Madrona was an operating role; it was closer to the actual company building work that we do to help our entrepreneurs succeed. That helped make the transition smoother.
YS: Tell us about your stint at Madrona. What were the high points and low points, and what did you learn from them?
MM: Every company you invest in has its highs and lows. I recall a week in December 2006 when one of my earliest investments, Vykor, shut down while another early investment, Isilon Systems, went public and was a success. IPOs, while mainly a financing event, are high points and create a special moment, an opportunity for reflecting on the accomplishments of a company. Not achieving your goals for a quarter or discovering that you don’t quite have “product–market fit” yet as a company are a couple of low point examples.
YS: The job of a VC is tough. You have to work with your partners and entrepreneurs who come to you with nothing more than a dream. What advice do you give young venture capital fund managers?
MM: You are correct that venture investors have two different and important types of customers. We believe that spending the majority of our time working closely with talented entrepreneurs is top priority. If you build a deep, trusted relationship with entrepreneurs and their teams, you are generally able to build a successful company. In our model, successful companies are able to deliver significant returns to our investors. We find that investors appreciate open communication, an understanding of the major investment themes we believe in, and, of course, leading returns.
YS: What is your approach to finding entrepreneurs you can bet on? What metrics do you use?
MM: We get involved early; often as early as Day One. So, metrics are generally hard to come by at that point. Instead, we look for entrepreneurs passionate about solving a specific problem who understand why that problem can be solved better than ever before, and have the initial ingredients to solve that problem. It is a lot easier to build a company today, given cloud computing and SAAS software. Developers can also use agile development and cloud-based collaboration to test and refine products more rapidly. The tougher part is that there is a gap between building an initial product and building a successful company; this is sometimes hard to appreciate.
YS: What should entrepreneurs focus on amid buzzwords like AI and machine learning?
MM: We can’t overestimate the impact of ML and AI on the future. The future is intelligent applications at all levels. The key is to have access to and usage of data that can help train the models you need, and tune them to the problems you are trying to solve. The edge is where the digital world meets the physical world
YS: The Pacific Northwest is sixth in the US in terms of funding, with Microsoft and Amazon being present there. Do you see it changing in the coming years?
MM: We have two of the two of largest companies by market capitalisation in the world in Seattle. Plus, we have many strong offices for other technology companies from around the world. In addition, we have a growing group of mid-size technology companies and great university research. I see the PNW growing up the ranks in the years ahead.