writes copy 16 Mar 2018

Whats wrong with Seattles startup scene Despite top talent a lack of venture capital stunts growth

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Image via the Greater Seattle Technology Ecosystem report.

After nine years of building a robust cloud services business with thousands of customers, Geeman Yip was ready to raise venture capital. But when the BitTitan founder began knocking on doors in Seattle, options were few and far between.

“No investors in this area were going to write us a $15 million check,” Yip said.

BitTitan ultimately landed cash  in 2016 from a San Diego-based growth equity firm. The Bellevue-based company plans to raise another round in the next few years.

What are the chances Yip looks for that in Seattle?

“Zero percent,” he said.

BitTitan CEO Geeman Yip at the GeekWire Awards in May. (GeekWire photo / Kevin Lisota)

Yip’s story is not uncommon and highlights the difficulty of starting and building a company in Seattle '” a city rich with engineering talent but one that lacks the investor support system necessary to sustain a leading worldwide technology ecosystem.

The dearth of regional investment options for entrepreneurs is one of the major findings in the annual  Seattle Tech Ecosystem Report, a new study from the University of Washington-Bothell School of Business and iInnovate Network.

The report notes that the Seattle region “punches below its weight” when it comes to venture capital, in particular with home-grown venture capital firms. Last year, virtually no Seattle area venture capital firms raised new funds '” a troubling situation since those pools of capital are needed to support the next batch of startups.

Think about it like a farmer who ran out of money, and therefore can’t buy seeds to plant the next crop.

Since 2006, Seattle area venture capital firms like Madrona Venture Group, Ignition and Maveron have raised $7.6 billion. In Boston, by comparison, the tally stands at $41.2 billion.

According to the latest PwC/CB Insights MoneyTree Report, $1.6 billion was invested across 164 deals in  Washington VC-backed companies last year. That’s far below the $6.7 billion invested across 406 deals in Massachusetts, and not in the same hemisphere as the $35.1 billion invested across 2,106 deals in California.

That’s a disconcerting trend for many who’ve closely watched the evolution of the Seattle startup ecosystem over the years.

Skilljar co-founder Sandi Lin.

And it leads Seattle area entrepreneurs '” like BitTitan’s Yip '” to an often painful conclusion. If you want to raise money '” especially larger rounds of capital '” you’ve got to hit the road. It’s good news for Alaska Airlines, but not necessarily the best outcome for Seattle.

More than two-thirds of the total venture capital financing deals involving Seattle companies in 2017 were backed by firms outside of Washington, the report noted.

Sandi Lin, CEO and co-founder of Seattle-based startup Skilljar, knows the drill.

The former Amazon employee  just this week raised a $16.4 million Series A round  led by two Silicon Valley venture capital firms. Though the 40-person company also counts Bellevue, Wash.-based Trilogy Equity Partners among its early backers, Lin searched across the country for to raise money for her latest round.

“With the number of capital sources in the Seattle area, your options are more limited,” she said.

That lack of capital creates additional challenges for entrepreneurs, forcing them to spend more time on the road raising money versus fine-tuning the product, winning customers or hiring. It  slows entrepreneurs down, especially compared to those in the San Francisco Bay Area where an investor meeting may be just a 45-minute drive away.

Yip, a former Microsoft developer who launched BitTitan out of his basement in 2007, said something else is missing in Seattle’s investment community. There’s a cadre of people who fashion themselves as investors, but “don’t really contribute anything.”

“I would equate Seattle to a big Kickstarter community,” he said. In other words, Seattle needs to grow a bigger pool of investors who not only write checks, but also provide value in terms of unlocking key customer accounts or tapping talent pipelines.

“Someone who has never started a company before doesn’t understand that, they haven’t gone through those challenges,” Yip said.

Seattle’s lack of home-grown capital is not a new phenomenon. But it’s worth a deeper discussion given the massive boom taking place in the region’s larger tech ecosystem, one that’s created unprecedented wealth. It’s not lost on some in the startup community that the two richest people on the planet live in the Seattle area.

Anchor tenants like Microsoft, T-Mobile and Amazon are undergoing tremendous growth spurts, and Silicon Valley giants such as Facebook, Google, Apple, Salesforce, Uber and others have recognized Seattle as a goldmine of tech talent. That causes additional pain for startups, which compete for engineers and office space against titans with seemingly endless pocket books.

Seattle “still has a relatively weak startup ecosystem,” said  R. Joe Ottinger, CEO of iInnovate Network, which co-authored the annual  Seattle Tech Ecosystem Report.

“We are good at attracting tech talent,” he said. “But not good at starting and growing tech companies.”

A Kauffman Foundation study ranked Seattle’s startup ecosystem 24th among U.S. cities, based on rate of new entrepreneurs, opportunity share for new entrepreneurs, and startup density.

Some think the Kauffman ranking is baloney.

“I don’t trust those results,” said Greg Gottesman, managing partner at Seattle startup studio Pioneer Square Labs. “We have more technical talent that anywhere in the world, other than the Valley.”

But that talent isn’t translating into vast company creation. In fact, Gottesman’s new firm, a so-called startup studio, is designed in part to proactively pull smart talent out of the big established tech giants to build new startups.

Tech giants often get blamed for sucking up entrepreneurial talent. And Seattle is developing a reputation where big tech companies thrive, with many employees at larger companies such as Tableau, Zillow, Concur, F5 Networks and Amazon content to ride out their careers in comfort.

In that regard, Skilljar’s Lin is an exception, having left her product management job at Amazon five years ago to test her luck with a startup. It wasn’t an easy leap, even though she was accepted into the ultra-competitive Seattle TechStars program.

Flying Fish co-founder Heather Redman.

“For me, every month, without making any salary, all those expenses hit my bank account,” she said. “I knew that going in and I had saved money from Amazon, but that's really hard … it's a lot to ask for entrepreneurs, for sure.”

Heather Redman, a longtime Seattle angel investor and managing partner of local early-stage investment fund Flying Fish Partners, said would-be entrepreneurs weigh the sacrifices before making the startup leap. And the lack of capital in the Seattle region plays a part in the calculus.

Top engineers often choose the high-paying secure position of a tech giant where they can do fulfilling work, versus trying to launch a startup “with one hand tied behind their back because of the lack of capital here,” said Redman, describing Seattle talent as “super smart and very rational.”

“We are wasting assets everyday by letting folks make that choice,” Redman said. “I totally reject the idea that we lack entrepreneurial zeal here or that we don’t have good startup founders on every corner '” I think we do. They are really smart and they don’t want to do something in a sub-optimal way. They are waiting for a signal from all of us that there is money to be had and that people will work hard next to them to make their company successful.”

Lin, who started Skilljar with no previous entrepreneurial experience, faced this decision.

“If you’re making hundreds of thousands of dollars at Amazon or Microsoft or Facebook, why go be an entrepreneur in Seattle when it seems like it will be so hard to get to where Skilljar is today?” Lin said. “It’s not rational from a financial or career perspective.”

The report noted that “progress could be made” in attracting later-stage investors to Seattle, the kind of folks who could invest in Yip’s BitTitan. But many say the region needs more support for seed and early-stage companies, as well.

“If you get funded by a venture capitalist outside the city, how do they help you recruit talent or get your first customer down the street?” asks Redman. “There are so many reasons why, at the seed and Series A stage, you really want local investors who can be your partner and help you along the way.”

Redman, Gottesman, and others are trying to address that gap with their own new funds or startup studios that focus on investing in Seattle-area companies. Madrona Venture Group, the city’s most active VC firm, is launching its own startup accelerator later this summer  based partly on senior engineers, product leaders, and other employees from larger companies in the area that attend Madrona’s hackathon-like events.

Mike Fridgen, CEO of Madrona Venture Labs, said they are trying to convince smart technical leaders who show up at the weekend hackathons “to quit their day job and go do this for real.'

Getting folks interested in startups is one thing, but Lin thinks the most important driver is capital. That would especially help first-time entrepreneurs like herself who may not know what to expect.

“It all feeds on itself '” more early-stage investment means there will be more successes, which means more role models, which then breeds more entrepreneurs and investments,” Lin said. “I don’t put this on the investing community alone, but investment is the obvious thing to jumpstart because there are only so many talented founders who will take no salary for years with very little hope of breaking through.”

Seattle simply needs more “wins,” said Chris DeVore, managing partner at Founders Co-op and managing director at Techstars Seattle.

Pioneer Square Labs co-founder Greg Gottesman.

“We need to generate a higher velocity and amplitude of investor wins in this market, across the spectrum of company types and stages,” he said. “The hype around investing is driven by big valuations, big investment rounds and big exits, and we’re too dependent on a few anchor companies without a deep bench of up-and-comers to build out the next layer.”

Redman encouraged people in Seattle with capital to invest in local companies and local talent. She said it’s critical to do so for the future of this city, particularly if one of the giant corporations goes through layoffs, for example.

Despite a thriving economy, there is no “undergrowth,” she said.

“We haven’t made this city sticky for young talent … we aren’t giving them every opportunity to put down roots here,” Redman added. “The No. 1 thing millennials want to do is start their own company. But if we don’t fund them and let them do that, we’re not going to keep the very best talent. We’ll have a brain drain because we don’t have the right ecosystem of capital here.”

Some are optimistic that as Amazon and others continue to grow, employees will save up enough cash to launch their own startups in Seattle, similar to what many did at Microsoft over the past several decades.

Gottesman is bullish about Seattle’s long-term outlook and said creating more capital isn’t the worst problem to have.

“If I was picking one place to bet on over the next 10 years, I would bet on Seattle,” he said. “Technical talent; anchor tenants; large research institutions; satellite technical offices '” you can’t just snap your fingers and make those happen. Capital is the easiest to fix in terms of all the key criteria, and it moves to talent. Over time, as we have great startups and great talent, capital will find us.”

Editor’s note: GeekWire co-founder John Cook contributed to this report.

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