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.]
