the explicit focus on ideas from within the firm and its network.
“One hundred percent internally developed,” Heitzeberg says of the ideas Madrona Venture Labs plans to develop. Gottesman hedges that a bit, adding that ideas from entrepreneurs Madrona has worked with before will also be considered. “We’re not set in stone on the right, perfect way to do this,” he says.
This reflects a shift in venture investing as firms that used to count on their partners’ networks to ensure proprietary “deal flow” have more competition for investment opportunities. Firms are moving to early stage investments in pre-commercial ventures to ensure access to later rounds, to build deeper relationships with entrepreneurs, and to learn about new markets. Some, as in the case of Madrona Venture Labs, are also turning to venture creation—forming new businesses themselves.
“The VCs of today are increasingly credible as operators and often have successful entrepreneurs within the ranks of their general partners,” says Ted Zoller, director of the Center for Entrepreneurial Studies at University of North Carolina at Chapel Hill, in an e-mail. “I think VC is swinging back to the entrepreneurial culture that gave it its birth in the age of silicon.”
Many venture capital firms have set up incubators with similar goals to Madrona’s, though they all have different approaches. Examples include Flagship VentureLabs; the General Catalyst Hatch Fund; and the technology side of Atlas Venture, which has unveiled plans for a startup incubator in Boston. Others, such as Polaris Partners, have scaled back their incubator efforts. And still others choose to support startups through outside accelerators and incubators, as was the case with Y Combinator and several top-flight firms, such as Andreessen Horowitz, that until recently served as limited partners. (Y Combinator announced an end to that practice earlier this year, in part to reduce consternation among other VCs.)
Gottesman says he’s not seen the explicit focus on forming companies from partner-spawned ideas at other venture firms before. Zoller, also a senior fellow at the Kauffman Foundation, agrees that it is “somewhat unique.” Gottesman likens Labs instead to stand-alone innovation shops such as betaworks in New York City or Ivy Softworks, another new effort in Seattle. (Similar projects in Boston include Redstar and Blade.)
“These types of efforts are definitely more common today than even three years ago,” says Josh Lerner, chair of the entrepreneurial management unit at Harvard Business School, in an e-mail. “There are increasing efforts to corporatize the production of start-up firms.”
Taken as a whole, the track record of accelerators and incubators thus far is short and inconclusive, according to research from Susan Cohen at University of Richmond and Yael Hochberg at the National Bureau of Economic Research. They note that there remains considerable confusion about what constitutes an accelerator (usually a short-duration, competitive, cohort-based program including mentorship and investment) versus an incubator (less competitive, longer stays, often non-profit, and focused on local economic development).
Today, you can add to that mix a proliferation of innovation studios, labs, workshops, and foundries—or whatever the term du jour may be—either independent or affiliated with venture capital firms.
They’re all part of an ongoing race to create innovative, high-growth companies and, for investors, to capture them as early as possible when the potential for outsize returns is greatest.
“We’re not interested in hitting singles,” Gottesman says.
Madrona, which turns 20 next year, will continue to incubate startup companies from outside entrepreneurs as it always has. Asked why this was the right time to begin the Labs effort, Gottesman pointed to his and Heitzeberg’s enthusiasm for the effort, and the potential for returns to the firm, which has a stake in every Labs spinout company, as well as the opportunity to invest alongside other firms as the Labs companies grow.
“We feel like we’ve got a good shot at building meaningful companies using this model, and the proof will be in the pudding,” Gottesman says.
