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Seattle is far from a nascent startup ecosystem, but despite the presence of tech giants like Microsoft and Amazon, the city still lags behind tech hubs like Boston and New York City in terms of venture capital raised. But a new study indicates that Seattle is starting to make progress on that front.
Today, the University Washington Bothell and Seattle-based advisory firm Iinnovate Leadership Network released their annual report on the health of Seattle’s startup and tech ecosystem. First, the good news: According to Iinnovate, Seattle’s VC firms raised more new funds in 2018 than they had in any year in almost a decade. However, Seattle startups are still struggling to raise seed stage funding. In fact, the number of seed stage VC deals in the area decreased by 14 percent between Q4 2017 and Q4 2018.
Seattle’s successes and struggles are worth noting because it’s one of the cities to have benefited from tech workers leaving Silicon Valley. And as Washington, D.C.; New York City; and to a lesser extent Nashville hope that the arrival of Amazon will help their tech community grow, Seattle’s ecosystem suggests that Amazon’s arrival might not be the all-around solution their leaders imagine.
Looking at the uptick in new Seattle VC funds, a few stand out. First is Madrona Venture Group, which raised a new $300 million fund this year, its seventh. Madrona’s last two funds were also $300 million, so while it’s not raising larger funds, the fact that it’s still able to raise nine-figure funds after 24 years in business is a good sign. Additionally, Pioneer Square Labs, a four-year-old startup studio, raised its first venture fund last year, at $80 million. The fund’s partners have said it will be for seed stage funding, which will be a critical source of additional capital for early-stage entrepreneurs in Seattle, who don’t have too many funding options. Another new Seattle VC firm that’s gotten some attention is Flying Fish, which has raised at least $27.8 million of a planned $80 million fund.
Other bright spots from 2018: Seattle added almost twice the number of tech jobs as San Francisco during the past two years, according to data from real estate group CBRE. And Seattle’s startups saw a nearly 180 percent increase in later-stage funding from Q4 2018 compared to Q4 2017. However, many of these startups are having to go to Silicon Valley for later-stage funding, as last year’s Iinnovate report found.
The Seattle-area startups that raised the largest rounds last year include on-demand trucking app Convoy, which raised $185 million, and dog-sitting startup Rover, which raised $155 million in May after merging with competitor DogVacay.
Iinnovate CEO Joe Ottinger says that the success of later-stage companies doesn’t mask the fact that seed stage capital is still hard to come by in Seattle.
“We have a deficit of early-stage and have almost no later-stage capital. But later-stage is easier for entrepreneurs to get elsewhere — you’re already successful, you have a business model, you can go down to the Bay Area or anywhere else in the U.S. that’s funding growth companies,” Ottinger told VentureBeat.
Ottinger says that there are a few things still limiting the growth of seed stage funding in Seattle. First, he says that the region has almost no “super angel” investors — and the ones that were active a few years ago have joined VC firms. Additionally, few Microsoft and Amazon employees have broken away from the company and started their own VC firms, or their own companies. In markets like Indianapolis, entrepreneurs who have successfully sold their companies or taken them public have then gone on to invest in local startups or start their own VC firms. That hasn’t happened as much in Seattle.
Ottinger also stresses that one challenge the Seattle area will continue to face is that it’s adding tech jobs faster than its infrastructure can support. For nearly two years, increases in Seattle’s housing prices have been among the largest in the nation, before they started to fall toward the end of last year. Rising housing costs could continue to push tech talent out, as it has in the Bay Area.
“We’ve got success, and now we’ve got to make sure we retain the great environment … because you know the talent will go from Seattle to Denver to wherever else,” Ottinger told VentureBeat.
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