Frothy fundraising climate causes Madrona to raise $120M ‘extension fund’ for portfolio companies

The Madrona team earlier this summer. (Madrona Venture Group Photo)

It’s a wild time in the venture world. Valuations, deal sizes, and investment funds have blown past records set in 2020. Many startups are raising two rounds within a year; mega deals of $100 million and higher are commonplace.

The frothy market forced Madrona Venture Group to try something new: allocate more capital to an existing fund to help continue backing its portfolio companies and keep up with the dizzying amount of dollars being deployed to startups.

The Seattle firm today revealed a $120 million “Fund VII Extension Fund” from investors who previously backed its $300 millionseventh fund raised in 2018.

The cash will be used to invest in follow-on rounds for 10-to-12 companies that landed checks from theseventh fund.

Venture capital firms use certain mechanisms to put more money into portfolio companies. Madrona pulls reserves from existing funds, for example. It also “recycles proceeds,” which is taking cash earned from successful investments and reinvesting them into a portfolio company.

But most companies in the seventh fund haven’t had time to reach a potential exit. And Madrona read the tea leaves when assessing the startup investing environment.

Madrona Managing Director Matt McIlwain. (Madrona Photo)

Take OctoML. The machine learning startup that got early backing from Madrona has already raised nearly $140 million across four rounds of capital in less than three years. Madrona has put in around $30 million — an amount that typically takes the firm four or five years to reach for a portfolio company.

If and when a startup like OctoML is raising again, Madrona wants to be ready, especially as other venture firms aim to grab a chunk of these fast-growing companies.

“We had a sense that we were going to want to put more capital into some later rounds, given all the factors in the market, with bigger rounds happening sooner,” said Matt McIlwain, managing director at Madrona. “And so we wanted to be prepared for that.”

There were 597 deals raised at $100 million or more as of Sept. 30, blowing past last year’s previous record of 333, according to PitchBook.

“The expansion of available capital at the late stage has been the consistent driver behind the growth in deal sizes and valuations since most of the marginal capital entering the VC strategy has been allocated to the more mature startups,” PitchBook wrote in its Q3 Venture Report.

(PitchBook Chart)

McIlwain said without the extension fund, the firm would only be able to do half of its “pro rata,” or its right to participate in follow-on rounds, for the seventh fund.

Madrona could have also simply re-opened its seventh fund to draw more money in, but creating a separate dedicated entity provided more favorable economics to its investors because it isn’t charging a management fee, McIlwain said.

It’s “generally advisable” for startups to raise capital now while the capital is flowing and valuations are high, McIlwain said. He’s aware of at least five unicorn companies that have raised a round this year and will likely raise again early in 2022.

“If you think you have productive ways to put that capital to work, you’re probably better to raise sooner than later, because you just never know when things are going to change,” he said.

However, he cautioned that for startups that may need to raise more money down the line, if valuations come back down “you don’t want to have to go back in the market and raise a down round.”

(PitchBook Chart)

Madrona, founded in 1995 and one of the top venture firms in the Pacific Northwest, raised $345 million for its eighth fund a year ago. McIlwain said the firm will likely invest in slightly fewer companies for the eighth fund compared to prior funds, and won’t need more capital for a similar “extension.” He added that the ninth fund will likely be a little larger than eighth.

As venture capital firms deploy huge amounts of capital, they are also reeling in funds at a record-breaking rate. U.S. firms raised a combined $96 billion through September of this year, already eclipsing last year’s mark, according to PitchBook. There were 19 funds of $1 billion or more closed in 2021 through September, another new record.

Madrona’s additional capital raise reflect its continued bet on the growing Pacific Northwest tech ecosystem, as well as the fruits of returns from investments in companies such as Accolade, Redfin, Snowflake, Heptio,, Lattice Data, and a flurry of others.

From left: Sunny Gupta, Charlotte Hubbert, Mark Nelson. (Madrona Photos)

The firm also today announced the addition of three new strategic directors:

In addition to its traditional funds that focus on companies based in the Pacific Northwest, Madrona also runs an “Acceleration Fund” designed for more mature companies located across North America. It raised $161 million for its second Acceleration Fund last year.

While Madrona has been investing more frequently in out-of-town companies, the focus still remains in its backyard, which has seen a big bump in funding and acquisitions throughout 2021.

“We still believe that while there will be more teams that are more distributed, and more capable of remote-first work, there’s often going to be concentrations of knowledge and people and expertise,” McIlwain said. “And Seattle is one of those places.”

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