Greg Gottesman has been an integral part of the Seattle startup ecosystem as it’s blossomed over the last two decades. He’s been a partner at the premier venture capital firm Madrona, founder of several highly successful startups, and is running Pioneer Square Labs, a unique spin on the accelerator model that incubates ideas with an internal team before finding founders to run the business.
Elliott Adams: You've been in Seattle for a while now, right?
Greg Gottesman: Yes, I've been here twenty years. I saw it from the beginning days as one of the founding managing directors of Madrona Venture Group, which has been the leading venture capital firm in Seattle. I’ve watched the tech scene really grow into something much more meaningful and significant over the last twenty years.
EA: What are some of the key things that have happened in the Seattle startup community over the last twenty years?
GG: Well, there's the whole Amazon thing, which has also been really helpful. I mean, for a lot of these ecosystems, you need elements to come together, mixed with a little bit of luck. The fact that Bill Gates was born here, and then Jeff Bezos decided to move here—those have played no small part and have been critical to how meaningful this ecosystem has become. So, there's always a little dash of good fortune in addition to all the other things. One of the great things about Seattle is, we've got a great research university with a very strong computer science department. It's been very strong for a long time, and that certainly has helped create sort of a hub for some really smart folks. Even when I had moved back here twenty years ago, it had Microsoft, and Amazon was just starting up, but it had an example at least. Having someone like a Bill Gates or a Jeff Bezos that people can look to as a role model is really important.
EA: What else has contributed?
GG: I think a lot of it has to do with there being so many success stories. As the University of Washington or any other computer science department starts to have success stories, people start to think, “I’m doing this great research, and that guy over there started a company and made a bunch of money. My husband/wife is telling me I'm just as smart as that person. How can I take this research and commercialize it?” I think we underestimate how important role models are for success.
We just have incredible engineering talent, and I believe people with that engineering talent are at the heart of great startups. One of the reasons why this ecosystem has developed is because we have an unusual abundance of very strong engineers. They come from the University of Washington, they come from Microsoft and Amazon and all these other great startups that have flourished here. Lately, there's a number of larger companies that are opening up engineering offices, and startups can come from there as well. So that's a really key point.
EA: Seattle doesn't have as much VC as Silicon Valley; does that give companies a tougher time who are staying in Seattle, or does that really not matter?
GG: There's definitely capital here. What happens is some companies will go on a short flight and find capital in the Valley. I think that what Seattle has that's better than the Valley is it tends to have more loyal employees. In the Valley, people are always looking for that next shiny penny.
EA: Let's talk about Pioneer Square Labs, which has a unique model. Can you explain how it works?
GG: As opposed to an accelerator, where companies come and pitch you and then come and spend a couple of months with you, like Y Combinator or Techstars, or a venture capital firm, which is looking to invest, we are a startup studio. The difference is that we actually create the companies from scratch. A lot of times, the ideas are from the people on our team, sometimes they're ideas from entrepreneurs that come and join us, and sometimes they're ideas from people in the community. We’re basically starting from scratch. Since the beginning, Pioneer Square Labs has owned all the company, or it may have owned all the company with an entrepreneur that we start with. The traditional model for us is that we would start a company. Last year, for example, we started thirty-five different projects and we killed thirty-two of those.
EA: How do you decide which move forward?
GG: Typically, there are three hurdles for a studio like ours. The first one is, we'll build a product and go out and talk to customers. The question is, can we validate that there's a real customer need? We can do that by talking to customers, by putting out a product, and seeing what happens. Most companies, even ones that we think are going to work, fail that test. They can fail it because the unit economics don't make sense. In other words, it costs too much to acquire a customer.
The second test is whether once we have that customer attraction, if we can somehow recruit a team of founders to work with us to spin off that company. We call them founders because they're really the ones that are ultimately going to take this company and make it successful. So, the first hurdle is whether we can get customer validation, and the second is whether we can find world-class talent to work with us to take this idea to the next level.
The third test is whether we can get funding from third parties. We actually have a lot of capital, but we really want to have third-party, sophisticated capital tell us, “This is a great idea, and we're willing to put our objective money behind what it is that you're doing.” If we can't overcome all three of those hurdles, then the idea is killed. Of the 35 that we tried in 2016, thirty-two failed the first stage.
So, our hit rate will change, but we expect it to be in that 10to 20 percent of ideas that we try. When they work, we find really incredible entrepreneurs that take us to a meaningful portion of the equity, along with us, and off it goes.
EA: I'm curious about how you recruit the leadership team to move these ideas forward.
GG: There's this myth that the person who comes up with the idea is always the best person to run the idea. For example, I've started this company called Rover.com, which is the world's largest online pet services company. It was my idea, but I'm not the right person to run that company. In fact, if I were running that company, it would have died many years ago. Aaron Easterly is the perfect person to run that company and scale it.
The reality is that he's much better at running that company than I ever would have been. It's not even close. What this studio model says is, “Hey, we can work on our ideas. People much better than ourselves go and run them." And that's what we're trying to do. We’re trying to find people that would be, literally, the best in the world at running something. We give them a huge part of the company and try to make them as successful as possible, and hopefully, they're the right folks to take it to the promised land.
EA: And when do you try to bring those people in?
GG: I like it to happen as early as possible. But it doesn't always work out that way. It just depends. Sometimes it happens early in the process. You start talking to folks who want to jump in, but you want to have it so that the person jumping in really takes ownership and believes. We're giving them the founder title because we believe that they are the founder. The earlier you can get them involved, the better.
EA: When you recruit a CEO, you're going to provide them development, design, and resources from Pioneer Square Labs for the company for a while?
GG: Yeah, that’s the model.
EA: So, you're not starting a whole team from scratch?
GG: We are building new products in-house, so for many months after that, we're the whole team. We're taking you to market, and we're helping you to recruit a team to replace us over time. Part of the value proposition is that our people on engineering and design and everything else are really good. But we have to have the right leadership.
EA: Is that the thing that’s toughest to solve, or is it the initial ideas?
GG: People wonder how it is that we have enough exciting ideas. For whatever reason, that hasn't been our issue. We have too many ideas that we want to start and spend time on. We just don’t have enough resources. The hard thing about this model is the people.
EA: How does that play out?
GG: If we are the world's best at coming up with ideas and validating them, but we're mediocre at finding talent, we're going to lose all our money. If we are mediocre at coming up with ideas but world-class at finding talent, we're going to do fine. If we're great at both, that's what you want to be, but the key is really that second step of going out and finding truly great entrepreneurs to work with. That's our customer. When we're starting these companies, we're really thinking, “Can we show enough here to go find someone world class to work with us on this?”
We’re privileged to be able to work with incredible founders, and hopefully we’re adding enough value to them that they feel like it was a great trade-off. The trade-off is you're getting our idea, our developers, our designers, our machine-learning folks, our digital marketing, our investor contacts. You're getting a lot of things, but you're giving up a lot of equity too. So is that trade-off worth it?
Some people are going to say that's not going to make sense for them, and others are going to say it makes a lot of sense.