Start-ups in Seattle: Where are the Amazon spin-out companies?

(Image:  Flickr/Wonderlane )

(Image: Flickr/Wonderlane)

Amazon’s outsize presence in Seattle has yet to translate into a new wave of start-ups but that is expected to change as the tech giant’s relationship with the city enters a new phase and the region’s venture capital ecosystem matures.

 

There are few degrees of separation between Seattle trucking start-up Convoy and the city’s e-commerce giant, Amazon (NASDAQ: AMZN). Grant Goodale, Convoy’s co-founder and chief technology officer, met CEO Dan Lewis at Amazon in 2013; the company received an early-stage investment from Bezos Expeditions – the investment vehicle for Jeff Bezos; and their experience working for Amazon played a critical role in schooling the two entrepreneurs in the art of growing and scaling a new business.

“We learned a lot at Amazon about how to build and operate a successful marketplace and a world-class technology company at scale,” said Goodale in an email to FreightWaves. “We also learned how to recruit and retain world-class teams.”

Valued at more than $1 billion following its $185 million funding round in fall 2018, Convoy is an unequivocal success story. But the company’s meteoric rise, ironically, also highlights what many in this city perceive to be a deficit of new start-ups, especially those launched by former Amazon employees.

Sure, former Amazon execs have spun out several world-changing companies – Instacart, Twilio and Hulu come to mind. But most weren’t started in the Seattle area, a region with a booming economy that nonetheless still suffers from an inferiority complex around its start-up and venture capital scene. (Another recent spin-out to watch is Boom, the Colorado company that landed $100 million last year in a push to bring back supersonic jet travel.)

Home to two of the largest market cap companies in the world (Amazon and Microsoft NASDAQ: MFST), an abundance of tech talent and one of the top computer science programs in the country (the $110 million Bill & Melinda Gates Center for Computer Science & Engineering opened at the University of Washington in February), Seattle is hardly a backwater. Contributing to the tech ecosystem are numerous internet companies including Expedia, real estate firm Redfin and Rover, the dog care juggernaut.

All this is not to say that Seattle Amazon spin-outs don’t exist; they do and among them are pro.com, a general contractor founded by ex-Amazon manager Matt Williams; Skilljar, a company that helps businesses provide customer-training and certification programs, founded by Sandi Lin; and Domicile, a business lodging startup founded by former Amazon general manager Ross Saario. 

But there could be more. To paraphrase Leo Tolstoy, each start-up ecosystem is unhappy in its own way. And in this dynamic international metropolis, known for incubating three of the world’s best-known brands (Starbucks is the third), there is an ongoing debate about the health of the local startup ecosystem. Specifically, is there enough early-stage capital and why aren’t more Amazon and Microsoft employees spinning out more companies at scale?

“There is a tremendous amount of wealth here,” said Joe Ottinger, founder and CEO of Iinnovate Leadership, a Seattle-based advisory firm. “But it’s just not organized to make it easy for someone to get capital.” 

Ottinger pointed to an annual report released recently by Iinnovate and the University of Washington showing Seattle’s venture capital firms raised more new funds in 2018 than they had in any year in almost a decade. However, Seattle start-ups are still struggling to raise seed stage funding. In fact, the number of seed stage venture capital deals in the area decreased by 14 percent between 2017 and 2018.

Culture and lifestyle may help explain why some consider the early-stage money spigot more a trickle than a flood. Start-ups and venture firms set up shop in Seattle because it’s less expensive and less cutthroat than Silicon Valley. The amenities (including Seattle’s proximity to the Cascade Mountains and Pacific Ocean) don’t hurt either –until they do, suggested Ottinger. “There is a cycle in Silicon Valley where someone is a founder, makes a ton of money, starts a venture capital firm and invests back into the community,” he said. “In Seattle that cycle is better described as, ‘I made a lot of money, and I’m going skiing.’” 

If that comment sounds glib, the numbers are less so. Seattle ranks fourth in the country in terms of venture capital investment, but at $2.96 billion, the dollar amount is small compared to the $11.89 billion in venture capital investment in Massachusetts, $14.31 billion in New York and $77.3 billion in California.

Scott Jacobson, managing director of Madrona Venture Group, a leading Seattle venture fund, takes issue with the claim that Seattle is missing the early-stage link. “That’s something of a dated perspective – that investors in Seattle are not willing to go in early,” he said. 

Together with the Washington Technology Industry Association, Madrona produces a “star chart” of Seattle’s tech universe, a graphic that in 2015 included more than 600 tech firms. Jacobson also points to the city’s vibrant and expanding accelerator scene, and the rise of new venture firms such as Pioneer Square Labsand Flying Fish that are raising funds under $100 million. Madrona itself invests mainly at the seed and Series A stages, and its funds clock in around $300 million. 

The firm raised its seventh fund last year and has invested in a handful of local Amazon spin-outs, including Pro.com and Domicile. But Jacobson agrees that Amazon employees don’t seem to be in a rush to leave. Substantial compensation packages (including stock options that have soared 2,000 percent in value over the past decade) and interesting work keep them happy.

“As big as it is, Amazon is an incredibly innovative company, and that innovative DNA makes it a very interesting place for entrepreneurial people to develop,” Jacobson said. “And so they stick around.”  But if a downturn hits, or share prices go down, Jacobson said, “that could change.” 

Things changed for Microsoft some years ago, and after the company entered a period of slow growth, employees weren’t making as much money on options. “Then you saw spin-out companies,” said Ottinger. But Microsoft has made an astonishing comeback in recent years, after the legacy PC-centered enterprise reinvented itself as a cloud-based software firm. It’s now a growth company, and employees are once again staying put.

Clearly, Amazon has had a tremendous impact on the city and region in terms of employment and income. Seattle is now home to remote offices of some of the largest tech companies in the world – Apple, Facebook, Google, HP and Oracle, for example. Amazon’s success, along with its talent –the company employs 45,000 at its Seattle headquarters –attracts these larger employers, said Convoy’s Goodale. “[It just] hasn’t yet spawned waves of new start-ups,” he commented.

“Seattle has a vibrant startup community, but we lack the density of venture capital other major tech markets have. The investors in Seattle are great at what they do - we just need more of them.”  

Like other observers, Goodale expects the situation to improve as the size of that talent pool continues to increase and entrepreneurs seeking to tap into that pool recognize Seattle is a viable home for their start-up.

Responding to a request for comment about spin-out companies, an Amazon spokesperson directed FreightWaves to a blog post noting the company’s investments in Seattle have created 53,000 indirect jobs in industries ranging from construction to healthcare.

 

Even if Amazon’s growth doesn’t stall out, there are signs that a new start-up wave may hit sooner rather than later.

One is the sheer breadth of Amazon operations. The e-retailer has expanded aggressively into cloud computing, logistics and advertising, with each new category a potential gold mine for entrepreneurs. And, noted Ottinger, the company’s “intrapraneurial” culture, in which employees have to make a case for a new service based on a consumer need, helps prepare employees who do decide to leave for pitching venture capital firms and crafting a viable business plan.

Amazon’s in-house reshuffling, along with shifting socio-political attitudes, may also birth a new class of start-ups. The tech giant announced last week it was relocating its entire Seattle-based worldwide operations team (involving thousands of employees) to Bellevue, Washington by 2023. The suburban campus, located across Lake Washington, may not appeal to tech workers accustomed to working in Seattle’s densely populated South Lake Union neighborhood.

“Some employees may not want to cross the lake,” Jacobson observed. “It could turn into an interesting opportunity for some.”

Amazon was founded in Bellevue, but early on Bezos moved the company to Seattle, under the assumption that tech workers wanted to be in an urban setting. Since then the company’s relationship with its hometown has become increasingly strained, with many city officials and community leaders blaming Amazon for Seattle’s skyrocketing housing prices, a worsening homelessness crisis and maddening traffic jams.

“Amazon’s growth has outstripped the infrastructure,” said Ottinger. Responding to these problems, some of the city’s largest businesses have joined new public-private partnerships like Challenge Seattle and the Urban Freight Lab, which seek to solve some of the city’s most pressing social and economic issues.

As established businesses march forward in the policy realm, a new generation of leaders may decide to invest their own resources in the start-up community, especially if they get a little push from their friends. “There are a ton of really great, experienced operators in Seattle who have gotten wealthy off the appreciation of Amazon and/or Microsoft stock,” Jacobson said. “We’re always interested in helping those people become angel investors.”