The flywheel is spinning at Pioneer Square Labs, the Seattle startup studio formed five years ago by a cadre of Seattle’s leading angel and venture capital investors.
In the course of a six-month span during the pandemic, PSL spun out six new startups, bringing its overall total to 25. The astounding rate of entrepreneurial energy coming out of PSL is noteworthy — very few Seattle firms have helped create so many ideas, so quickly.
And in five short years, the 22-person firm has rapidly emerged as a cornerstone of the Pacific Northwest’s red-hot innovation ecosystem.
“They are filling the gap for experienced entrepreneurs that want to move as fast as possible to get through the first steps required to establish any company,” said Omri Bahat, a Seattle angel investor and Alliance of Angels board member who has backed multiple PSL companies.
PSL’s long-term impact on the Seattle startup ecosystem remains to be seen. It does not yet have a breakout star or Seattle’s next unicorn. Only one portfolio company has raised a Series B round or later. And some are critical of the startup studio model, saying firms such as PSL take too much stock ownership from founders, increasing dilution and potentially dissuading future investors.
Venture capital is a long game, and it’s still early innings. Most of the 25 PSL spinouts have launched in the past 18 months. But the firm is bullish about the future.
“There are some billion-dollar companies in there,” said PSL managing director Greg Gottesman.
The PSL process
One of the first things that stands out is PSL’s high “kill rate.” To get to the 25 startups in the PSL portfolio, the firm eliminated about 215 ideas that didn’t make the cut.
PSL has a maniacal focus on getting customer signal as quickly as possible for a potential idea. It uses phone calls and structured interviews with customers; landing pages and targeted traffic; and other tools, including custom-built software that helps PSL assess whether it should refine an idea, work on it some more, or kill it.
“We pride ourselves on killing ideas quickly and ruthlessly,” said Gottesman, who previously served as a managing director at Seattle’s Madrona Venture Group.
Ideas that went through the ringer and never made it out include an online music lesson platform; a baby food subscription service; and an esports coaching marketplace.
“We think it’s irresponsible not to gather as much quality data as you can before you start building,” said Gottesman.
That framework has proven to be valuable during the pandemic. PSL co-founder Ben Gilbert said he was surprised at how productive the studio has been over the past year.
“If you’re an entrepreneur and you can’t collaborate in person, this is an amazing option to be able to slot into a process that’s already well-defined and moving fast,” he said.
PSL companies include those started by entrepreneurs who approached the firm with their own ideas, and others that PSL recruited after coming up with a tested pitch.
Some are serial entrepreneurs such as Brian Monnin, the former Play Impossible CEO who is now leading a new COVID-19-related smart camera startup called Quivr. It was created by PSL in partnership with industrial giant Fortive.
Others spent years at larger companies and were ready for the startup journey. Jason Murray and Mac Brown, co-founders of e-commerce logistics startup Shipium, came from Amazon and Zulily, for example.
Those who partner with PSL get access to a fine-tuned idea-testing machine and other valuable resources. But in exchange, they may also give up more equity than a founder who raises investment from traditional investors. That’s why startup studios are unique — and also a point of debate among entrepreneurs and venture capitalists.
Too much equity?
In Seattle’s tight-knit entrepreneurial circles, one of the biggest criticisms of PSL — and other studio models for that matter — is that they take too large of an equity stake upfront. That scares some entrepreneurs.
Alexander Day, co-founder of real estate startup Modus, worked with another Seattle-area startup studio when his company was getting off the ground. It wanted a 20% stake in the company in exchange for $100,000.
“That really puts the cap table in a pretty shitty position for future investors,” Day said. “That’s not an incubation — that’s almost like a hostage situation.”
Modus ended up raising capital from firms outside of Seattle, and was just acquired by Compass in October.
PSL declined to provide a specific breakdown on how much equity the studio takes from spinouts.
However, those familiar with PSL’s economics said when the firm started it was taking around a 40% stake, or even higher — a significant chunk of the pie. Since then, sources say PSL has reduced the amount of equity it takes right off the bat, with the firm adjusting based on entrepreneurial experience and other variables such as the amount of investment required by the studio before a spinout.
Immigration services startup Boundless is one of PSL’s more mature spinouts, having raised more than $18 million after making an acquisition in October. As a first-time founder, Boundless CEO Xiao Wang felt it was worth it to partner with PSL so he could worry less about startup logistics and more on building a product.
“Could I have built Boundless in a garage eating ramen? Yes,” Wang said. “But we’d be at least a year and thousands of immigrants helped behind.”
For an entrepreneur like Wang, stock ownership wasn’t a top concern. He declined to disclose PSL’s initial equity stake.
“My goal is to make a meaningful difference in the world, not become an acquisition target and cash out in a few years,” he said. “Thus, either we made it, in which case the dilution doesn’t matter, or we don’t make it, in which case having more equity also doesn’t matter. At the end of the day it’s about maximizing the chances of making it, and PSL was and continues to be a great ally in this.”
A survey conducted by Global Startup Studio Network found that startup studios take on average a 34% equity stake when a company is founded. In some instances, studios command upwards of 80%, with low points around 15%.
For comparison, a lead investor in a Series A round typically wants 20% of the company, according to Silicon Valley accelerator Y Combinator, which also advises entrepreneurs to avoid giving up more than 25% of their company in a seed round.
Techstars, another top startup accelerator that provides mentoring and networking access, takes a 6% stake of fully-diluted capital stock in exchange for $20,000. It also offers a $100,000 convertible note to participating companies.
If PSL takes a large cut off the bat, it could cause future investors to balk. Among the 25 spinouts, only JetClosing, a digital title and escrow company, has raised a Series B round or later.
PSL companies have raised more than $200 million combined to date from fellow Seattle firms such as Madrona and Flying Fish, as well as out-of-town investors including Los Angeles-based Greycroft and Norwest Venture Partners from Silicon Valley.
Gottesman countered the criticism about equity, noting that those who do not want the extra support and resources of the studio model can elect to pitch the firm’s traditional venture capital fund. PSL raised an $80 million seed-stage venture fund in 2018, giving it flexibility to back up-and-coming companies that don’t go through its studio.
“Regardless of what you’re looking for, we think we’re the best in the world at helping you start a company here in the Pacific Northwest,” Gottesman said.
A new approach to startup investing
PSL startups accounted for nearly a quarter of venture rounds raised at $10 million or less during the pandemic by Washington state startups, according to data from PitchBook. A majority of PSL spinouts have gone on to raise additional investment, including two — NextStep and Yesler — in the past week.
Any organization that helps entrepreneurs create companies “is a good thing for the ecosystem,” said Chris DeVore, managing partner at Seattle VC firm Founders’ Co-op. But he added that there isn’t enough data to assess PSL’s performance and impact on founders or later round investors.
“It’s probably too early to say if their model delivers long-term value to all necessary participants,” DeVore said.
The startup studio concept is not new; Idealab was one of the first to find success, more than two decades ago. But more and more are cropping up lately; the global total is near 600, according to Enhance Ventures.
They differ from accelerators, incubators, or standalone venture funds. The idea is to build multiple startups, getting involved at the ground floor and helping recruit a team to carry the company forward. Companies such as Snowflake, which had a record IPO last year, and Hims are among the studio success stories.
“The studio approach is achieving better results (30% better to be exact) as they build repeatable processes, focus on their specific expertise, have skin in the game from day one as an institutional co-founder, and provide financial resources,” according to a recent report from Global Startup Studio Network.
Betting on diversity, and Seattle
Looking ahead, a main focus for PSL is helping build companies with diverse teams. One-third of the studio spinouts are woman-founded — such as Remarkably and Gemma. And one of eight have at least one founder who identifies as BIPOC (Black, Indigenous, people of color), such as Glow and Cash.
Julie Sandler, a PSL managing director who previously worked at Madrona Venture Group, said the pandemic has exacerbated inequities across the startup and tech communities. Given PSL’s expertise and connections, she said it can help disadvantaged people maneuver past roadblocks and get a leg up — and help level the industry-wide playing field in the process.
“We’re in a unique position to remove some of that friction for strong entrepreneurs of diverse backgrounds, pandemic or not — but it’s especially powerful during a pandemic,” she said.
The studio itself has raised $27.5 million to date from more than a dozen U.S. venture capital funds and 50-plus angel investors — a who’s-who list that includes firms such as Bezos Expeditions and individuals like Expedia and Zillow founder Rich Barton.
Gottesman helped launch Madrona Venture Labs while he was a managing director at Madrona Venture Group, before teaming up with Gilbert — a former Labs co-founder — alongside veteran investors Geoff Entress and Mike Galgon to start PSL. The studio later added Sandler and startup vet T.A. McCann as managing directors.
PSL plans to continue betting on Seattle. Much of its investment thesis relies on Seattle’s strengths in cloud computing, machine learning and artificial intelligence.
The Seattle region has seen its tech and startup ecosystem grow rapidly in recent years, buoyed by hometown giants Microsoft and Amazon, along with increased venture capital investments and more billion-dollar startups.
Earlier this year, Seattle’s startup scene moved into the top 10 of Startup Genome’s annual global startup ecosystem rankings.
Meanwhile, as the pandemic accelerates adoption of digital technology, the spotlight is shining brighter on the robust business-to-business technology ecosystem in the Seattle area amid the ongoing economic and health crisis.
“If you believe that engineering is at the heart of startups, is there a better place on planet Earth that has a higher concentration of talented entrepreneurs than Seattle?” said Gottesman. “Because we’re Seattle, we undersell ourselves a little bit. We don’t need to, and we shouldn’t anymore.”