Seattle-based Pioneer Square Labs has raised $100 million for its second fund. It marks a key milestone for the 5-year-old firm and shows investor confidence in its unique model that combines a startup studio with a venture capital fund.
Fund II: PSL planned to raise $80 million but had more demand from existing institutional investors. It also added new backers and deliberately aimed to diversify its limited partner base for the second fund, as represented by individual investors and partners at the institutions that invested. The $100 million fund will back more than 30 companies. The firm’s initial check size is typically between $1 and $3 million.
The model: PSL launched its startup studio in 2015, aiming to come up with ideas, match them with an entrepreneur, and spin out companies. The studio itself has raised $29 million to date. PSL raised $80 million for its first early-stage fund, called PSL Ventures, in 2018. That gave PSL flexibility to back up-and-coming startups that don’t go through its studio. The fund allocates about half of its cash for companies with no prior connection to PSL Studio, and the other half in PSL Studio spinouts (PSL does not lead those investments; Sandler says this minimizes signaling risk for founders).
Track record: The rate of entrepreneurial energy coming out of PSL is noteworthy. The studio has spun out 25 companies in five years, including six over the course of a six-month span during the pandemic. The spinouts represent about 15% of all early-stage technology companies that have raised venture capital in Washington state over the past year. Only one portfolio company has raised a Series B round or later.
Investment thesis: The firm makes pre-seed and seed stage companies in the Pacific Northwest. “We love this region, we love this community,” said PSL Managing Director Julie Sandler. PSL focuses on three main themes: machine learning and engineering innovations, digital transformation of consumer habits, and shifting legacy verticals to the cloud.
Equity debate: 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. PSL last month declined to provide a specific breakdown on how much equity the studio takes from spinouts. A survey conducted by Global Startup Studio Network found that startup studios take on average a 34% equity stake when a company is founded. For comparison, a lead investor in a Series A round typically wants 20% of the company, according to Silicon Valley accelerator Y Combinator.
The team: PSL has 22 employees who help come up with ideas at the studio and work with founders. “This is really special (and unusual) in the global VC landscape for a ‘first check in,’ and one of the neat things this dual fund/studio model enables,” Sandler noted. PSL’s managing directors are Sandler; Mike Galgon; Geoff Entress; Greg Gottesman; T.A. McCann; and Ben Gilbert, who was just promoted for the second fund.
PNW $$$: PSL is the latest Seattle-area tech-focused firm to raise a new fund as investors increasingly turn their attention to the Pacific Northwest. Founders’ Co-op — an early backer of Auth0, which announced a $6.5 billion acquisition Wednesday — this week revealed a $50 million fund. Fuse Venture Partners and Flying Fish Partners are also raising new funds. Madrona Venture Group, the largest VC in the region, raised $345 million for its 8th fund in December. Sandler, Gottesman, Entress, and Gilbert previously worked at Madrona.
Go deeper: Check out our deep dive on PSL last month.