AI is for real and intelligent apps is its vehicle according to Madrona Group’s Matt McIlwain

Q: You’ve been incredibly successful as a VC—you’ve had numerous major exits and been named to the Forbes Midas list several times. To what do you attribute your success?

I think the most important thing about being successful in the venture business is being able to work with these great entrepreneurs. We try to find them at an early stage then roll up our sleeves and help them be successful.

I spend a lot of time understanding team DNA. Why are they motivated to start a company? What are they hoping to do an in a unique way?

The other piece is understanding big trends and their relevance to new opportunities being created in the marketplace. It is often at the intersections of these different trends that the best new opportunities emerge.

Q: Gil Penchina  said that one of the key lessons he has learned about investing is how little control he has over the outcome of an investment. Do you feel the same way? Or do you feel you can have significant influence on a startup’s outcome?

I think we can have pretty significant impact but success really comes down to the company’s team.The key to an investor/entrepreneur relationship is building trust. You want the entrepreneurs to trust you enough to genuinely ask your opinion on matters like hiring and strategic direction.

We can also make a big difference on both the size and quality of an acquisition based on how we manage the process of maximizing the exit.  In all these ways, an engaged, trusted venture partner can influence the outcome.

Q: You’ve said that one of the biggest areas of opportunity right now is the rise of ‘Intelligent Applications’ i.e. those that use AI (Artificial Intelligence) and ML (Machine Learning) to learn and adapt. In the past, AI has overpromised and then disappointed, leading to a phenomenon known as ‘AI winter’. There’s the famous Ray Kurzweil quote that “in the next few years we’ll have machines so intelligent and capable that we’ll be lucky if they keep us [humans] as pets” Obviously, that didn’t come to pass. What is different this time?

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It is always scary to say why it is different this time around but I do believe with every fiber of my being that it is different!

I think the main reasons why are:

  1. The prevalence of digitized data—you can now bring together lots of disparate types of data and in much greater quantities
  2. Availability of massive computing power at a drastically lower cost
  3. Significant improvements in Machine Learning—the mathematical models and techniques used to turn the data into insight

We can think of the intelligent application as a three-layer cake where there is data at the base, machine learning in the middle and the intelligent apps on top.

You can push the insights generated by ML into these automated SaaS (Sofware as a Service) applications in real-time to do more intelligent things, whether in my travel and expense report, personalizing offers to customers, or in help-desk situations like ZenDesk is doing.

We experience this daily when we get movie recommendations on Netflix, song suggestions on Spotify or interact with Amazon Echo and will continue to see more of these types of applications in the next decade.

Q: There’s also a lot of hype in VR (Virtual Reality) and AR (Augmented Reality). You’ve invested in Envelop-VR. How do you see things playing out in this space? How far off is it from becoming mainstream? Which markets will be first? What is most interesting from an investor’s perspective?

My point of view on this changed radically about 18 months ago when I saw some of the early developer kits of high end VR systems like Oculus and Valve. The experience was magical and, most importantly, I didn’t feel sick. For me, those were the two minimum bars.

That said, we are still in the early stages of having technology, applications and experiences that are affordable and accessible to a large enough market to make VR and AR big successes.

You’ve got to take a ten-year view. Ten years ago people didn’t think of using touch as the primary way to interact with computers. And most people now (at least in the US) have smartphones and smart pads with touch interfaces. In fact, you get frustrated when you can’t use touch.

Ten years from now, we will take for granted having some kind of augmented real-world hologram experience. For example, taking a 2D spreadsheet and projecting the graphs into a 3D hologram that you can walk around and analyze from different points of view.

Our thesis is we would like to invest in the platforms that enable specific applications, gaming or entertainment experiences. I think the hardware will be done by really big companies with lots of capital and gaming and entertainment is too hits-driven for venture capitalists to be successful.

We prefer the horizontal layer where companies like Envelop-VR and Pixvana sit. They are both enabling experiences across VR/AR platforms.

Q: You’ve said you are interested in the intersection of healthcare, research and tech. In fact, you are on the board of the Fred Hutchinson Cancer Research Center. What are some interesting advances you foresee in this area?

I wear two hats in terms of my interests here. One is my personal interest and why I am on the board of Fred Hutch, a terrific, primarily cancer, research center. They have had amazing breakthroughs at the intersection of protein research (Biology and Chemistry), Data Science and Computer Science.

For example, in immuno-therapy where you take immune system cells (T-cells) and retrain them to recognize certain proteins that are cancerous. You use a combination of lots of computing power and data science to eliminate cancer calls. A company called Juno Therapeutics was spun out of Fred Hutch to work on this. I am really excited by these kinds of advances.

The second hat I wear is as an investor in healthcare IT companies. You can look at historical healthcare data and infer that various outcomes were related to certain characteristics (what data scientists call features) in each of the patients. You can then predict fairly accurately–probabilistically–that a patient with a given genetic make-up will respond to a particular treatment strategy.

I think outcomes based research is going to be important and we just invested in Accolade, which helps consumers and organizations make informed healthcare choices.

Q: What are some specific things tech executives like you and Satya Nadella (Microsoft’s CEO) do to help advance Fred Hutch’s mission?

I was delighted to have both Satya Nadella and a terrific Amazon executive, Mike Clayville join the board. Neither of those companies have had a board member in the past and they are important in our community.

I think Both Satya and Mike agree that finding cancer cures is a great unifier of people. The learnings they’ve had in their careers in computer and data science can be applied to cancer research.

And then there are questions like, “how do we scale fast and have a bigger impact?” Satya has incredible experience here. Lastly, I believe the cultural and operational skillset he has been applying at Microsoft will be helpful to Dr. Gary Gilliland, the CEO of the Hutch, the organization and even their entire ecosystem.

Q: Who are one or two fellow VCs you admire and why?

I’ll give you the top two that come to mind:

Amazon Founder Jeff Bezos Interviewed At The Washington Post

Jeff Bezos: We’ve co-invested with Bezos Expeditions before and here’s why I like him as an investor. He takes such a long term perspective but is always bringing you back to the customer’s problem. He also understands that you need to experiment and iterate quickly to address the need. So while it is harder to get Jeff’s time when you are a co-investor, the approach he has applied magnificently at Amazon, we’ve also seen him use as an investor.

Greg McAdoo: He was at Sequoia for a number of years and we had a close working relationship. We partnered on Isilon and he was also the seed investor in AirBnB. I think very highly of him and his approach to working with entrepreneurs and other venture investors to build great companies.

Q: If you were to pick one and only one single biggest factor that determines a startup’s success, what would it be? Why? Some say it is product-market fit (Marc Andreesen), others hold that it’s timing (Bill Gross) and yet more believe it is the team. Asked another way, what do you think is essentially different about successful startups?

The team. I think a lot about this because I teach a class at the UW school of business and we ask our students about it. You can make a case for any of the factors but it really truly is the team that makes a difference.

Q: Do you have any parting thoughts or advice for entrepreneurs?

Being an entrepreneur is incredibly challenging. You are a pioneer and are often seeing something before others see it. It is so important that you love the problem, understand it and are passionate about solving it.

But you need to bring others along (investors, employees, partners, customers) so also learn to be the chief sales officer. If you do these things you have a real shot at success.