The news: Pioneer Square Labs raised a $20 million third fund for its startup studio. Founded in 2015, the Seattle-based firm is one of more than 800 studios that generate ideas and recruit people to lead new companies. PSL, which also operates a separate venture fund, will use the fresh cash to invest in generative AI opportunities.
The bet on AI: The studio is already building multiple “co-pilot” apps for industries such as finance and healthcare. “This is not crypto, this is not the metaverse,” PSL Managing Director Greg Gottesman said of generative AI. “It’s already having a profound impact on almost every technology business, and ultimately will have a profound impact on every business.”
The studio’s own engineers are using generative AI and LLMs (large language models) to speed software development as they work on new ideas. Gottesman likened the technology to how Amazon Web Services made it easier for startups to get up and running. “You can build things a lot faster, and you can test things a lot faster,” he said. Gottesman wrote more about the AI bet in a blog post.
The track record: There are 33 PSL startups. A majority raised subsequent investment rounds, and a few were acquired.
But the studio does not have a unicorn or a defining acquisition in its portfolio, eight years after it launched.
Much like a traditional VC firm, PSL measures success in part on creating returns for its investors.
Gottesman said the portfolio companies are still young. He’s bullish about the founders and the types of problems they are solving.
“We’re in a more challenging climate, and so exits are going to be harder to come by right now,” he said. “But let’s talk in a couple of years. I think the results will speak for themselves.”
The studio model: PSL axes about 90% of ideas before they turn into startups. It’s increasing the “kill rate” in the recent tighter fundraising environment. “The bar is higher,” Gottesman said.
Some ideas originate inside PSL, which recruits experienced leaders to run a spinout. In other cases, entrepreneurs come to PSL with an idea, and the studio helps them create a startup.
The studio model is “booming,” said Alper Celen, an advisory board member for the Global Startup Studio Network. More than half of active startup studios around the world formed within the past five years, he said. There are several in Seattle, including Pienza, Conduit Venture Labs, TF Labs, and Madrona Venture Labs.
One critique of studios is that they take too much equity from founders. Gottesman said PSL equity stakes vary depending on when the idea formed and who came up with it, among other factors. Sometimes the stake can be more than 30%; other times it’s lower, he said.
By comparison, the AI2 Incubator in Seattle takes 9%. Techstars, which runs an accelerator in Seattle, takes 6%.
Celen said many entrepreneurs value what studios offer — fundraising, recruiting, customer acquisition, etc. — and see them as “institutional founders.”
PSL can use its venture arm, which raised $100 million in 2021, as an alternative for founders who want a bigger slice of the pie. PSL Ventures invests in both studio and non-studio startups.
“It’s very busy right now for both sides of our model,” said Julie Sandler, managing director.
The talent: Finding founders is one of PSL’s biggest challenges, said Palvi Mehta, CFO and operating partner. But the recent widespread layoffs and compensation changes across the tech industry could drive more people to entrepreneurship.
“The golden handcuffs aren’t on as tight.”
“The golden handcuffs aren’t on as tight,” Mehta said.
PSL says it can level the playing field for potential founders who might not be able to afford going a year without a salary, since it provides operational and financial support. “Both are extremely relevant in this current market,” Gottesman said.
PSL startups are based in Seattle, though the studio did launch and sell a remote-only spinout over the pandemic without ever meeting the founding team in person.
But it remains committed to its backyard. “The caliber of tech talent that comes out of the Pacific Northwest is unparalleled,” Mehta said.
PSL prides itself on diversity within its portfolio. More than a third of its companies are founded by women, and more than a third of founders are BIPOC (Black, Indigenous and people of color), said Sandler.
The corporate partnerships: PSL continues to work with corporations as part of their R&D arms, helping brainstorm ideas for potential spinouts. The studio partnered with industrial giant Fortive in 2020, creating a joint innovation studio. Fortive acquired the first spinout (TeamSense) one year later.
PSL is also working with Capital One, Kroger, Rover, and FIS.
The studio helps corporate partners innovate faster but PSL also reaps benefits. “Understanding the problems that large companies are trying to solve is a great way to figure out what problems are out there,” Gottesman said.
The backstory: Gottesman was one of three initial managing directors at Madrona Venture Group, a longstanding VC firm in Seattle. He helped launch a startup studio called Madrona Venture Labs.
In 2015, Gottesman and his Labs co-founder Ben Gilbert left to start PSL alongside veteran investors Geoff Entress and Mike Galgon. The studio later hired Sandler, a former Madrona partner, as managing director to help launch the venture arm, and also added startup vet T.A. McCann as another managing director.
PSL raised $12 million for its first fund in 2015, and $16 million for the second in 2018.
Foundry, the Boulder, Colo., VC firm founded by Brad Feld, led all three funds. Vault Capital, Atlas Capital Ventures, and WestRiver Group also participated in the latest fund.
