Hola Jenn,
Ok, here are some smaller venues you can check out to hear local bands. I have been to all, my favorite is probably Moby Dick
-Moby Dick (also a nightclub) by Metro Santiago Bernabeau in the famous Av. del Brasil Area. Has some well known bands play occasionally. I saw the Used there.
-Sala Sol (Alt and Rock) concerts nightly around 23.00 (also a great discoteca after 2.00am)
-Ritmo y Compas (its a venue a few blocks from Diego de Leon Metro) where they have a concert venue in the same building as rehersal studios. Here its hit or miss, check the schedule.
-Gruta 77 Near Metro Oporto I think. Similar deal as Ritmo y Compas. Can see some good bands but hit or miss.
Also Sala Heineken near Pl España is a bigger venue for about 900 people so lots to offer there too.
- One more, The recently reopened Sala Caracol near Embajadores is anothe place to check out
Sadly Madrid doesn't have as good of medium sized venues as the bands and public deserve. Barcelona is luckier in this arena.
Enjoy the shows!