“Dan Levitan cofounded consumer-only venture firm Maveron in 1998 with friend Howard Schultz, the famed Starbucks CEO, whom he met as Starbucks’ investment banker for its 1992 IPO. Levitan was a seed and Series A investor for Maveron in e-commerce company Zulily.” “Dan currently serves on the boards of Trupanion, Pinkberry, PayNearMe, Peach, Potbelly and Earnest.”
1. “Get the team right. Startups to me are about: people, people, people.”
“We’re looking for people first.” “We can find a great sector or business, but we’re investing so early that unless there’s this tenacious grit, determination, resourcefulness, ability to evolve, it won’t work.”
The earlier a venture capitalist invests the greater the level of uncertainty and the more the investment is about buying mispriced optionality. The future of truly disruptive startups is so uncertain that founders and team members who can quickly respond to unanticipated changes have tremendous value. The qualities Dan Levitan describes are essential in a founder and team members since the future is never predictable with certainty. The ability of the startup to adapt to an unpredictably evolving world is essential and is driven by the founders and team members.
Successful venture capitalists also know that the right team chemistry is critical. When you are working with people you know and trust, tremendous efficiencies are created. Charlie Munger refers to the approach that allows Berkshire headquarters to consist of only 25 people as a “seamless web of deserved trust.” The more you know a person, the more likely it is that a seamless web of trust environment can be created. Successful venture capitalists and founders are obsessively focused on finding great people to work with. They spend far more of their time recruiting than most people would imagine for this reason.
When I was writing my post on Maveron co-founder Howard Schultz, Dan Levitan looked at an early draft and said “you need to put the points about people right up front.” Dan emphasized that Howard Schultz is all about people and so it should not be a surprise that Dan is all about people too. Not just any people, but great people. That applies to having the right skills but also to being great people in terms of values (the Yiddish word for this would be mensch: “a person of integrity and honor”) and how the person treats other people. The best people treat everyone with respect. Even little things are big clues about character.
2. “We’re looking for extraordinary entrepreneurs who can create very large businesses. After 15 years and backing almost 100 entrepreneurs, I think it’s that rare person who has a combination of attributes that gets through the challenges of a startup and is able to really create value.”
“The shortage is great entrepreneurs. There’s still too much capital chasing too few great entrepreneurs attacking big ideas.”
“The world does not need to be a zero sum game with founders. By contrast, there are so few great entrepreneurs and great ideas it is somewhat of a zero-sum game among VCs.”
Fred Wilson wrote a rather famous blog post about factors that limit the scalability of the venture capital model and, by implication, the number of innovative startups that help create growth, productivity and jobs. Dan Levitan and many other people believe that the primary bottleneck shortage in the venture industry is a limited supply of great startup founders. What does it take to be a great founder of a business? Dan Levitan’s firm Maveron has compiled a list:
1) works ridiculously fast;
2) has superior communications skills with team, investors and partners;
3) is self-aware and can evolve;
4) balances being aware with being detail oriented;
5) all-star recruiter that prioritizes team and company building;
6) prioritizes value creation for company investors etc.;
7). can sell both product/vision and knows his/her customers inside out;
8) has category advantage from past experiences and relationships;
9) is a data driven decision maker;
10) has contagious passion and relentless perseverance.
That list is a tall order, but it does sometimes get filled. When venture capitalists see these characteristics there is nearly always a rush to be an investor in the startup.
3. “How is the CEO recruiting? If we are two years in [after seed round] and we think this is a big idea and there’s been no impact players hired, that tells you something about the space or the CEO. The best biggest companies always seem to be able to hire people they shouldn’t be able to hire.”
One characteristic on Maveron’s list of “qualities they seek in a CEO” is that they be an “all-star recruiter”. Great founders know how to sell and one key “tell” of sales skill is recruiting. If the founder can’t sell employees on the vision and prospects of the business they will probably have trouble selling to potential customers of the product or service. Early hires at a startup are particularly important. On the importance of hiring the right people Dan Levitan has quoted Maveron’s co-founder Howard Schultz: “If you are going to build a 100-story skyscraper, make sure the corners are perfect.” What Howard Schultz means is that the early hires are particularly important since they set the foundation of what will become the culture of a growing business.
4. “We always talk about how you have to build a brand from the inside out, not the outside in. Brands are not wrappers. Brands are based on the values of the founders, and then they spread to the people who work for the company, and then that psychological contract is spread to the customer.”
“Get the people right and it flows to the customers.”
Even when it comes to building a brand, Dan Levitan believes that the process starts with people. What do founders value? How do the transmit those values to customers? As an example, one of the most interesting things to watch in business right now is McDonald’s current set of challenges and how it is responding with new marketing. McDonald’s does not need new marketing, it needs better food. MCD would benefit from listening to Howard Schultz who points out: “You have to stand for something important. What is your core purpose and reason for being? That should be the guardrails within which you create the enterprises meaning to your customers.” I’ve wrote about Howard Schultz’s approach to branding in this post (see #2 in particular).
5. “Early stage money is not fungible. It comes with an attitude. Makes sure that the people on your bus are the people you want on your bus.”
“Early stage investing [in particular] is all about the people.”
At this point if you haven’t figured out that Dan Levitan believes people are more important than any other variable in just about everything you are clearly not paying attention. People, People, People. Founders must be great people. The team must be composed of great people. Brands start with great people. Venture capitalists must be great people too. What Dan Levitan is saying is that money received from an investor can come with a big extra price tag attached – choose well. I suggest calling other people who have worked with the venture capitalist who wants to invest in your startup. Doing research on people pays off.
There’s expensive money and value-added money. Knowing the difference is important. And life is lots better when you get to work with great people.
6. “I spent a lot of my thirties and forties creating mentors. As I’ve gotten older, it’s become more fun turning that around and find someone who want to be mentored.”
“One of my mentors is Bill Campbell. He’s: ‘Product, Product, Product.’” Howard Schultz says the first person you should hire is a human resources person.”
Dan Levitan has said he has four primary mentors: 1) Howard Schultz 2) Coach Bill Campbell 3) Coach K of Duke and 4) Joel Peterson. These mentors are all different and bring different skills and attributes to the relationship. As Dan Levitan points out, they will disagree on some points. That’s OK and in fact desirable. As you go through life you can say: “I really like how person X does Y.” You don’t need to adopt everything that X does to get this benefit. Having a number of mentors is like being at a supermarket and buying ingredients. Of course, wanting to “be like X when they are doing Y” is a lot easier said than done sometimes, but at least you know what you want. Listening to Dan talk about his mentors is infectious. For example, it was Coach Krzyzewski who taught Dan the central lesson of Maveron’s consumer-focused success: always ask “Do you love your team?”
7. “There are lots of ways to make money in venture capital, and there are even more ways to be mediocre. We believed the world didn’t need another commoditized venture capital firm. Our theory was that the operating characteristics of technology companies would be incorporated into consumer businesses in an unprecedented way.” “Technology-driven consumer-facing brands.”
“We decided to focus on consumer very narrowly and invest only in end-user consumer brands. It’s worked much better, including because we’re presented with more [of these types of startups]; we have a greater pool of companies facing similar problems, which helps our entrepreneurs; and our LPs are getting more consistent returns.”
Dan Levitan is a believer that venture capital firms will increasingly specialize as competition increases. Maveron’s decision to be “consumer only” in its approach to venture capital is “walking the talk” on that viewpoint. When you focus on something you tend to get better at it. When you get better at it, people come to you for that skill, which makes you better yet at that skill. This feedback loop is powerful and financially rewarding if you pick skills that scale well. It is more lucrative to be a venture capitalists than to be a great maker of chicken rice in a hawker stand in Singapore, but specialization is valuable in both professions.
8. “We dabbled in enterprise and we sucked at it. This is a humbling business. It’s really hard to be good. We asked ourselves: and every startup should ask yourself: what do you do better than others and how does that concentration work in your favor? What do you do well?”
A value investor would refer to what Dan Levitan is talking about here as implementing a “circle of competence” approach. A good example of someone implementing a circle of competence concerns Tom Watson Sr., the founder of IBM, who once said: “I’m no genius. I’m smart in spots—but I stay around those spots.” By finding what you are truly great at as an investor and focusing on those things you can create in an investing edge. Every investor has strengths and weaknesses and the sooner you recognize what yours are the faster you will travel down the road to success.
Another way of looking at circle of competence is as an opportunity cost analysis. Charlie Munger puts it simply: “Opportunity cost is a huge filter in life. If you’ve got two suitors who are really eager to have you and one is way the hell better than the other, you do not have to spend much time with the other.” In investing’s case you have two skills, and you are way better at one skill than another. The choice for many people is obvious enough that they chose to specialize.
9. “What we’ve learned over the years is that one of our formulas for success is a smaller fund, where one or two significant wins can really have a positive impact. The challenge for successful venture capitalists is having the discipline to stay small and keep the fundraising within the same parameters as they originally achieved success in. I think there is a lot of temptation [to go big], particularly when the press asks ‘How big is the fund?’ What’s more important is what’s in the fund.”
In investing after a certain scale is reached in terms of “assets under management” or AUM, size can work against performance. Sometimes $500 million is not much more effort to manage than $50 million. But once you reach a certain size it is impossible to put more money into a single business so you must find a new business and have the necessary time to devote to that new business. Since the number of great founders with the right business attacking huge markets is limited, this can cause the some venture capital firms to stretch too far and fund startups that will drag down returns. As was the case with Goldilocks and the Three Bears, what you are looking for is something that is “just right” in terms of fund size.
10. “There’s plenty of money out there for great consumer entrepreneurs with great consumer products attacking really big markets.”
“Grand slam home runs are what defines [success in the venture business.”
Massive wins require big markets. Fred Wilson’s post that I referred to above lays out the simple arithmetic that leads to this conclusion. The other point Dan Levitan makes is that (especially right now) money is not the input to a business that is in short supply. It is not easy to raise money for a new business, but if you have a great team of people attacking a big market with an innovative solution to a real problem raising money is not your biggest problem. For example, the bottleneck problem at Series A referred to by Josh Koppelman is not happening because venture capitalists are grading on a curve. It is happening because startups are not satisfying the metrics needed for success. Stated simply, the problem at series A is not insufficient dry powder held by venture capitalists.
11. “Some of the best ideas that we’ve invested in have made no sense to conventional sources.”
“There have been a few times in the last 16 years when we’ve funded something that was a no-brainer and it worked well for us. But most of the time, it’s not a no-brainer.”
It is mathematically provable that you must be contrarian if you are going to outperform the market. Ray Dalio puts it this way: “You have to be an independent thinker because you can’t make money agreeing with the consensus view, which is already embedded in the price. Yet whenever you’re betting against the consensus, there’s a significant probability you’re going to be wrong, so you have to be humble.”
Dan Levitan and his firm have chosen to specialize and with that comes an opportunity to “think different.” Being a contrarian can be uncomfortable for some people. As Mike Maples points out: “Wildly disruptive startups will be misunderstood for a long time.” Too many people would rather fail conventionally than succeed unconventionally. Great venture capitalists are comfortable standing apart from the crowd.
12. “We get over 1,000 inquiries a year and will make 4-6 core investments and 15-20 seed investments. If businesses are not referred to us in some way or another, it is hard for us to really focus on it.”
“If we put $100,000 into a seed round, we want to earn the right to do the A round.”
Sorting through more than 1,000 inquiries a year is not simple or easy. This process inevitably means that you must deliver a lot of “no” messages and only a few “yes” messages. By requiring a referral three objectives are achieved:
1) you get a filter operating to make decisions easier,
2) you reduce the number of pitches you need to consider, and
3) you put entrepreneurs to the test (if they can’t somehow get a referral they are not resourceful and may not have good sales skills).
The biggest fear of any venture capitalist’s at this stage are mistakes of omission. There aren’t any venture capitalists who have been in the business that have not passed on a big success. That’s a part of the process. As long as you hit your share of grand-slam tape-measure home-runs, errors of omission will be overshadowed. They know that they will not always be right and that it is magnitude of success and not frequency of success that drives financial returns in their business.