DAN LEVITAN COFOUNDED THE venture capital firm Maveron in 1998 with Howard Schultz, the Starbucks CEO. Levitan is a thoughtful advocate for specialization in the venture capital business and for the importance of finding the right mentors in life. Levitan has led many of the firm’s successful investments, including Capella Education Company, Quellos Group, Potbelly, and Zuilily. He is a graduate of Duke University and Harvard Business School. After school, Levitan spent 15 years in investment banking focused primarily on consumer businesses. During his banking career, Levitan helped more than 100 companies go public. As a Managing Director at Schroders he led the firm’s consumer group and founded its West Coast investment banking division. Levitan met Schultz in 1991, when Starbucks began planning for its IPO.
1. “Get the team right. Startups to me are about people, people, people.”
We can find a great sector or business, but we’re investing so early that unless there’s this tenacious grit, determination, resourcefulness, and ability to evolve, it won’t work.
The earlier a venture capitalist invests in a business, the greater the level of uncertainty and the more the investment is about buying mispriced convexity. The future of truly disruptive startups is so uncertain that founders and team members who can quickly respond to unanticipated changes have tremendous value, referred to as optionality. The ability of a startup to adapt to an unpredictably evolving world is essential. Successful venture capitalists also know that team chemistry is critical. When you are working with people you know and trust, tremendous efficiencies are created. The more you know about a group of people, the more likely an environment characterized by a seamless web of trust will 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 would imagine since they realize how critical a strong team is to success.
2. “We’re looking for extraordinary entrepreneurs who can create very large businesses. After eighteen years and backing over one hundred entrepreneurs, I’ve learned it’s a rare person who has the combination of attributes to get through the challenges of a startup and create a large company that changes our lives.”
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.
The venture capitalist Fred Wilson once 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. Levitan and many others 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? Levitan’s firm Maveron has compiled a list:
1. Works ridiculously fast
2. Has superior communications skills with the team, investors, and partners
3. Is self-aware and can evolve
4. Balances being aware with being detail oriented
5. Is an all-star recruiter who prioritizes team and company building
6. Prioritizes value creation for company investors
7. Can sell both the product and the vision and knows the 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
Finding someone with every attribute on this list is a tall order, but it can be done. When venture capitalists see these characteristics, they nearly always rush to invest in the founder’s 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 ideal qualities for a founder is that he or she be an “all-star recruiter.” Great founders know how to sell, and one key “tell” of sales skill is recruiting. If a founder cannot sell employees on the vision and prospects of the business, he or she will probably have trouble selling to potential customers. Early hires at a startup are particularly important. On the importance of hiring the right people, Levitan has quoted Maveron’s cofounder Howard Schultz: “If you are going to build a one hundred–story skyscraper, make sure the corners are perfect.” What Schultz means is that early hires are especially important since they set the foundation for 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.
When it comes to building a brand, Levitan believes that the process starts with people. What do founders value? How do they transmit those values to customers? Another great Schultz quote sums it up: “You have to stand for something important. What are your core purpose and reason for being? Those should be the guardrails within which you create the enterprise’s meaning to your customers.”
5. “Early-stage money is not fungible. It comes with an attitude. Make 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 have not figured out that Levitan believes people are more important than any other variable in just about everything, you are clearly not paying attention. 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. The qualities of a great person include being trustworthy, loyal, helpful, friendly, courteous, kind, cheerful, thrifty, enthusiastic, and brave. That’s true for just about anything. But there are specific qualities that are desirable in a venture capitalist, such as a missionary attitude and a love of building valuable products and solving customer problems. What Levitan is saying is that money received from an investor can come with a big price tag attached—so it’s important to choose well. There’s expensive money and value-added money. Knowing the difference is important. Life is a lot 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 finding someone who wants to be mentored.”
One of my mentors is Bill Campbell. He’s “product, product, product.” Yet Howard Schultz says the first person you should hire is a human resources person.
Levitan has said he has four primary mentors: (1) Howard Schultz; (2) Bill Campbell; (3) Mike “Coach K” Krzyzewski of Duke University; and (4) Joel Peterson. These mentors are each different and bring different skills and attributes to the relationship. As Levitan points out, they will disagree on some points. That’s okay and, in fact, desirable. As you go through life, you can say, “I really like how person X does Y.” But you do not need to adopt everything that person X does to benefit from a relationship with him or her. 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 Levitan talk about his mentors is infectious. For example, it was Coach Krzyzewski who taught Levitan 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.
Levitan believes 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 of 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. This feedback loop is powerful and financially rewarding if you pick skills that scale well.
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 itself, ‘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 Levitan is talking about here as implementing a “circle-of-competence” approach. A good example of someone implementing a circle of competence involves 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, and then focusing on, what you are truly great at as an investor, you can create an investing edge. Every investor has strengths and weaknesses, and the sooner you recognize what yours are, the faster you will achieve success.
9. “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. 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.”
After a certain scale is reached in terms of “assets under management,” 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. As there are a limited number of great founders with the right businesses attacking huge markets, some venture capital firms stretch too far and fund startups that will drag down returns. As with Goldilocks, what you are looking for is something that is “just right” in terms of fund size and the amount invested in each company.
10. “Capital is not the barrier for the best businesses. There’s plenty of money out there for great consumer entrepreneurs with great consumer products attacking really big markets.”
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. Levitan’s focus is on consumer entrepreneurs, but the point applies to many sectors of the economy right now. If the idea for the business is sound, there is a big market and a great team, money is not the input that will be in short supply to a business.
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 sixteen 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.
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. Too many people would rather fail conventionally than succeed unconventionally. Great venture capitalists are comfortable standing apart from the crowd.
12. “We get over one thousand inquiries a year and will make four to seven core investments and fifteen to twenty-five 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.
Levitan views it as Maveron’s job to pick well early and then do the work to be the best partner possible. He views venture capital as a service business, and it’s on Maveron to outperform once it’s on your team.
Sorting through more than one thousand inquiries a year is not easy. The process inevitably means that you must deliver a lot of “no” messages and only a few “yes” messages. Delivering thoughtful “no” messages is one of the hardest jobs for any venture capitalist. By requiring a referral before you consider an inquiry, 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.
3. You put entrepreneurs to the test. (If they cannot somehow get a referral, they are not resourceful enough and may not have strong sales skills).
The biggest fear of any venture capitalist at this stage is mistakes of omission. There are no venture capitalists who have been in the business who have not passed on a big success. It’s a necessary part of the process. As long as you hit your share of grand slams, errors of omission will be overshadowed.