Ben & David "pour over" the 1992 IPO of the legendary Seattle coffee company with the help of Dan Levitan, who served as lead investment banker on the IPO and who would later co-found the venture capital firm Maveron with Starbucks' CEO Howard Schultz.
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The Carve Out:
Full Transcript below: (disclaimer: may contain unintentionally confusing, inaccurate and/or amusing transcription errors)
David: Sorry, guys. Sirens going by my window.
Ben: Guys, David’s in Europe.
Ben: Welcome back to Episode 34 of Acquired, the show about technology acquisitions and IPOs. I’m Ben Gilbert.
David: I’m David Rosenthal.
Ben: And we are your hosts. Today, we’ll be talking about one of the great legends of a historically non-tech company in a technology city: Starbucks. I’m here with Dan Levitan in Seattle, and we are both sipping our Starbucks. So I’ve got an almond milk latte here. Dan, what are you drinking?
Dan: I’m drinking a tall decaf americano. The “why bother” drink.
Ben: Seriously, what is the point? It’s a good evening beverage but I’ll ask you later why the no caffeine right now.
Dan: I just like the taste of coffee and I don’t need non-natural energy.
Ben: Dan doesn’t do drugs. So, listeners, before we dive into the show, a couple of things I want to cover. One, if you’re new to the show, we’ve got a great Slack community. So we’ve got over 500 people discussing mergers, acquisitions, IPOs, tech news, really anything that people want to create rooms for, so you can learn more about that at Acquired.fm and join. Hit us up on Twitter, @acquiredfm. And we are super lucky to have Silicon Valley Bank sponsoring this episode. So before we dive into it, I want to tell you a little bit about SVB.
So SVB, for more than 30 years, has helped innovative companies and their investors move bold ideas forward fast. They provide targeted financial services and expertise through their offices in innovation centers around the world. With commercial, international, and private banking services, Silicon Valley Bank helps address the unique needs of innovators. You can learn more at SVB.com. And I just wanted to say real quick, they have unbelievable customer service. I’d say countless but I think I can count, I think it’s been three examples where in the last couple of years I’ve had something come up, I’ve emailed SVB and we got everything resolved immediately. Actually, they are the bank of Acquired. So if you are at a stage where you’re looking for a bank or will be considering one in the future, I couldn’t recommend them more. David, can you introduce us to our guest today?
David: Yeah. So as Ben mentioned, we are covering the landmark Starbucks IPO today and we are lucky to be joined by Dan Levitan who is the managing partner and cofounder along with the soon-to-be former and original CEO of Starbucks, Howard Schultz, of the consumer-only venture capital firm Maveron. Dan and Howard started Maveron in 1998. Since then, Dan has invested and served on the boards of many successful companies including Zulily, Trupanion, Potbelly, and Drugstore.com. Dan and Maveron are great early-stage VC investors and investors both in PSL where Ben works and co-investors with many of the companies I work with at Madrona, and really delightful folks to work with.
But today, we’re actually going to be talking about Dan’s days before Maveron when he was an investment banker in New York at a firm called Schroder Wertheim & Co. And he met a crazy entrepreneur from Seattle who was a hell of a coffee company that was named after a character in Moby Dick, and Dan would go on to serve as that coffee company’s lead investment banker on their IPO. And that's the story we’re here to tell today. So thank you, Dan, for joining us.
Dan: Thank you for having me, guys.
Ben: Yeah, yeah. For Acquired listeners out there, we’ve had founders, we’ve had M&A professionals, we’ve had journalists. We’ve even had some executives at companies recently acquired on the show. But we’ve never had a chance to analyze an IPO before from the perspective of the investment banker that actually took them public and did the deal. So, super excited to have a first here on Acquired today. Actually, it's also worth noting the date works out pretty well because right now happens to be the 25th anniversary of Starbucks going public.
Dan: Actually, June 26 is the 25th anniversary.
David: It’s the year of the 25th anniversary but it is also Howard Schultz’s last month on the job before he retires.
Dan: True. He’s onto his next plaque.
David: So with that, let’s dive in. I’m going to quickly relate the origins of Starbucks because I think it's actually something probably definitely many of our listeners but most people don’t know and then we’re going to dive into the IPO with Dan. But the original Starbucks company, not the Starbucks Coffee Company, but the original Starbucks was founded in Seattle in 1971 by three friends: Jerry Baldwin, Zev Siegl, and Gordon Bowker who had met in San Francisco as students at the University of Francisco. They had become acquaintances of the legendary Berkeley, California coffee roasting entrepreneur, Alfred Peet. Folks might know Peet’s Coffee. The three friends had become sort of disciples of Alfred’s and after college they moved up to Seattle and they wanted to get into coffee roasting themselves. So they started a company, decided to name it after Starbuck from Moby Dick, and they set up shop in Seattle. But they were just a roaster. They roasted beans and they sold beans. They did not brew coffee. And it becomes a nice small local business in Seattle. Then we fast forward 10 years to the early 1980’s.
Ben: David, it's important to note they didn’t brew coffee. It’s not just because they were drawing some hard line in the sand like you could see today of like we’re not going to be like that every other street corner that you see that has a coffee shop on it where people are brewing coffee and sitting there and drinking. Many of our listeners are familiar with the idea but like that didn’t exist.
David: Yeah, that's right.
Ben: That was a thing that Starbucks would later kind of create.
David: They didn’t brew coffee because nobody brewed coffee. That was what you did at home with your Folgers or your beans that you bought from Starbucks or somewhere similar.
So we fast forward 10 years to the early 1980’s. When a young Howard Schultz who had been in an earlier life a salesman for the Xerox Corporation, sales executive, he was working as the general manager of a Swedish company named Hammarplast that made coffee machines. He heard about these guys out in Starbucks, heard they roasted good coffee and he went out to see them. He was actually really impressed and he was so impressed that he spoke to them and sort of begged joining the company, and he got a job. So he became the director of marketing for Starbucks. This was in 1982. So Howard is director of marketing working for these three founders and he goes on a buying trip to Milan, Italy. And he noticed something different about Milan versus the streets of Seattle or any other American city – that’s that there are these coffee bars everywhere throughout the city and they served coffee, and people go and they meet there and they hang out there. And they’re not just places to buy beans or buy coffee to take away. It’s actually a place where you sit and you talk to people. So he’s really taken by this idea. He comes back to Seattle and he tries to persuade the original Starbucks founders that this is something that they should start doing in Seattle, start doing it themselves, open up cafes in the city.
But the founders, they actually have something else going on at the time and that’s that their original mentor, Alfred Peet, is retiring down in San Francisco and he wants to sell his business to them, to the three founders, his disciples. So they say, “You know, Howard, that’s nice. If you want to do that, why don’t you go do that yourself. We’re in the midst of buying Peet’s and we’re going to move back to San Francisco and we’re going to do that.”
Ben: Yeah. It’s hilarious to think about like, “yeah, we’ve got Starbucks.” Today, given where both companies are, like “oh yeah, we’ve got Starbucks” but like, “nah, we’re not going to do the whole coffee shop thing. We’re going to go do Peet’s.”
David: Yeah. And truth is stranger than fiction sometimes. So Howard actually leaves the original Starbucks in 1985 and he starts a new company kind of pursuing his dream of what he saw in Italy of café shops that serve coffee and serve as meeting places in cities. He starts a new company and he calls it Il Giornale and models it after his Italian experience. So he operates this company for a couple of years, grows it in Seattle, has a fair amount of success. Then in 1987, two years later, he approaches the Starbucks founders again. At this point, they’re focused on Peet’s and still in roasting down in San Francisco. He offers to buy the Seattle retail locations that are still called Starbucks from them, and he does, and they agree to sell it to them for $3.8 million. Schultz buys these Seattle retail outlets, merges them with Il Giornale and rechristens the company, the Starbucks Coffee Company.
Ben: So David, did he have the $3.8 million liquid to be able to make that purchase? Dan’s over here shaking his head.
David: Yes. So this is where I wanted to bring Dan into the story. How did this transaction, the first one long before the IPO come together?
Dan: Well, I didn’t actually know Howard until 1991 and that’s a story that I should tell. But the way transaction came together is Howard at the time was a 30-something, very determined young man. He went to I think the number was about 250 people before they said yes to him. That was for Il Giornale. Then it was easier to raise the money for Starbucks, but no, he was a poor kid from Canarsie, Brooklyn. So he went around Seattle and met the Angel community which was obviously very much more focused on kind of traditional businesses than tech businesses at the time, and he scraped together the 3.8. In fact, one of the stories that is largely not told was that there was a group of businessmen in Seattle that had seen Starbucks emerge. I think by that time it had 7 stores. They weren’t sure that this young 30-something-year-old kid was the right guy to buy Starbucks. So there was a movement on the side to see if they could put in an “experienced person” and they were going to have an alternative bid for Starbucks. But as has happened many times in the last 45 years, Howard prevailed and was able to line everybody up and buy the company. I think Starbucks Coffee Company started with 11 stores in 1987.
David: Wow. Which is so funny. Speaking as a “young” 30-something myself these days, I feel like, now, that’s old, right? If you’re in your 30s, you have gray hair in the tech world It’s the 20-somethings that are the young entrepreneurs right now.
Dan: But, you know, they were looking for an experienced retail operator but obviously, he proved them wrong.
David: Obviously, he did. So he merged the companies and the growth was pretty incredibly. So it was 1987 when the merger happened and the Starbucks Coffee Company was born. They did 1.2 million in revenue that year. The very next year, 1988, they did 10.2 million in revenue. So almost 10x in one year.
Dan: But that was because of the combination.
David: Oh, that was because of the combination. Okay, that makes sense. Still even then, for the next basically 5+ years they practically double revenue every year which in a bricks and mortar retail business is hard.
Ben: Yeah, and it looks like in ’89 they had almost 20 million. In ’90 they had 35, in 1991 they were up to 57.6. Dan, how did they do that? What was the driver of the exponential revenue growth for them?
Dan: Well, Howard was from the very beginning kind of aware that Starbucks really was in two business. One business was operating these retail stores and the other was developing a pipeline of these retail stores. So from very early on, he focused on hiring ahead of the curve and developing an infrastructure to visit and then ultimately build a whole fleet of stores. You know, when I first saw it, I was really struck by the culture and of consumer passion that people had around Starbucks, and he kind of knew that. And so his whole mindset was “I’m going to build a company that’s going to be the development cult of Starbucks.”
Ben: Was it sort of like a Bezos type mindset of every dollar the comes in we’re going to aggressively invest in new store growth? Or how did they so quickly open so many new stores?
Dan: Well, he raised a lot of equity and that was the problem then of retail businesses like that, that they required a lot of equity.
David: What’s funny now by current standards, he did raise a lot equity back in those days. He raised over $30 million in equity before going public which was a lot. But now, looking at the tech companies, the Maveron and the Madrona and the like fund, you know, that's like maybe your Series A and your Series B.
Dan: Yeah. No, the scale has changed dramatically. I think Starbucks raised about 250 or 300 million in equity in total before it kind of flipped around and the cashflow generation of the existing store base was greater than the incremental amount of cash required to build new stores.
Ben: Uh-huh. And that’s including the IPO?
Dan: That’s including the IPO.
Dan: But Howard, I would say, was very, very different from Bezos. At the start, one of Howard’s key constituencies was his employees. That came from Howard’s background with his dad and the fact that his dad didn’t have health insurance. So as a result of that, Howard kind of was fortunate enough to have a business model where he invested in his people, and his people nurtured relationships with customers. So yes, there was a ton of money invested in the new stores but things like healthcare, they called it Bean Stock.
David: Yeah. This was amazing. I mean, every employee in the company from barista on up, part-time baristas on up, not only got health insurance but also got stock options, got equity in the company.
Dan: And one free pound of coffee per week. Still happens today.
Ben: It is really incredible that they’ve managed to preserve that at scale. I mean, when they announced things, I think it was two, maybe three years ago but announcing the program for all partners – Starbucks doesn’t refer to them as baristas, but every employee is a partner – for all partners to be able to attend an online university. I can’t remember quite who they partnered with.
Ben: ASU. And opening that up to so you know what, like for all of our partners we’re here for your continued growth and education and we’re going to continue to reinvest in you. That’s one thing that’s really nice to say and very possible not at school and it’s just incredible at the scale that they’re doing to keep it up.
Dan: Particularly when companies go through traumatic periods where everyone questions what are the values of the company.
Ben: Which Starbucks had. I mean, I don’t want to jump way ahead too much but Starbucks hasn’t always been the absolute behemoth that we know it today.
Dan: A hundred percent. I think that is the story of resiliency, tenacity, whether or not it's Apple or Starbucks, these are not straight lines.
David: Or Amazon. From our episode with Tom talking about Amazon and after the IPO and during the post-internet bubble crash, I mean you could have bought Amazon for the equivalent of like 5 bucks a share. Incredible.
Ben: Yeah. David, you want to take us through...?
David: Yeah. Dan, I wanted to bring you in here. So the company is growing incredibly fast leading up to the IPO for any company, tech or otherwise. So you met Howard in 1991. In New York I hear about what was going on out here in Seattle and how did you meet Howard and this relationship start that would lead to so many things over the years?
Dan: Well, as it turned out I was working in our Los Angeles office at the time and a partner of mine from New York called up and said there’s this coffee company, we have to go visit it in Seattle. I said, “Coffee? What are you talking about? How could that be a fast-growth business?” Because in those days, Folgers and Maxwell House and those branded cans of coffee –
Ben: Just terrible.
Dan: – was a declining business. And this guy named Bob Israel said to me, “Dan, trust me. Let’s go to Seattle.” And I kept struggling to try and understand how this could be a growth business. When I first heard and talk about it, the only frame of reference I had for coffee retailers was those Greek coffee shops on the corner in Manhattan that served those blue and white cups of coffee. Anyhow, I came up to Seattle and I will never forget the time, it was an August day in 1991 and I took a cab in from Sea-Tac. By the way, everyone in the audience might be puzzled as to how could you not check out a company. There was no internet then. So unless you knew people –
David: You had to literally come to Seattle.
Dan: Exactly. And unless you knew people in Seattle, it was super hard to experience the visual or what Starbucks was. So you literally had to come to Seattle. At the time I think they were in Seattle, Portland, and Vancouver. But anyhow, I remember getting in the taxi vividly from Sea-Tac and taking a ride to the hotel and me asking the guy, “I hear there’s a lot of coffee in this town. Which coffee shop do you go to?” and he said, “Oh, there’s a ton of coffee in this town.” And probably versus today, there’s 120th of the number of coffee stores. But he says, “There’s a lot of options but I always go to Starbucks, and it’s the best.” Then I check in to the hotel and before I go upstairs to my room, I ask the woman behind the counter, “I got to get a coffee tomorrow. Where do you recommend?” and she said, “Oh, there’s lots of places but I always go to Starbucks and here’s the spot.”
So I woke up the next morning and I always had a principle that I would never not visit the company stores that I was calling. So they sent me to the kiosk in City Center that’s still there over on Fifth Avenue.
Ben: Just a kiosk, not the full store experience?
Dan: Kiosk. Because there was no store near the hotel.
Dan: They were so underpenetrated versus now. And so I sat there for about 45 minutes and people were lining up for this coffee. I was like, you know, “Why is this coffee so great?” And I wasn’t a coffee drinker at the time and it was kind of one of the first times I ever had coffee was that day. So we headed over to Starbucks and for an hour and a half, Howard just talked nonstop. He was talking about the business model, he was talking about his people, he was talking about his customers, and this kind of passion that was completely intoxicating and contagious. But I was an investment banker, and investment bankers have to sell. If I couldn’t talk, I couldn’t sell. I was kind of frustrated because at the end of an hour and a half, literally, he looked at his watch and basically he made it clear to me that it was over. He kind of closed up his notebook and he kind of started walking me to the door basically. I had just been kind of overwhelmed by this incredible experience about passion but most importantly for me, it was about a guy who understood that his business was more than his shareholders. He kind of talked about his customers and he talked about his people in an incredibly compelling way. I was just really struck by that and hadn’t really heard that prioritization of “people first, customer second, shareholders third” from anyone.
So there was a long hallway in the old Starbucks headquarters which is down near Airport Way South and he walked me out and in the middle of the hallway, he stopped abruptly, turned around and he said, “Do you know what the problem with investments bankers are?”
Ben: Meanwhile, you haven’t gotten a word in, right?
Dan: I could not have gotten a word in and I said, “Excuse me?” And he said, “Do you know what the problem with investment bankers are?” And I had no idea where he was going with this. He said, “There are no mensches in investment banking.” In 1991, mensch was not a word in the urban dictionary.
Ben: Just in the Yiddish dictionary.
Dan: It was only in the Yiddish dictionary and that was not widely circulated in 1991. So I was like, “Who is this guy saying this?” It was really incredible. But to his credit, he gave me (the investment banker) the keys to getting their business.
Ben: Wait. So was he implying that you were one or was he implying like... from there, you had to form some relationship so he’d get some data on you. Like how did that go?
Dan: So he was implying that he hadn’t met one as an investment banker and that I had the opportunity.
David: He wasn’t convinced yet but he was going to give you a shot.
Dan: He wasn’t convinced at all and I wasn’t convinced that I was going to get a shot. But I remember taking a plane back from Seattle back to LA and in those days, Airfone, it was called, on the planes was like super expensive and I spent the whole trip on the Airfone talking to all my colleagues saying I had just discovered this incredible company. But what happened, fast forward, is occasionally he came to LA and over time we just started spending more time together. In those days, it was harder to get references and he spent a bunch of time with a bunch of different firms and kind of narrowed it down. The whole selection of the investment banker is a whole another story but it’s not really related to tech. It’s related to human psychology. But I was particularly fortunate that our firm, as David said, was part of the IPO which was an incredibly interesting experience.
Basically, a beauty contest went on in the end of March to beginning of April of ’92. The markets were particularly slow back then.
Ben: When you say the beauty contest, what do you mean by that? Over a 2-day period, the company invited six investment banks in to “pitch” why they should be part of the IPO. It was always going to be a small IPO, so it was pretty clear that there were going to be two investment banks, maybe three max. There was a bunch of different vectors off of which they would make their choice. The chemistry with the people, what the industry specialization was of the people, what the track records of the investment bank were, the trading history. They send us this 7- or 8-page checklist that we had to submit the answers in advance. When we got there, they would take you through a tour of the roasting facilities and we didn’t know it, but we were being judged as to who was really interested in a roasting facility versus who was really because they were going to pitch the IPO.
So Howard’s assistant at the time, a woman named Laura Moy, Laura took us around the roasting plant and she was making notes that she then back-fed to Howard about these people are jerks and these people are really interested in what we’re doing because they were trying to parse through who had the heart and the passion and the connectivity with the company. A few months after this, Howard kind of told me that they dinged us because we showed up in a limousine. Because we had five or six people and there were no Suburbans back then, so we showed up in a limo and that was a negative. Everything was being scripted in this beauty contest which was really interesting. And it was an hour and a half presentation, and it was a committee of Howard, the CFO at the time Orin Smith, and two directors. It was those four that we’re going to make the choices to who to pick between the six possible ones and the two they eventually picked. The company was quite thoughtful and discerning. A company like Goldman Sachs was interested in pitching but Goldman kind of said, “Hey, we’d like you to come to New York and meet all of our senior people but they can’t come to Seattle.” So boom, they got dinged because they couldn’t bring their senior people.
Ben: No white glove service there.
Dan: Exactly, yeah.
David: Well, and this was, you know, it’s hard to imagine today but as we talked about in sort of the intro with the history and facts, Starbucks today is it's a verb, it’s a noun, it’s on every corner in every city in the entire world. But back then this was small fry as far as Goldman was concerned. I mean, even the IPO which we’ll get into a sec, prices –
Dan: The IPO priced on June 26, 1992.
David: At a roughly $225 million market cap, which was more than it is today, but these were still very, very early days for the company.
Dan: Oh, 100 percent. There might have been 80 stores. But the visibility of companies was a lot less back then. Again, you don’t have the internet. You don’t have dedicated news sources about business. So it was harder to discover these companies. Something like RetailRoadshow.com where you can go and see every perspective, every video of every IPO, that didn’t exist. So, you know, the underwriters on Starbucks, the lead underwriters were our firm and Alex Brown, and unless you had accounts there, it was hard to get a prospectus. So the access to information wasn’t what it is today. Part of the reason why the company went public frankly was the visibility of going to a bigger platform and in fact in the months following the IPO without getting ahead of ourselves, the comp store growth significantly increased because they realized this successful IPO would equate to curiosity amongst customers.
Ben: Yeah. Of course, one of the reasons to IPO, not always the greatest reason but for the visibility hit that you get from it. Along with raising the capital and getting liquidity for your shareholders, you certainly get that buzz for a few weeks or a month around the IPO like we’re seeing with Snap now. Dan, what do you think the kind of competitive moat around Starbucks is? What is the defensibility? Why can’t any mom and pop shop knock them out of business?
Dan: I think there are probably two competitive moats that have been around Starbucks since the beginning. The first is Howard. I would say Jeff Bezos was a competitive moat. I would say Steve Jobs is a competitive moat. These companies are willed into existence through ups and downs because of the resilience, the grit, the determination and the ability of these founders. I think that's super important. Then in terms of Starbucks specifically, I frequently talk about the psychological contract that Starbucks has with its employees and how the strength of that psychological contract manifests itself in the psychological contract between the employees and the customers. So Starbucks is an incredibly retail-facing, consumer-facing business with 26,000 points of distribution.
Dan: And even if you’re doing the mobile order-and-pay, you show up and physically see the barista. I think that certainly Howard thinks the product is much better but I think if you talk to a hundred people, some might say yes, some might say no. The real differentiation and how they have withstood the competition is because of the commitment of the people which then made Starbucks become in customer’s mind something bigger than just buying a cup of coffee. In the annual meeting this week they talked a little bit about using their platform and their scale for good. I talked a lot about that actually. That's just been a theme that Howard has used for a long time.
David: In just a sec we’ll wrap up the history and facts with the IPO itself and then talk a little bit about Starbucks’ evolution after that. But I think this is something that’s super clear in going back and reading the S1, which also was super fun because it came out before the internet, so you have to do some rooting around online to find it. We’ll link to it in the show notes. But Howard, you know, and Dan, you mentioned Howard, Jeff Bezos, Steve Jobs being moats. I think something that’s common to all of them and really comes out reading the S1, is how deeply Howard understood and the company understood customer loyalty especially – it seems obvious but like for thinking back to when they started Starbucks or when Howard started Il Giornale, the idea that you would go and buy your coffee and drink it either to take away or drink at a store in a city, that was just something nobody had ever thought. It was just you made it at home but the creating this place and this experience where people are going to come back again and again, that's what enables the business to work, enables them to invest money and opening the store, invest money in marketing because when you acquire that customer, they’re going to be coming back again and again and again for their lifetime.
Dan: Yeah. I remember the research at the time of the IPO was that the average engaged Starbucks customer came 18 times a month.
Ben: It’s accurate for me.
David: Yeah. I mean, that compares favorably with like, you know, hacks today with, like, Facebook.
Dan: Exactly. But I think the other thing I would say is if you know you have 18 opportunities to exceed your customer’s expectations or flubbing, everything matters. So your attention to detail and your “earn it every day” attitude becomes present... I’d like to go back before we leave the IPO, just one anecdote. So in an IPO and it’s still remarkably similar today, the management of the company goes around the country and depending upon the size of the IPO, perhaps the world, and pitches to investors, and they do it in two formats. One is group breakfast and lunches, and the other is one-on-ones. The one-on-ones are for the biggest investors: Fidelity, T. Rowe Price, Capital Research. So in the Starbucks IPO there were 60 one-on-one schedules over a two-week period, and it was 8 or 9 days in the United States and a few days in London, Paris and Geneva.
Ben: That is a lot of meetings in a short period of time.
Dan: It was a lot of meeting. Sixty one-on-ones. So Howard said to me before, right as we were starting, he said, “How many of the 60 do you think I'm going to get?” And I said, “What do you mean?” And he said, “Well, of the 60 meetings that we’re going to have one-on-one, how many do you think will convert to orders?” At that time, I had probably done 10 IPOs and, you know, I said 80 or 90 percent. And he said, “I'm going to get 60.” And I said, “Howard –”
David: Not 60 percent. A hundred percent get all 60.
Dan: Exactly. And I said, “You know, Howard, there’s lots of reasons why people don’t invest, including the fact that the IPO is so popular that they might not get enough stock to be meaningful to them. So don’t hold yourself accountable to a 100 percent hit ratio.” And he said, “I’m going to get 100 percent.”
Ben: And this is only raising $25 million, right?
Dan: No. They raised 40-something million. Part of the offering was the secondary.
Ben: I see.
Dan: Not a good sale by those...
Ben: Not even a huge amount of money, right? Like there’s just not that many shares to go around.
Dan: Definitely true, but everything was smaller back then, so 40 was not necessarily a small IPO in 1992.
Ben: I see.
Dan: But as it turns out, he got 59 of the 60.
David: I’m sure it kills him to this day.
Dan: Well no, the story gets better. There was a guy named Mickey Straus, and Mickey Straus was at a firm called Weiss, Peck, and Greer. Wonderful man, may he rest in peace. Mickey decided not to buy at Weiss, Peck, and Greer. Within nine months after the IPO, who was the largest shareholder of Starbucks? Weiss, Peck, and Greer. And the lesson for you entrepreneurs out there is, what goes around can come around. Howard was so frustrated that Mickey Straus didn’t buy on the IPO but he then became in the public market the biggest buyer.
David: So the lesson for the venture capitalist is, if you really want to invest in a company, you should turn them down the first time because then the entrepreneur is going to want to get you the second time.
Ben: Right. Earn that right in the A round.
David: Yeah. That’s such a great story.
Dan: So we go around the world and where it’s finally time to price, the offering was oversubscribed 8 or 10 times as I remember. We had filed at $14 to $16 a share.
Ben: Would you say like 10 times more interest in the IPO than there was room?
Ben: Wow. What’s normal?
Dan: Well, in Snap and some of these others it’s a lot more. At Zulily I think we had 20 times interest. Because what ends up happening is if these things get hot, then everyone acts like they really want it but maybe they don’t really want it for the long term. They want it just for the flip. And so it’s very hard to gauge real demand versus flipper demand. But what ended up happening at the pricing was the comps went down 30 percent, if there were comps between the time we failed and the time that the company priced. By the way, that was so different then. You couldn’t file confidentially. So when we filed, everyone saw our filing and it was super bad because if you couldn’t complete an IPO, then everyone knew that you had failed and you couldn’t get it done, and that was quite a taint.
Dan: But in terms of the pricing, the deal’s way oversubscribed and the capital markets guys recommended that we price the deal at $16 a share. High end of the range. And Howard said no. We had to price it at 17. The capital markets guys from both firms recommend we price it at 16. And so we had this very awkward phone call where these wise guys who somehow couldn’t really tell you why it was 16 but they felt that it was 16, they kept saying how to be 16. And Howard kept saying how to be 17. It was a difficult spot for me because as the investment banker who’s in corporate finance and kind of representing the client, I was kind of pulled toward Howard yet the colleagues in my firm were saying 16, 16, 16. Howard relentlessly prevailed and we priced the deal at 17. Ultimately, the stock traded to 20-21 that day and kind of the rest is history. It’s gone up 183 times.
David: So you price it at 17 which was roughly a $225 million market cap. And then today, Starbucks has an $83 billion market cap. So that’s about an 18,000 percent return since then. So the selling shareholders in the IPO probably should have held on to those shares.
Dan: Yeah. But like every other early company, they might have had a 5x or a 10x at the offering. So, you know, for the Apple’s, the Amazon’s, the Starbucks’, those turn out to be incredibly bad sales but you have to have patience and tenacity and you can’t be thinking of yourself as a trade.
Ben: Yeah. And Dan, before we move on from this, what are the implications of pricing at 16 versus 17 both for the company, for the people buying those shares, for the investment bank. Why was that a contentious issue?
Dan: Well, the pricing of an IPO is a very complicated thing because you have multiple constituencies. For the company, clearly, they would have gotten more money and they did get more money at 17. In theory for the flippers, they wouldn’t get less the money the higher you price. So I think from the very beginning, the investment bankers are trying to find what a nice bump is but not an incredibly overwhelming bump, because it feels like you’ve left too much money on the table yet if you don’t kind of have it be if it breaks the IPO price, then it becomes a negative story.
David: Right. It’s damaged goods.
Dan: Exactly. One of the things that I always use to counsel public company CEOs is don’t let yourself or your people be judged by whether or not the stock today goes up or down. It’s your building a company and in the long term they will correlate but in the short term, they can frequently widely diverge.
David: I want to get into sort of maybe a one-off section, if you guys are willing to experiment here. We introduced on the Snap IPO a new section, narratives. But one I think that doesn’t make total sense and would be really hard to do the research given how long ago the Starbucks IPO happened, that narrative section that we’re going to do going forward is what the company’s narrative is that they’re trying to tell during the IPO process and what the narrative is in the press and the market around it. But what I think is really interesting especially for listeners of this show, that there has been a narrative that’s emerged over the last 10 to 15 years around Starbucks and that’s it’s a coffee company, it’s a retail company, it’s a real estate company but it’s also technology company. I think that especially for you Dan, being a technology venture capitalist and a consumer-only technology venture capitalist and founding Maveron with Howard, how has Howard’s thinking and the company’s thinking evolved from those days when there was no internet? You could only find out about Starbucks if you saw them on the street corner to the days today when you can request your usual mobile order on your phone or from Alexa and then pick it up in the building of your lobby or have it delivered to you.
Dan: Yeah, it’s changed a lot. In 1998 when we started Maveron the whole thought was, “Holy cow. Technology is integrating into consumer’s lives in unprecedented ways. So how will it change the business models of these companies?” I think in 1998 a company like Starbucks or even in 2008, most companies that were in the retail business thought of themselves as using IT as a way to manage their business but not really as a way to attract consumers. I would say in the last 10 years with the advent of the web and the power of social media, you saw the eye-opening opportunity that social media can drive traffic into stores. And say that was the first aha that a lot of companies had. Starbucks maybe was a little more advanced because with Maveron and Howard was on the board of eBay, so I think he came from that regular retail world but he was exposed to, consciously exposed to technology perhaps before other traditional retail companies. I think now I find it kind of somewhat humorous that people refer to Starbucks as a technology company. I would say it’s an incredibly powerful consumer company that’s utilizing technology to integrate into customer’s lives.
David: One thing that's interesting though, you’re right it’s a consumer company, but you mentioned JC Penney, you mentioned Sears, these were its peers for a long time that haven’t evolved. Obviously cofounding Maveron with you, being on the eBay board, Howard was for a while on the Square board. I guess the question is, like, what along the way do you think were some of those key moments when Starbucks built that capability and part of that transformation into being a technology company when some of its peers didn’t.
Dan: Well, there was a guy named Chris Bruzzo who was the first social media person at Starbucks and he’s now in marketing at EA. But anyhow, Chris was kind of before his time at Starbucks and just kept pounding on the opportunity that social media had to be an awareness vehicle and a traffic driver. He didn’t have much budget but he kind of relentlessly kept on it and I think Howard started seeing that through social media they could literally send people into the stores. If you think about retail, one of the key metrics that every investor looks at is same-store sales. In fact, I was privileged enough to know a guy named Jerry Gallagher, may he rest in peace, who was the inventor of same-store sales. I asked him to join the Potbelly board with me, which he did. But anyhow, the concept of same-store sales was I think became a valuation driver for these retail companies. So at the beginning, the first aha was if technology and social media could drive traffic and incremental traffic into the stores, then that was worth investing in. But as recently as five years ago, many traditional food and other retailers really had a hard time investing in technology because they couldn’t really see the return. They felt it was cool to be on social media but they didn’t want to spend money.
Ben: Yeah. I think there’s a good tech trend to extrapolate here is the shift from technology as a cost center in the IT spend to a revenue driver and a core part of the product organization and the driver of part of the innovation of the company. I mean, when you look at some of the things that have happened with Starbucks, they’ve had a lot of experiments with other technology company partnerships and bringing things that weren’t huge. I mean, there was like that 2012 Square deal. They had that early partnership in the mid-2000s with Apple and iTunes and co-advertising there. Then they still have I think like the song of the week and the app of the week with the free download card in the stores. The thing that ended up really working in my mind is they have incredible loyalty due to their app, I mean, or manifested in their app. They were one of the first to pioneer putting those gift cards in the app and now I don’t think I’ve actually used cash or a credit card at a Starbucks to buy anything other than reloading my card so I can get my stars. They’ve always been pioneers in loyalty and then using technology as a lever to strengthen the loyalty program, I think in my mind at least, that’s the thing that they’ve really exemplified the best in using technology of any retailer on earth.
Dan: Yeah. It’s funny that you say that because 12 years ago, Madrona and us invested in a company that had order-ahead and –
Ben: What company was that?
Dan: And it went flop. I’ve forgotten the name of it. I kind of blot it out, yeah. But we literally lost $10 million investing in a business that had order off your cellphone. At the time, we had a test going with 5 or 6 Starbucks and they didn’t think it was relevant. But the complication of understanding this stuff is they didn’t think it was relevant partly because the smartphone proliferation wasn’t as wide as it is now, obviously, and the feature set wasn’t as compelling as it was. So I think the stored value component coupled with the order-ahead became kind of a compelling feature set and now, I would argue that the suite of products that Starbucks has in Mobile Order and Pay is being clamored for by all sorts of other restaurant and retail companies.
David: What I think it’s – I feel like we’re – maybe we can mark the official transition into tech themes on this show at this point, we’re sort of in it. But something that we’ve talked about a lot on this show and I'm just such a huge believer in technology is, it has to be in service of a superior customer experience. Just doing tech or just doing mobile ordering for the technology aspects isn’t going to work, and this is why I think Starbucks has executed so well on in the last few years is, you know, doing the order-ahead in the app with my stored value, like it makes the experience better because I get my coffee faster. But I still interact with the people there and my name is still written on the coffee and it’s wonderful. It’s just, I don’t have to wait in line and so it’s better as opposed to forcing you to jump through technology hoops just for the sake of jumping through technology hoops.
Dan: Yeah. And where I’ve had the most luck working with technology companies is companies that have a great compelling product but can put themselves in the shoes of the retailer or the consumer company and trying to understand what that customer experience is as opposed to just kind of selling it based upon where we’ve had –
David: Feeds and speeds, yeah.
Dan: Exactly. Where we’ve had no luck is where tech companies think that, well, you know, these retailers just don’t get it. They don’t understand the big idea and it’s that alchemy of building cutting edge technology, that thing can be adopted, relevant and embraced by these companies who are responsible for nurturing their relationships with their customers.
Ben: Great point. Before we go hoo-ha into tech themes here, it’s worth stopping for a moment in our What Would Have Happened Otherwise section. We’ve talked about and at least before the secondary and that initial IPO, they raised $25 million. Did Starbucks ever consider doing that on the private markets like we see a lot of today? Obviously they needed a capital infusion to continue opening the stores at the rate that they were doing that but I guess the two possibilities are, what if they grew more slowly, would Starbucks be the way it is today? And then two, could they have raised that money in a different way?
Dan: What if they had grown more slowly, they probably wouldn’t have the domination that they have, unlike an Amazon/Starbucks kind of one market by market. So it was super important for them in their mind to get to markets quickly and eventually build the resources where they could go into a market and kind of own it. They did that in a number of different ways. I remember when I was privileged enough to work with Starbucks in buying a company called The Coffee Connection in Boston. It was a venture-funded company by a guy named George Howell and was funded by a bunch of VCs and we basically told them, you know, “We’re coming to Boston. We’re going to either steamroll you down or you could sell to us,” and they did. Same thing in London where Scott Svenson from MOD Pizza sold what he called the Seattle Coffee Company to Starbucks which served as the footprint for Starbucks and those stores.
So, it’s in Howard’s DNA – that growth, growth, growth. And I think part of that is to give back to the partners and create opportunities. So, I don’t think in the early days there was much of a chance that he was going to slow down. But you had asked it, it’s a two-part question. I’m sorry I lost the second part.
Ben: The other part being raising the private markets.
Dan: Oh yeah. I don’t think many of your listeners can comprehend the vastness of what’s happened and the changes in the capital markets over the past 25 years.
David: Yeah. There was no... not even “late-stage” but there were especially no... there probably weren’t even very many hedge funds. Period. But there certainly weren’t any of them that were investing in private companies.
Dan: Right. There were a few crossover funds but the amount of capital doing that was small. So Starbucks did a $20 million raise in December of ’91 and that was a big raise. They used DLJ as an agent for it. So the fact that you have 180 multibillion dollar or more private companies today, that's probably 178 more than there were in 1992. So they didn’t have access to the capital that private companies have today. Period, full stop.
Ben: There you go. Well, that's a great lead-in to go in hard into tech themes here. It’s shocking to think that the lack of information and the significantly fewer options available to anyone, to companies, to investment bankers, to venture capitalists in those days and we see very different companies and very different market dynamics falling out because of, well, the internet.
David: Yeah. Which is related to one... I had some fun thinking about this and you guys and listeners might think I'm just going off into crazy town here but I’m curious what you think. You know, I think it's so cool that in the coffee industry, there’s this concept of waves, like everybody talks about third wave coffee and for listeners that aren’t “steeped” in coffee culture, the first wave of coffee was the Folger’s and the Maxwell House that we talked about in the beginning of the show, the making your coffee at home. I, perhaps unlike many of our listeners and old and perhaps dating myself a little bit, and I remember growing up, my parents having the TV on in the morning and hearing the jingles like the best part of waking up is Folgers in your cup and good to the last drop – Maxwell House.
Ben: It was never true.
David: It was never true. But then Starbucks really was like the... that was the second wave and it was the first time that this sort of orthogonal business model had emerged in coffee which was this idea of coffee as an experience, not just as a beverage. And Starbucks obviously rode that huge wave into becoming orders of magnitude bigger than Folgers and Maxwell House ever were. Then today you have the third wave coffee which is the sort of disaggregated, the artisanal brew, small batch roasting and brewing local coffee shops. But I think there’s this great analogy between all of that to the tech industry, and that the first wave being, you know, like to the tech industry and the internet, the first wave being AOL. Like everybody remembers the jingle and like it wasn’t nearly as good as it was supposed to be. The second wave being the truly compelling version of AOL being Facebook and social. And we talked about social media earlier and I think of Starbucks being the social place, Facebook being the social place, the insight being that once you bring human interaction into a market, you can completely transform it, and then you have the third wave today of the further disaggregation of everything happening on Facebook, that of course Facebook is a big part of with the messengers and WhatsApp and Snapchat and Instagram, taking the photos, but basically creating through tech, through data but also through humans matching the best of each individual element for you personalizing it to what you’re doing.
Ben: So, would you summarize that as first wave being one size fits all but bad.
Ben: Second wave being one size fits all but good –
David: With your friends.
Ben: With your friends, yeah. Then the third wave being not one size fits all. Truly this broken up, small group, small batch, highly targeted, highly personalized experiences.
David: That would be a summary of my coffee drug-induced fever dream.
Dan: Well, I guess where I would go is, we’ve been spending a lot of time at Maveron thinking about voice and how voice facilitates impulse and I think if you kind of step back, kind of version one was I was on in ’95 and ’96 where you had to intentionally go and it was hard. In many ways, the digital ordering experience has gotten better, it’s become more mobile. But mobile is only one step toward impulse and we were fortunate enough to be involved in the very beginning at Zulily which was another kind of impulse experience, somewhat of an intersection between QVC and traditional e-commerce.
David: And the internet, yeah.
Dan: I think voice is the next frontier. Part of that is obviously artificial intelligence. But at the Starbucks annual meeting this week, they previewed you get into your Ford car and you order your latte from there and you pick it up on the way to work.
Ben: Yeah, awesome.
Dan: So I think you’re going to see voice on ramps adopted within e-commerce situations that are going to change the way in how we buy. And seems like such an exciting time to do that but you have to do it in a way that reinforces kind of the brand and the buying experience.
Ben: Dan, I think that’s super insightful. I think that’s totally right. And I think that, you know, I have the Starbucks app in my phone, I pull it out when I get to the register. I often don’t think it’s worth it to pull my phone out when my hands are cold in this Seattle weather and like punch in the order, But if there were, and I know this is a problem on Apple’s side, not Starbucks’ side, but if I could pull out Siri and say “three minutes almond milk latte, Starbucks 3rd and Madison” and it was just there, I think that’s when you break out of that uncanny valley and it actually slots right into your life in a convenient way.
David: Yeah. And I think it comes back to what we were talking about a minute ago of everything has to be in service of creating a superior customer experience. Part of a superior customer experience is not taking your phone out in your hand and pushing a button when it’s cold out.
Ben: Yup, yup. All right. On to grading the IPO. So the way that we do this – and Dan’s smiling, guests can participate or not but we’d love to get your commentary – is as we started with acquisitions, we would grade based on was that a good idea for the acquirer to acquire the acquiree. Like was that a gigantic money pit for them or did they actually manage to turn that into a one plus one equals three. Then as we shifted over to IPOs, the way that we think about it is what did that event enable that company to do on all three of the pillars that I mentioned earlier of notoriety and brand for the company, getting liquidity to those early investors and primarily, what do they do with that capital infusion. And I think before diving into it, it’s worth recapping a little bit. Dan, you made that great point that the DNA of the company and of Howard was growth and they needed to open more stores, they needed to go into more markets. And the question that’s been kind of hanging in the back of my head is, were they in a highly competitive landscape? Like did they need to rush into markets and beat out competitors because there were other sort of copycats coming in and starting these coffee chains that were getting brand loyal? Or could they have afforded to buy their time a little bit more and just reinvest their profits?
Dan: The Starbucks IPO even back then when you had a successful IPO in a particular sector, it drew a lot of copycats. So they went public in June of ’92. By the fall of ’92, there were a couple of companies that were rolling out different existing coffee chains. Gloria Jean’s and I forget the other ones. But many of them have gone by the wayside. But they were trying to put mass together and what they didn’t realize is that they really weren’t focused on execution. They were focused on creating something that was IPO-able but not exceeding customers’ expectations every day. But I would think that part of the reasons Starbucks is where it is today is that Howard was impatient and always wanted to grow and as a result of that, he got to markets quicker than he might otherwise and he... you talked about Peet’s. I haven’t seen the numbers for Starbucks, San Francisco but I would say that whether or not it’s Blue Bottle or Peet’s –
Ben: Or Philz.
Dan: Excuse me?
Ben: Or Philz.
Dan: Or Philz. The fact that they didn’t have the dominant position the way they have it in Seattle or LA enabled the smaller competitors to pop up. So I remember making my first investment in Starbucks was in that December 1991 round and you saw this cauldron of consumer passion in a market-by-market basis and you really ask yourself, “Is the east coast any different? Is Atlanta any different?” And if you came to the conclusion no, then it's okay, so –
Ben: Go, go, go.
David: Yeah, it’s interesting. As you were talking there, I was at first because you mentioned, you know, when a company would IPO back in those days, it would attract copycats and it reminded me of something Brad Stone said on our episode about the Uber and Didi merger that there are folks in China especially but over the world, they’re just reading Tech Crunch and as companies raise their first round of venture funding, they’re copying themselves. So funny how the acceleration has happened. But yeah, it also made me, you know, I think one of the dominant themes of the IPO and lessons from it and from Starbucks and Howard is, is that focus like you just said, Dan, on exceeding your customers’ expectations at every opportunity, and I just look at companies today that are doing that well versus ones who aren’t. And again, thinking back to the Uber-Didi episode and even since that episode, all the challenges that have come out about that company and not to pile on, Uber has done many amazing things but man, it’s really come out in the culture that like the culture there is not about delighting your customer and exceeding their expectations. I just think about the competitive bloodbath that we saw in that episode in China and that it was playing out all over the world, and how Starbucks was able to avoid that even as the copycats popped up by (A) growing fast but also (B) just keeping that core mission of always exceeding the customers’ expectations.
Dan: Yeah. Well, I think it starts by just a fundamental belief that at these 26,000 points of distribution, everything matters and you’ve got to provide training and you’ve got to invest in your people such that they feel good about themselves and therefore they feel good about the brand. I mean, they are the brand ambassadors and in many ways, I would argue that Starbucks is one of the most difficult daily execution. They have 90 million customers coming through their stores every week. Ninety.
David: Wow. Every week. Wow.
Dan: And they’re so visible that every opportunity to screw it up is an opportunity for social media to amplify that message and I kind of frequently talk to our Maveron companies about, relatively speaking, how easy their task is to exceed customer expectations. Because if you have your own distribution, then you just really need a customer service infrastructure that gets what you’re trying to do and what the brand says and speaks for. It’s just much easier and I think that's one of the masteries of Starbucks but I look at Apple as an example and I look at the Apple stores. I don’t know how you guys feel but I knew 15 years ago that Apple was on to something when my 70-year-old mother-in-law at the time told me how she’s making reservations at the Apple store and she just loves it and she’s learning. So, I think, you know, it’s not a surprise to see Amazon first with the bookstore and then eventually go because again, let’s take it full circle. Technology for itself is not the issue. Technology for serving customer needs, to me, becomes incredibly powerful and sticky and enduring.
David: Well said.
Ben: Completely agreed. So I will stop dancing around it and say that yes, very much well said. Obviously, I'm biased. I'm sitting in the room here with Dan but we’ve gone over this full analysis and I’m going to give this an A. I think for the branding event reason that enabled them to go into markets and really, like, that worked, right? Like when they spread to these new markets, they were suddenly national news and people understood it wasn’t this little coffee chain in Seattle and on the west coast. It was an IPO that people knew about and they had a pedigree and they could move to these new markets with that. And then also, then I'm splitting what they did with the capital into idea and execution. The idea of what to do with it, to continue this frenzy of opening new stores the right way in new markets and moving in was both the right thing to do with that capital and really well executed. I mean, when you look at that, well, you hear your stories, Dan, of 59 out of 60 said yes and pricing it at $17, not $16, and still getting that little pot. Not a ridiculous one but a good one. I was just pulling up the history of the stock price like there was no... I'm just looking at these first few years because I think that’s a relevant part. There was no “oh crap” moment. There was no... the bottom didn’t seem to have fallen out. It was like it went to the public markets with a true-to-the-company value and continued to grow from there as the company’s value grew.
David: Masterfully executed by the investment bankers.
Dan: I agree 100% on the IPO analysis. I would say that but when you say there was no “oh crap” moment, there’s plenty of times in the history of all these businesses where there are “oh crap” moments. I think that's another thing that we try to help entrepreneurs with which is there’s plenty of dark days in every business. I’ve spent too much time with Howard where people are saying, “How did you know when you were successful?” He kind of is taken aback over it and he kind of says, “What are you talking about? I have to earn it every day. We have to earn it every day.” I think there is, you know, life’s a process, right? It’s not a destination, it’s a journey. I think these businesses are tested in different... I can give you a bunch of examples where Starbucks was truly tested. It’s sitting on the top of the hill now and everyone kind of thinks, “Uh...”, you know, it’s been a...
Ben: They’ve made it.
Dan: Yeah. But in terms of the IPO, I agree with your assessment.
David: Yeah. Look, I'm an A too here and not just because we’re talking to Dan. As a side, I do think it’s... ooh, like the Facebook IPO was a very challenging one and we gave that a – well, we gave it two grades, one of which was an A and one of which was I think a C where we both... But anyway, we need to do a bad IPO one of these days soon.
Ben: Plenty of those.
David: It’s hard to argue with an 18,000 percent appreciation since the Starbucks IPO. But for me, the two things, like taking away from this conversation and Dan, your stories and your insights that I thought about a lot but it’s the combination of the two I think are so powerful and expressed so beautifully within Starbucks and within Howard, it’s that Starbucks and Howard had these two equal drives within them and that one was for growth. Then the other one was for exceeding customer’s expectations every single time. I think it's the marriage of those two things that make for the most powerful consumer companies out there. I mean, I think about ones that I work with that Dan, we worked with together with your colleague David in Booster, an early stage company that Madrona and Maveron are investors in together and that’s what Frank, and Diego, and Tyler, and the team, and John, and everybody there, that's what they do every day. They’re hyper focused on growth and they are hyper focused on exceeding customer expectations every day. And if you can nail that and sustain that, like that’s how magical companies are created.
Dan: That's in the DNA of the CEO or it isn’t. I remember the early days of my relationships with Starbucks and as a scrappy investment banker, one of the many things that I tried to do was always give store experiences. I was hated within Starbucks because my phone calls at the beginning and then my emails were routed through the ops department and, you know, in Westport, Connecticut at 9 PM or 9 AM, there was a problem and people would go crazy because I would tell Howard and then Howard would tell the head of ops and then the head of ops would tell the regional person and the district person and the store manager would eventually get it. People would be, “Oh, you’re Dan?”
Ben: We’ve heard about you.
Dan: We’ve heard about your feedback. And they would say thank you. Then I contrast it to what happened on Sunday morning and here’s a company, as you said $80 billion plus, I was waiting on Sunday morning for my coffee at the Starbucks Madison Park and I was stuck behind two large mobile orders physically and so I was waiting for a super long time. And I shot Kevin a note.
David: Kevin is the incoming CEO of Starbucks.
Dan: Yeah. Kevin Johnson. And I said, and I kind of framed the problem up and the frustration. I thought that was the end of it. I go to the Starbucks annual meeting and the head of US stores, Adam Brotman, a digital person and one other person, all said to me, “We saw your email for Kevin. Thanks for the insight.” And it’s that one customer, one cup at a time. And that's in the Starbucks vision statement or their mission statement, kind of their... I wish I had it memorized but they’re going to exceed customer’s expectations one cup, one store, one neighborhood at a time.
Dan: So there’s this incredible balance between detailed execution and yet having a big vision that their employees first and then their customers can agree.
Ben: After the show, why don’t you just shoot me Kevin’s email and then I’ll be able to...
David: I’m sure our listeners would appreciate that too.
Ben: Yeah. That's a great story.
David: What a great story to wrap on. Should we move on to carve outs?
Ben: Yeah, let’s do it. So mine is a lot of the time we’ll go philosophically about some cool burning man video that we saw or some completely unrelated book that we read. Mine is something that I think every single Acquired listener will enjoy, and that is an email newsletter called Pro Rata by Dan Primack from the new company Axios. So Dan wrote the term sheet for a long time at Fortune and moved on to help start this company, Pro Rata, which is this third wave of email newsletters. There’s some really great content in that.
David: It’s on the waves.
Ben: There’s also a website, but I mean the newsletters are where it’s at. And Pro Rata in particular is great because you get some really good insight by Dan who is a true journalist. Not to knock too hard on a lot of like tech bloggers, but he has the journalistic integrity you would expect out of a Pulitzer Prize winning, someone chasing the story from 50 years ago. And I think really a pleasure to read that. Then the cool thing is you get a list of all of the companies that have gotten funded today in VC, in PE, companies that have gone public. And it really helps me, someone that works to create early-stage companies identify trends. So it’s pretty interesting to see what’s going on in the world of new company creation.
David: Yeah. Really good. Dan’s work is and has been excellent for a long time. My carve out probably also will appeal to I was going to say all Acquired listeners, but perhaps not quite all, at least those of a certain generation, is a super fun podcast and also fun thinking back to the time of the Starbucks IPO that I’ve discovered recently called The Wizard and the Bruiser which is a nostalgic take. Definitely not safe for work, by the way, so not like this podcast. Looking at geek culture from the ‘80s and it just takes me back to my childhood, like The Legend of Zelda, Sonic the Hedgehog, all the cartoon TV shows. Super, super fun stuff and these guys are hilarious, so I highly recommend.
Dan: This is my first carve out and I was trying to decide whether or not I should be self-aggrandizing for one of the Maveron companies that I love or not, and I’ve decided to stay away from the Maveron companies.
David: Well, we can be self-aggrandizing or we can be aggrandizing for you. So many of the companies they funded deliver the same kind of growth and superior customer experiences that we’ve talked about on this show.
Dan: Well, thank you David. I hope they deliver the same kind of growth.
David: That's your job as a board member.
Dan: Exactly. Well, it’s the management’s job, but anyhow, I’m going to do something that I wish when I was in my 20s and 30s someone had said to me. Because when in your 20s and 30s, the table is not set yet. You’re still trying to figure out what your table is and how to set it. There’s actually a poem that was written in 1932 by a man named Peter Wimbrow and the name of the poem is called The Man in the Glass. I will quickly read the poem because in my mind, it says it all:
When you get what you want in your struggle for self
And the world makes you king for a day
Just go to the mirror and look at yourself
And see what that man has to say.
For it isn’t your father, or mother, or wife
Whose judgment upon you must pass
The fellow whose verdict counts most in your life
Is the one staring back from the glass.
He’s the fellow to please – never mind all the rest
For he’s with you, clear to the end
And you’ve passed your most difficult, dangerous test
If the man in the glass is your friend.
You may fool the whole world down the pathway of years
And get pats on the back as you pass
But your final reward will be heartache and tears
If you’ve cheated the man in the glass.
David: That's great.
Ben: Dan –
Dan: Sexist. “Man.” You know, it’s 90 years ago. So it’s really relevant for people not males.
Ben: Yeah. And I can say for listeners, one of the first times I met Dan, we were having a little email exchange afterwards and he sent me that same poem, so I know it’s near and dear to your heart. And great message.
Dan: Thank you for having me, guys.
Ben: Thanks for coming.
Dan: It's exciting, your format and what you’re trying to do and help educate people. And thank you for having me be a part of it.
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We finally did it. After five years and over 100 episodes, we decided to formalize the answer to Acquired’s most frequently asked question: “what are the best acquisitions of all time?” Here it is: The Acquired Top Ten.
Note: we ranked the list by our estimate of absolute dollar return to the acquirer. We could have used ROI multiple or annualized return, but we decided the ultimate yardstick of success should be the absolute dollar amount added to the parent company’s enterprise value. Afterall, you can’t eat IRR! For more on our methodology, please see the notes at the end of this post. And for all our trademark Acquired editorial and discussion tune in to the full episode above!
Purchase Price: $4.2 billion, 2009
Estimated Current Contribution to Market Cap: $20.5 billion
Absolute Dollar Return: $16.3 billion
Back in 2009, Marvel Studios was recently formed, most of its movie rights were leased out, and the prevailing wisdom was that Marvel was just some old comic book IP company that only nerds cared about. Since then, Marvel Cinematic Universe films have grossed $22.5b in total box office receipts (including the single biggest movie of all-time), for an average of $2.2b annually. Disney earns about two dollars in parks and merchandise revenue for every one dollar earned from films (discussed on our Disney, Plus episode). Therefore we estimate Marvel generates about $6.75b in annual revenue for Disney, or nearly 10% of all the company’s revenue. Not bad for a set of nerdy comic book franchises…
Total Purchase Price: $70 million (estimated), 2004
Estimated Current Contribution to Market Cap: $16.9 billion
Absolute Dollar Return: $16.8 billion
Morgan Stanley estimated that Google Maps generated $2.95b in revenue in 2019. Although that’s small compared to Google’s overall revenue of $160b+, it still accounts for over $16b in market cap by our calculations. Ironically the majority of Maps’ usage (and presumably revenue) comes from mobile, which grew out of by far the smallest of the 3 acquisitions, ZipDash. Tiny yet mighty!
Total Purchase Price: $188 million (by ABC), 1984
Estimated Current Contribution to Market Cap: $31.2 billion
Absolute Dollar Return: $31.0 billion
ABC’s 1984 acquisition of ESPN is heavyweight champion and still undisputed G.O.A.T. of media acquisitions.With an estimated $10.3B in 2018 revenue, ESPN’s value has compounded annually within ABC/Disney at >15% for an astounding THIRTY-FIVE YEARS. Single-handedly responsible for one of the greatest business model innovations in history with the advent of cable carriage fees, ESPN proves Albert Einstein’s famous statement that “Compound interest is the eighth wonder of the world.”
Total Purchase Price: $1.5 billion, 2002
Value Realized at Spinoff: $47.1 billion
Absolute Dollar Return: $45.6 billion
Who would have thought facilitating payments for Beanie Baby trades could be so lucrative? The only acquisition on our list whose value we can precisely measure, eBay spun off PayPal into a stand-alone public company in July 2015. Its value at the time? A cool 31x what eBay paid in 2002.
Total Purchase Price: $135 million, 2005
Estimated Current Contribution to Market Cap: $49.9 billion
Absolute Dollar Return: $49.8 billion
Remember the Priceline Negotiator? Boy did he get himself a screaming deal on this one. This purchase might have ranked even higher if Booking Holdings’ stock (Priceline even renamed the whole company after this acquisition!) weren’t down ~20% due to COVID-19 fears when we did the analysis. We also took a conservative approach, using only the (massive) $10.8b in annual revenue from the company’s “Agency Revenues” segment as Booking.com’s contribution — there is likely more revenue in other segments that’s also attributable to Booking.com, though we can’t be sure how much.
Total Purchase Price: $429 million, 1997
Estimated Current Contribution to Market Cap: $63.0 billion
Absolute Dollar Return: $62.6 billion
How do you put a value on Steve Jobs? Turns out we didn’t have to! NeXTSTEP, NeXT’s operating system, underpins all of Apple’s modern operating systems today: MacOS, iOS, WatchOS, and beyond. Literally every dollar of Apple’s $260b in annual revenue comes from NeXT roots, and from Steve wiping the product slate clean upon his return. With the acquisition being necessary but not sufficient to create Apple’s $1.4 trillion market cap today, we conservatively attributed 5% of Apple to this purchase.
Total Purchase Price: $50 million, 2005
Estimated Current Contribution to Market Cap: $72 billion
Absolute Dollar Return: $72 billion
Speaking of operating system acquisitions, NeXT was great, but on a pure value basis Android beats it. We took Google Play Store revenues (where Google’s 30% cut is worth about $7.7b) and added the dollar amount we estimate Google saves in Traffic Acquisition Costs by owning default search on Android ($4.8b), to reach an estimated annual revenue contribution to Google of $12.5b from the diminutive robot OS. Android also takes the award for largest ROI multiple: >1400x. Yep, you can’t eat IRR, but that’s a figure VCs only dream of.
Total Purchase Price: $1.65 billion, 2006
Estimated Current Contribution to Market Cap: $86.2 billion
Absolute Dollar Return: $84.5 billion
We admit it, we screwed up on our first episode covering YouTube: there’s no way this deal was a “C”. With Google recently reporting YouTube revenues for the first time ($15b — almost 10% of Google’s revenue!), it’s clear this acquisition was a juggernaut. It’s past-time for an Acquired revisit.
That said, while YouTube as the world’s second-highest-traffic search engine (second-only to their parent company!) grosses $15b, much of that revenue (over 50%?) gets paid out to creators, and YouTube’s hosting and bandwidth costs are significant. But we’ll leave the debate over the division’s profitability to the podcast.
Total Purchase Price: $3.1 billion, 2007
Estimated Current Contribution to Market Cap: $126.4 billion
Absolute Dollar Return: $123.3 billion
A dark horse rides into second place! The only acquisition on this list not-yet covered on Acquired (to be remedied very soon), this deal was far, far more important than most people realize. Effectively extending Google’s advertising reach from just its own properties to the entire internet, DoubleClick and its associated products generated over $20b in revenue within Google last year. Given what we now know about the nature of competition in internet advertising services, it’s unlikely governments and antitrust authorities would allow another deal like this again, much like #1 on our list...
Purchase Price: $1 billion, 2012
Estimated Current Contribution to Market Cap: $153 billion
Absolute Dollar Return: $152 billion
When it comes to G.O.A.T. status, if ESPN is M&A’s Lebron, Insta is its MJ. No offense to ESPN/Lebron, but we’ll probably never see another acquisition that’s so unquestionably dominant across every dimension of the M&A game as Facebook’s 2012 purchase of Instagram. Reported by Bloomberg to be doing $20B of revenue annually now within Facebook (up from ~$0 just eight years ago), Instagram takes the Acquired crown by a mile. And unlike YouTube, Facebook keeps nearly all of that $20b for itself! At risk of stretching the MJ analogy too far, given the circumstances at the time of the deal — Facebook’s “missing” of mobile and existential questions surrounding its ill-fated IPO — buying Instagram was Facebook’s equivalent of Jordan’s Game 6. Whether this deal was ultimately good or bad for the world at-large is another question, but there’s no doubt Instagram goes down in history as the greatest acquisition of all-time.
Methodology and Notes:
Transcript: (disclaimer: may contain unintentionally confusing, inaccurate and/or amusing transcription errors)
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