Episode 34 The Starbucks IPO with Dan Levitan

In episode 34 of Acquired, hosts Ben Gilbert and David Rosenthal, joined by Dan Levitan, co-founder of Maveron, delve into the legendary IPO of Starbucks. They explore the company's journey from a non-tech entity in tech-centric Seattle to a global coffee empire. The discussion highlights Starbucks' early days, its commitment to employee welfare through benefits like health insurance and stock options, and how it leveraged technology to foster customer loyalty and streamline operations. They also touch on the company's strategic growth, Howard Schultz's influential leadership, and the pivotal role of the 1992 IPO in catapulting Starbucks to its market-dominating position, allowing it to raise crucial capital and gain visibility. The episode underscores the importance of prioritizing customer experience and the transformative impact of integrating technology into consumer companies.

• Ben Gilbert and David Rosenthal introduce the episode and their guest, Dan Levitan.
• Episode 34 of Acquired focuses on the Starbucks IPO.
• Dan Levitan and Ben Gilbert are both in Seattle, sipping on Starbucks drinks.
• Dan prefers decaf Americano for the taste without the need for caffeine.

"I'm drinking a tall decaf Americano, the why bother drink."

Dan Levitan enjoys the flavor of coffee without the need for the stimulating effects of caffeine.

• Acquired has a Slack community with over 500 people discussing tech topics.
• Pilot, a startup-focused accounting firm, is sponsoring the episode.
• Pilot provides accounting, tax, and CFO services to startups and growth companies.
• Pilot's philosophy aligns with Jeff Bezos's axiom of focusing on core business and outsourcing the rest.

"Every company needs it. It needs to be done by a professional. You don't want to take any risk of anything going wrong. But at the same time, it has zero impact on your product or customers, things you do uniquely well."

Accounting is essential for all companies but does not directly affect the product or customer experience, making it a prime candidate for outsourcing.

• Starbucks was founded in 1971 by Jerry Baldwin, Zev Siegel, and Gordon Bauker.
• They were inspired by Alfred Pete of Pete's Coffee and initially sold roasted beans, not brewed coffee.
• Howard Schultz joined Starbucks in 1982, influenced by Italian coffee bars during a trip to Milan.
• Schultz left Starbucks in 1985 to start Il Giornale, focusing on the cafe experience.
• In 1987, Schultz bought the Starbucks retail locations and merged them with Il Giornale, creating the Starbucks Coffee Company.

"So he operates this company for a couple of years, grows it in Seattle, has a fair amount of success. And then in 1987, two years later, he approaches the Starbucks founders again."

Howard Schultz's vision of creating a cafe culture led to the growth of Il Giornale and the eventual merger with Starbucks retail locations.

• Starbucks saw rapid growth, with revenue increasing from $1.2 million in 1987 to $10.2 million in 1988.
• Howard Schultz focused on building an infrastructure for store development and fostering consumer passion.
• Starbucks raised significant equity before going public to fund new store growth.
• Employee benefits were a priority, including health insurance, stock options, and educational opportunities.
• The company faced challenges but demonstrated resilience and tenacity.

"I would say, was very different than Bezos at the start. One of Howard's key constituency was his employees, and that came from Howard's background with his dad and the fact that his dad didn't have health insurance."

Howard Schultz's personal experiences influenced his commitment to providing benefits to Starbucks employees, which helped build a loyal and passionate workforce.

• Dan Levitan met Howard Schultz in 1991, initially skeptical about the growth potential of a coffee company.
• After visiting Seattle, Levitan was impressed by the "cauldron of consumer passion" for Starbucks.
• Schultz raised money from Seattle's angel community to fund the growth of Starbucks.
• Starbucks required substantial equity investment to grow its retail footprint before becoming cash-flow positive post-IPO.

"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."

Dan Levitan's visit to Seattle and his encounter with Starbucks and Howard Schultz led to a partnership that would play a significant role in the company's IPO and future growth.

• Dan Levitan recalls his first visit to Seattle and the strong presence of Starbucks.
• Upon arriving, both a taxi driver and a hotel clerk recommended Starbucks for coffee.
• Levitan made it a principle to visit the stores of companies he was considering for investment.

"And he said, oh, there's a ton of coffee in this town. And probably versus today, there's one 20th of the number of coffee stores."

This quote highlights the abundance of coffee shops in Seattle even at a time when there were significantly fewer than today, emphasizing Starbucks' prominence.

"So they sent me to the kiosk in city center. That's still there over on Fifth Avenue."

Levitan was directed to a Starbucks kiosk due to the lack of a store near his hotel, indicating Starbucks' early stages of expansion.

• Howard Schultz's passion for Starbucks was evident during Levitan's meeting with him.
• Schultz's focus was on the business model, his employees, and customers.
• Levitan was impressed by Schultz's prioritization of people and customers over shareholders.

"But I was an investment banker, and investment bankers have to sell. And if I couldn't talk, I couldn't sell."

Despite being an investment banker, Levitan was captivated by Schultz's passion, which dominated the conversation.

"He kind of talked about his customers, and he talked about his people in an incredibly compelling way."

Schultz's discussion about his customers and employees struck Levitan as unique and compelling, highlighting a business philosophy that puts people first.

• Howard Schultz challenged Levitan on the nature of investment banking.
• Schultz used the term "mensch" to describe a quality he found lacking in investment bankers.
• Levitan was given a chance to prove himself despite Schultz's skepticism.

"Do you know what the problem with investment bankers are? There are no mensches in investment banking."

Schultz's statement to Levitan reflects his perception of a lack of integrity or humanity ("mensch") within the investment banking industry.

"Well, so he was implying that he hadn't met one as an investment banker and that I had the opportunity."

Schultz was not convinced of Levitan's mensch-like qualities but was willing to give him the opportunity to demonstrate them.

• Starbucks' IPO process was described as a "beauty contest" among investment banks.
• Investment banks were evaluated on various criteria, including chemistry with the company and industry expertise.
• The selection process involved a detailed checklist and observation of interest in the company's operations.

"By that, over a two day period, the company invited six investment banks in to, quote, pitch why they should be part of the IPO."

The "beauty contest" was a two-day event where investment banks pitched their case for being part of Starbucks' IPO.

"And it was an hour and a half presentation. And it was a committee of Howard, the CFO at the time, Oren Smith, and two directors."

The decision-making process for the IPO involved presentations to a committee including Howard Schultz and other key figures at Starbucks.

• Starbucks' business model relied heavily on customer loyalty and repeat visits.
• Howard Schultz's understanding of customer loyalty was compared to other successful founders like Jeff Bezos and Steve Jobs.
• The company's S-1 filing highlighted the importance of creating a place where customers would return frequently.

"And I remember the research at the time of the IPO was that the average engaged Starbucks customer came 18 times a month."

This statistic illustrates the high level of customer engagement and loyalty Starbucks enjoyed at the time of the IPO.

"But creating this place and this experience where people are going to come back again and again, that's what enables the business to work."

The quote emphasizes the importance of creating a customer experience that encourages repeat visits, which is fundamental to Starbucks' success.

• Starbucks' competitive advantage was attributed to Howard Schultz's leadership and the company's relationship with its employees.
• The psychological contract between Starbucks and its employees was seen as a key differentiator.
• Starbucks' scale and visibility were also factors that contributed to its success.

"The real differentiation and how they have withstood the competition is because of the commitment of the people which then made Starbucks become in customers mind something bigger than just buying a cup of coffee."

Levitan suggests that Starbucks' commitment to its employees and customers has created a brand that represents more than just coffee, giving it a competitive edge.

"And in the annual meeting this week, they talked a little about using their platform and their scale for good."

Starbucks' focus on using its scale for positive impact is part of its brand identity and competitive moat according to Levitan.

• The pricing of Starbucks' IPO was a contentious issue, with Howard Schultz insisting on a higher price than the capital markets advisors recommended.
• Pricing an IPO involves balancing the interests of the company, investors, and the perception of the stock post-IPO.
• Schultz's insistence on a higher price reflected his confidence in the company's value.

"Howard relentlessly prevailed, and we priced the deal at 17, and ultimately the stock traded to 2021 that day."

Schultz's determination to price the IPO at $17 per share, against the capital markets advisors' recommendation, paid off as the stock traded higher on the day of the IPO.

"Don't let yourself or your people be judged by whether or not the stock today goes up or down."

Levitan advises against using short-term stock performance as a measure of success, emphasizing the importance of long-term company building.

• Statsig is a feature management and experimentation platform.
• It allows product teams to ship features faster, automate A/B testing, and measure the impact on core business metrics.
• Statsig provides visualizations backed by a powerful statistics engine for real-time product observability.
• The tool connects new features to business metrics, allowing instant knowledge of their impact on customer usage.

"So now Statsig is the modern version of that promise and available to all companies building great products."

This quote explains that Statsig is a contemporary tool based on the principles used by successful companies like Facebook, now accessible to a broader range of businesses.

"Statsig lets you make actual data-driven decisions about product changes, test them with different user groups around the world, and get statistically accurate reporting on the impact."

This quote highlights the core functionality of Statsig, emphasizing its data-driven approach and global testing capabilities for product development.

"Customers include Notion, Brex, OpenAI, Flipkart, Figma, Microsoft and Cruise automation."

This quote lists some of the high-profile customers of Statsig, indicating the platform's wide adoption and credibility.

"Also, Statsig is a great platform for rolling out and testing AI product features."

This quote points out Statsig's utility in managing and testing AI product features, showing its versatility and relevance in the current tech landscape.

• Starbucks has evolved from a coffee company to integrating technology into its business model.
• Social media has been instrumental in driving traffic to stores and impacting same-store sales.
• Starbucks' use of technology has transitioned from a business management tool to a customer attraction strategy.
• Their mobile app and loyalty program exemplify the successful integration of technology to enhance customer experience.

"It's changed a lot... and 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 customers."

Dan Levitan provides a historical perspective on how retail companies like Starbucks initially viewed technology as a management tool rather than a means to attract customers.

"I think it's interesting, though... Howard, was for a while on the square board."

David Rosenthal notes the influence of Howard Schultz's involvement with technology companies like eBay and Square on Starbucks' technological evolution.

"Well, there was a guy named Chris Brusso... he kind of relentlessly kept on it."

Dan Levitan credits Chris Brusso for pioneering the use of social media at Starbucks, which became a significant driver of in-store traffic.

"They've had a lot of experiments with other technology company partnerships... They were one of the first to pioneer putting those gift cards in the app."

Ben Gilbert discusses Starbucks' history of technology partnerships and innovations, particularly their early adoption of digital gift cards in their app.

• Starbucks' aggressive growth strategy was critical to its market dominance.
• The company's expansion involved acquiring competitors and establishing a strong presence in new markets.
• Starbucks' need for capital to fuel its growth led to its IPO, as private market options were limited at the time.

"What if they had grown more slowly? They probably wouldn't have the domination that they have."

Dan Levitan argues that Starbucks' rapid growth was essential for its market dominance and that a slower growth rate could have jeopardized its success.

"Starbucks did a $20 million raise in December of 91, and that was a big raise."

Dan Levitan reflects on the scale of Starbucks' fundraising efforts in the early '90s, indicating the limited options for raising capital in private markets during that era.

• The transition from technology as a cost center to a revenue driver has transformed business models.
• Starbucks' success is partly due to its ability to use technology to enhance the customer experience.
• The integration of voice technology and AI is the next frontier for consumer companies.

"I think that'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."

Ben Gilbert identifies a significant trend where technology has shifted from being seen as a cost to becoming an integral part of product innovation and revenue generation.

"I feel like maybe we can mark the official transition into tech themes on the show... technology is it has to be in service of a superior customer experience."

David Rosenthal emphasizes that technology should always aim to improve the customer experience rather than being used for its own sake.

"Well, I guess where I would go is we've been spending a lot of time at Mavron thinking about voice and how voice facilitates impulse."

Dan Levitan shares insights on the potential of voice technology to revolutionize the consumer experience, especially in e-commerce.

• There is a parallel between the evolution of the coffee industry and the tech industry.
• The "waves" of coffee culture can be likened to the different eras of internet and technology development.
• Each wave represents a shift in consumer experience and market transformation.

"I think it's so cool that in the coffee industry there's this concept of waves... the first wave being AOL, right?"

David Rosenthal draws an analogy between the waves of coffee culture and the stages of the tech industry's evolution, with AOL representing the first wave of the internet.

"So would you summarize that as first wave being one size fits all but bad, second wave being one size fits all but good with your friends?"

Ben Gilbert summarizes the analogy by characterizing the different waves of coffee and tech as progressing from a generic experience to a personalized and social one.

• The grading system for IPOs is based on what the event enabled the company to do.
• The focus is on the impact of the IPO on notoriety and brand, liquidity for early investors, and the use of capital infusion.
• Starbucks needed growth and to open more stores in more markets.
• The competitive landscape and timing of market entry are considerations.
• The IPO attracted copycats in the sector, but Starbucks focused on execution and customer expectations.

"The Starbucks IPO, even back then, when you had a successful IPo in a particular sector, it drew a lot of copycatters."

This quote emphasizes that the Starbucks IPO was a catalyst for competitors to enter the market, highlighting the importance of execution over merely capitalizing on IPO trends.

• Starbucks faced a competitive landscape with copycats trying to roll up coffee chains.
• Starbucks' growth strategy was driven by Howard's impatience and desire for expansion.
• The company's focus on execution and customer experience differentiated it from competitors.
• The IPO allowed Starbucks to grow quickly and enter new markets before competitors could establish a dominant position.

"But I would think that part of the reason Starbucks is where it is today is that Howard was impatient and always wanted to grow."

This quote reflects Howard's growth mindset and its influence on Starbucks' rapid expansion, which was crucial for outpacing competitors.

• Starbucks' success is attributed to its focus on exceeding customer expectations.
• The company invests in employee training and sees its staff as brand ambassadors.
• Starbucks' high visibility and customer traffic present challenges and opportunities for maintaining a positive brand image.
• Other companies, like Apple, are also highlighted for their focus on customer service and experience.

"And they're so visible that every opportunity to screw it up is an opportunity for social media to amplify that message."

This quote underscores the importance of consistent, high-quality customer service, especially for a highly visible brand like Starbucks, where any misstep can be quickly publicized.

• The Starbucks IPO is graded based on branding, market expansion, and capital utilization.
• The IPO enabled Starbucks to become a national brand and enter new markets effectively.
• The capital from the IPO was used to open new stores and expand, which was well executed.
• Despite challenges, Starbucks maintained its growth and customer service focus.

"I'm going to give this an a. I think for the branding event reason, it enabled them to go into markets."

This quote reflects the speaker's positive assessment of the Starbucks IPO, highlighting the company's successful use of the IPO for branding and expansion.

• Entrepreneurs are reminded that all businesses face dark days and challenges.
• Starbucks' history includes moments of crisis, but the company's daily commitment to excellence has been key to its success.
• The journey and process of building a business are emphasized over the destination.
• The company's ability to respond to customer feedback and maintain its mission is critical.

"I have to earn it every day. We have to earn it every day."

This quote from Howard conveys the continual effort required to maintain success and the importance of resilience in entrepreneurship.

• The combination of growth and exceeding customer expectations is powerful for consumer companies.
• Starbucks and its CEO Howard Schultz exemplify this balance.
• The focus on customer experience is ingrained in Starbucks' DNA and is reflected in its daily operations.

"It's that Starbucks and Howard had these two equal drives within them and that one was for growth and the other one was for exceeding customers expectations every single time."

This quote highlights the dual priorities that have driven Starbucks' success: aggressive growth and unwavering commitment to customer satisfaction.

• The discussion concludes with personal reflections and advice for listeners.
• A poem, "The Man in the Glass," is shared to emphasize self-integrity and the importance of self-evaluation.
• The speakers share their own "carve outs," or personal recommendations, on various topics.

"But your final reward will be heartache and tears if you've cheated the man in the glass."

This quote from the poem shared by Speaker C serves as a metaphor for personal integrity and the importance of being true to oneself in the pursuit of success.