How To...Find a Hit as Big as Starbucks
By Jeremy B. Dann; Howard Schultz; Debra Somberg; Dan Levitan

(Business 2.0) – Want to know the secret to Starbucks's retail success? It's not the coffee. According to Howard Schultz, the key is this: The customers always come second--the employees matter more. It's certainly not conventional wisdom, yet Schultz insists that happy employees unleash their enthusiasm. And that's infectious.

Can his recipe for success be replicated? Schultz thinks so, and so do Dan Levitan, the former Schroder Wertheim investment banker who took the coffee vendor public, and Debra Somberg, a founding partner of Thomas Weisel Partners. In fact, that's the premise behind Maveron, the Seattle-based venture capital firm they built six years ago with a kitty of $75 million. It now has $400 million under management and has invested in some 26 companies.

Maveron discovered eBay's enthusiastic employees and customers. It has since found similar types at Motley Fool, a financial website; Good Technology, a maker of software for wireless devices; and Lucy Activewear, a women's apparel store. We talked with the trio to learn what else Maveron looks for in, as Schultz puts it, companies "whose dots aren't connected in a traditional way." -- Interview by Jeremy B. Dann

SCHULTZ: We recognized early on that the equity of the Starbucks brand was going to be the retail experience that the customers had in our stores. There wasn't money for traditional advertising--and even if we'd had it, I don't think it would have been effective. So the investment we made was in creating a unique relationship with our people and getting them to understand that if the battle cry of the company was "to exceed the expectations of our customers," then as managers we had to first exceed the expectations of our people.

We provided comprehensive health care as well as equity in the form of stock options to all employees. For the first time in America's history, not only did part-time workers have a stake in the financial outcome of the company, but they had the kind of health-care programs that gave them the sense of security and a psychological contract with the company that the company was not going to leave its people behind.

LEVITAN: Working with the company on its initial public offering really showed me the difference between Starbucks's approach and that of other food service providers. When I met Howard, it was the first time I had ever called on a food service company where there was a real emphasis on what the company stood for and its core values. Shockingly, most food service executives are really focused on keeping wages very low so labor costs can be controlled. Howard had a completely different approach to that. He made it very clear that his hierarchy of importance was employees first, customers second, and shareholders third. And the values underlying those principles totally differentiated Starbucks from any other food service company.

SOMBERG: I can't think of one of our portfolio companies that isn't absolutely maniacal about their interactions with customers.

LEVITAN: Clearly, we do both financial and technical due diligence. But we also try to get underneath the numbers and listen to how people talk about the company and understand why it matters to them. We invested in a Chicago company called Potbelly Sandwich Works, which has many of the same characteristics that Starbucks had in the early days. There is this intensity and passion among people that it is their Potbelly.

SCHULTZ: Once you get under the hood of the firms that interest us, there's that common thread to how the company communicates to the marketplace with honesty and integrity and how the company treats its people.

LEVITAN: We may ask to speak with ex-employees before making an investment. We want to get as intimate an understanding as possible of how the place works behind closed doors, how they treat each other and employees, and how they act under pressure.

SCHULTZ: We also think about how consumers distrust corporations as much as they mistrust conventional advertising and product-positioning statements. It's not just the perceived product parity in the marketplace and that product life cycles are collapsing, or that the world is over-retailed with too many stores for too few customers. It's that too many products look and feel the same.

I love these stories where you've got some very big, entrenched companies and then along comes something completely under the radar that captures the imagination of the marketplace and the customer. Cranium [a Seattle board-game creator] has done that in a very unique way.

LEVITAN: We made our decision to invest because Cranium demonstrated a differentiation that was replicable and sustainable. It played to the need people have for quality interactions--"community cocooning." They've won "game of the year" for three years consecutively, first with Cranium, then Cadoo, and next Hullaballoo. They have an intense focus on learning the needs of "nurturing moms," the women who control the entertainment dollars for their families.

SOMBERG: We think people love to be marketed to. We have opportunities with new technologies to provide information and services to potential buyers at just the right time. We're completing an investment in a company called Allconnect. When individuals or families move, it's a time when they're spending a lot of money, and also a very stressful time. So when someone makes the call to turn on the electricity, Allconnect offers them a way to start up the cable, telephone, ChemLawn, Terminix, and other services without a hassle. At a time when there's such an overwhelming demand for things like the National Do Not Call Registry, it's a real competitive advantage when a customer welcomes a special offer from a firm.

LEVITAN: Retailers will also find points of differentiation by engaging with customers in areas other than just the products they carry. I'm a big fan of the American Girl Place [Mattel's retail and entertainment centers in New York and Chicago]. It engages girls 3 to 12 with their love of dolls, but also provides a great way for parents to share the experience with them--holding tea parties and the like at the store--ultimately strengthening their relationships. It's such a compelling merchandising and entertainment environment.

SCHULTZ: I think it would be arrogant for me to say Starbucks has cracked the code on how every company in America should market or build its brand, but what I am saying is that traditional marketing and traditional brand building have become obsolete.