A peek inside a VC’s thought process

A peek inside a VC’s thought process

By Adam Lashinsky, Sr. Editor at Large February 6, 2014: 7:04 AM ET

Maveron’s Dan Levitan, in his own words, on how he met Trupanion CEO Darryl Rawlings and decided to invest in his company.

FORTUNE — Maveron is a U.S. venture capital firm based in Seattle and San Francisco that was co-founded in 1998 by Starbucks CEO Howard Schultz and investment banker Dan Levitan. The firm focuses exclusively on consumer businesses, and has made a name for itself with successful investments in the billion-dollar companies eBay (EBAY), Capella University (CPLA), Groupon (GRPN), and Zulily (ZU). (Another, the fast food chain Potbelly [PBPB], is more than halfway to the billion-dollar-valuation mark.)

In a recent interview, Levitan explained how he came to invest in Trupanion, a Seattle-based startup company that offers health insurance for pet animals. It’s a fascinating look at the investment process for a venture capital firm. Below, Levitan in his own words, as told to Fortune senior editor-at-large Adam Lashinsky.


Some of the best ideas that we’ve invested in have made no sense to conventional sources. A lot of people have been talking about Potbelly and Zulily lately. We have a business that we’re quite excited about called Trupanion. It’s in pet health insurance.

Trupanion is health insurance for dogs and cats. It’s astounding to me that Americans spend approximately $55 billion on their pets every year. And every year I’m reminded when I see the holiday cards with people’s pets how much of a change that’s become in the world we live in.

In the mid-2000s we were looking for scalable, compelling ideas within the pet segment because all this money had been allocated to it. And everyone invested in organic food and this and that. And we kind of couldn’t find in our mind venture returns in those kinds of investments. Well, one day, I get a call from a friend, and he says, “You need to meet this guy. He has this pet health insurance company.”

And I thought it was interesting. As you peel away the onion, you see that veterinary medicine is growing over the past 25 years at twice the rate of the GDP. The operations and care that they can give these dogs and cats has narrowed between what they used to do and human beings. And now it’s kind of gotten closer to how they treat humans. So there are a lot of secular trends that were really interesting in insurance. In fact, as we looked into it, 25% of the pets were insured in the U.K., and 1% of the pets in America were insured. It just seemed like such a dichotomy. So in walks this guy from Bowen Island, outside of Vancouver, and he says, “I want to have the best pet health insurance company in the world.”

I spent a year getting to know him and working on it because my partners kind of reminded me that I didn’t know anything about insurance, and we ended up getting Renaissance Reinsurance to invest with us.

But my point in all this is, I asked around a bunch of veterinarians about that time, and in fact, one of the investors in our fund was married to a veterinarian. And there had been some early attempts at this business, and they weren’t executed very well. Veterinarians thought this was a bad idea in general. They were afraid of being HMOed to death. This was happening in 2007, when the economy was robust — lots of people had discretionary dollars, and there wasn’t this concern for spending.

So flash-forward a few years later, to 2010. Suddenly people don’t have as many discretionary dollars. Suddenly that’s the worry of vets, that their customers don’t have the money to treat dogs and cats the way they need to. Suddenly the shift starts changing. Trupanion kind of had a very simple straightforward program that vets can embrace.

That’s an example of something that, in my mind, wasn’t an obvious idea at the time. But we back people before we back businesses. And this particular guy that we backed at Trupanion, just always felt was a really good guy.

I don’t want to give you the impression that we don’t like macro trends that work. I was talking to someone recently who was with Charlie Munger [Warren Buffett’s business partner and vice-chairman of Berkshire Hathaway], and they asked Munger, “How come you don’t really look at the details? You’re such a big picture guy.” And he said, “I’d rather be roughly right than precisely wrong.” I think that we were precisely wrong with all the consultants’ reports on a transatlantic airline we invested in called Eos. I think that we were roughly right that consumers love their pets and are fearful of the catastrophic consequences of major problems with their pets.

But I get back to it all being about the people. We can find a great sector or business, but we’re investing so early that unless there’s this tenacious grit, determination, resourcefulness, ability to evolve, it won’t work. We’ve created a checklist of 10 characteristics of an entrepreneur that have been the successful characteristics for us in terms of who we back. Unless you find that you can have the best business in the most exciting industry, but if the execution, if the torch-holder, if the value-creator isn’t there, then we don’t make it happen.

And this guy was fascinating to me because he was unusual, he was confident, but he was quiet, he was determined. And he kept coming at me and telling me how much he wanted Maveron.

And at one point he said, “You know, I think you guys add value, da-da-da-da-da-da.” And I said, “Well, you’re living in Vancouver. If you really think Maveron will add value, move to Seattle. That’s where we can add the most value.” And the next day he called me and he said, “I went home to my wife, and I talked to her. And we’ll move to Seattle if you fund us.”

That was a very direct kind of, “I’m serious about making this business work” statement. That was 2007 when he said that. We closed the deal in 2007. We invested in a company; at the time it was called Vet Insurance. One of the reasons he came to us was he knew that Vet Insurance wasn’t probably the best name.

We used the naming guy that did Starbucks to come up with Trupanion. And we had a first board meeting, and he welcomes everyone, and he goes up to the whiteboard and he writes a big “10X.” And he says, “I know you guys are here because this is what you want. 10X. Well, I’m going to deliver that. But the reason why I’m telling you this now is you’re going to help me deliver that. You’ve been picked, and you need to own 10X also. I’ll own it delivering it, but I need your help.”

It’s been a really nice ride. I do one of the most fun things with any of my CEOs: He and I climb a mountain every year, and we go through what the goals that he thinks the year should be, and we kind of negotiate, and we take a rock from the top of this mountain in Sun Valley. We’ve climbed the same thing every year. It’s a mountain behind my house, and we write down what the goal is, and the rock is sitting on my desk and on his desk. And his management team is sick of hearing about all these rocks because he’s not shy in raising the bar for them. That’s the integration of business and people that we were talking about before. I think that if you ask what’s made us successful, it’s because we’ve been fortunate enough to identify, in a number of cases, great people early. Then we throw all the resources behind them and are aligned with them.


About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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