Back in 2009, Chris Dixon wrote a blog post called “Man And Superman,” in which he talks about, among other things, what separates the best leaders (or CEOs) from the rest. Most companies (or leaders) pull off one great coup, riding those as long as they can before fading away. Rarely do they repeat with the same success. The same can be said of investing; you can make a killing from one huge exit, but many have watched their coffers shrink in the attempt to turn one big hit into two, three, five.
Joel Peterson isn’t a superman, but he does have a long history of successful growth capital investments — across a number of industries. He’s the founder of Peterson Partners, a private equity group that’s made 50 investments since 1995 and has half a billion under management, as well as Peterson Ventures, which invests in startups.
But Peterson’s perspective is informed not only by being an investor, but also by the boardroom and the classroom, as he teaches in Stanford’s Graduate School of business, was the first investor in JetBlue Airways (and now serves as the discount airline’s Chairman), and is also currently the Director of management services company FranklinCovey and commercial real estate finance company, Ladder Capital.
Peterson is also one of the proponents of a lesser known investment model called the “Search Fund”, which, for the uninitiated, has special relevance to startups and entrepreneurs, as they are essentially vehicles for small groups of investors to financially back inspired young entrepreneurs. But not in that entrepreneur’s company, no, they then collectively search for companies to acquire and run. Peterson worked closely with H. Irving Grousbeck, a celebrated professor at Stanford University’s Graduate School of Business, who is often credited with pioneering search funds in the mid-’80s.
According to Stanford’s take on search funds, they offer relatively inexperienced professionals with little capital resources a quick path to managing a company in which they have a meaningful ownership position.” (More here.)
We asked Joel about the meaning of search funds in the landscape to which he admitted that, under the search fund model, investors typically need to have access to strong private equity networks as they may end up covering all overhead for a couple of years and giving up a significant on-going ownership of firms that are purchased. However, the upside is that companies targeted are smaller than those targeted by private equity firms, and thus investors are more willing to back younger, less experienced leaders, with the main attractions being the ability to more fully help them build great companies (more freedom, and a higher level of involvement), in addition to being able to work with like-minded investors. He continued:
From my experience observing search results, they are somewhere between venture investing (where there are lots of failures and a few spectacular successes) and private equity investing (where there are fewer failures and fewer home runs). Generally, it takes investor patience and some willingness to work on boards, to mentor and to work with entrepreneurs in order to see the best results. It’s not for every investor, but for those who like building companies from a foundation of existing products/services and existing customers — and who can work with young entrepreneurs — it can be rewarding financially and psychically.
Searches tend to represent a small portion of his investments, Peterson said, and it tends to work only for certain types of investors — typically angel investors who are looking for later stage investments.
Aside from search funds, Peterson’s career has long been focused on building and scaling customer experiences, using the experience of turning JetBlue into a billion dollar company to invest in and help build startups like Bonobos, Asurion, and Mangia.
When we asked the JetBlue Chairman what his criterion were for investing he said that, while funding great people has to be any investor’s top motive, he unilaterally ranks leadership foremost when evaluating deals. Second is the size of the market opportunity, followed by competition and how many substitues already exist, and the product or service (including “moats”). It’s easy for investors to fall in love with deals, entrepreneurs, or the motive behind the company, and that’s why it’s so important to have great partners, he says, who can keep you in check.
Peterson has traveled far and wide looking for the right qualities in entrepreneurs that will lead to great investments and great relationships — among them high energy, intelligence and flexibility. As he told Fast Company, the best entrepreneurs “figure things out over time, they take counsel, they listen, and they are humble.” It’s those entrepreneurs, he says, that he is willing to follow into far-flung industries, even if they aren’t in his area of strength.
When we asked him if the above qualities were what attracted him to Bonobos, JetBlue, and his many other investments, he said:
I invested in Bonobos because I thought Brian Spaly and Andy Dunn were terrific young entrepreneurs and high-quality human beings — not because I was an expert in selling men’s clothing online. The same thing is true of Asurion and Jim Ellis and Kevin Taweel and of David Neeleman, founder of JetBlue and Avion Azul. All of them were not just terrific entrepreneurs, but great people. Trammell Crow, my mentor, used to say, ‘You can’t do good business with bad people.’ Character matters.
But, while it’s all about the entrepreneur, there is a growing sense that startups lose themselves in raising funding, become starry-eyed by the big numbers, and forget that the real challenge is attracting a sustainable base of paying customers, and that building a smart management team around that product or service who can consistently deliver a quality experience until the cows come home — that’s the real key.
When I asked Peterson what the biggest mistakes were that he’d made along the way, while he said that relying on the reputation of name-brand investors is dangerous, again, it all comes back to building a great leadership team — not making changes in management soon enough and not “building the bench quickly enough” were among his top three.
In the end, business is a team sport. The failure to build a great culture — one that attracts and keeps great people with shared values and complementary skills is what kills many companies. The culture starts with the leaders, and their influence is generated one conversation at a time. So, I tell my students to ‘build a brand’ around each interaction with customers, suppliers, lenders, employees, and so on.
Great leadership teams have the ability to remind their teams (and themselves) that ideas, services, or products, do not inherently make great businesses. In the tech industry especially, it’s become a regular thing to see products/ideas masquerading as businesses. And Peterson says that this is a common problem for young entrepreneurs:
So long as there are companies who find it cheaper and more productive to buy features or products than to develop them in-house (and this is likely to continue to be true), you’ll find successful sales of products/features to strategic buyers of narrow entrepreneurial efforts — and, thus, the occasional successful investment limited to a product/feature. Nothing wrong with this; but it shouldn’t be confused with a stand-alone business that’ll require a lot more than many innovator-entrepreneurs are able/willing to develop.
I then asked him to weigh in on the “bubble debate,” to which he said: “Today’s pricing seems frothy to me. In my years of investing in real estate, start-ups, PE and searches, this has almost invariably been an early warning signal that things are moving in the direction of a correction. In some cases, (for example, the housing market) while it was clear to professionals in the space that things were getting out of whack — prices continued to rise for a lot longer than made sense. So, it’s hard to predict when adjustments will occur.” But he has no doubt that they will.
As to what advice he has to share with young entrepreneurs, he said that, in his experience, the best entrepreneurs, all suffer from a combination of relentlessness, optimism, curiosity, confidence, willingness to iterate rapidly and to recover from setbacks … “really, conditions of mind that allow them to embrace the world with enthusiasm.” At which point the investor/professor went old-school, hitting on a few things that (in my opinion) today’s workaholic entrepreneurs could stand to hear again:
Appreciate the people you work with, take care of your investors, celebrate successes along the way, communicate lavishly (good news and bad news), tell the truth, don’t try to maximize everything (all-thing-considered optimization is also a pretty good strategy, too), and stop to smell the roses (life is pretty short and most of what really matters doesn’t happen at the office).