Mike Maples Jr. on Pattern Breaking Startups and Venture Capital Insights

Introduction to Mike Maples Jr. and Floodgate

Mike Maples Jr. is a partner at Floodgate, a pre-seed stage venture capital firm that has invested in well-known companies like Twitter, Lyft, and Twitch. Maples recently authored a book titled "Pattern Breakers: Why Some Startups Change the Future" which explores what he's learned from studying successful seed-stage investments.

The Unique Challenges of Seed-Stage Investing

Maples explains that seed-stage investing operates under a completely different set of rules compared to later-stage investing:

"I like to say that I invest too early, way too early, or even legally ambiguously too early," Maples notes. He gives examples of investing in Twitter when it was still deciding between names like "voicemail 2.0" or "twttr", and investing in Lyft when it was launching an illegal ride-sharing service with pink mustaches.

At the seed stage, investors have very little data to work with - no customers, no revenue, no proven business model. Maples says:

"You have to bet on the potential and you have to come up with ways of identifying signal of great upside potential even before it's realized. You have to get comfortable with the idea that you don't know exactly how the dots are going to forward connect."

The Power Law of Venture Returns

A key insight Maples shares is that venture capital returns follow a power law distribution, not a normal distribution:

"The biggest outcome is bigger than all the other outcomes combined. The 2x outcome, I mean it's nice to make two times your money, it's nice to make three times your money, but it doesn't impact the fund's performance. The one that impacts the fund's performance is the magnitude of your best one."

He explains that for a typical fund to generate strong returns:

• The best investment needs to return 2.5x the entire fund or more
• You need to get 100x returns about 5% of the time
• You need to get 20x returns about 15% of the time
• The rest of the investments don't matter much in terms of overall fund performance

This power law dynamic shapes how seed investors need to approach evaluating opportunities.

Identifying Pattern-Breaking Startups

Maples argues that great startups need to be "radically different, not just different." He uses the example of Tesla's Cybertruck:

"You may like the Cybertruck, you may dislike it, you might think it's ridiculous. But here's one thing nobody ever says - how does that compare to Ford F-150? The difference is self-evident."

He continues: "If you have to answer the question 'how are you different from the incumbent offering?' you already lost. Because now why would somebody buy from a company that's 80% likely to go out of business if they have a semi-credible alternative that exists?"

Instead, Maples looks for startups that are creating entirely new categories:

"In the world of startups, everybody sells apples. You're not going to try to be the 10 times better apple. You want to be the world's first banana. You want to say 'Look, you may not value bananas, but for everybody who values the advantage of bananas, I'm the only guy that's got them.'"

The Importance of Inflection Points

Maples uses a surfing analogy to explain how he thinks about technology inflection points:

"In surfing, you've got to be a good surfer if you're going to have a successful outing, but you also have to have a wave. The surfer doesn't create the wave."

Similarly, startups need to leverage external technology inflection points to create radically new offerings:

"What the startup does is they leverage an inflection, a change event external to the startup, to show up with something radically new and different that's never been seen before."

He gives the example of ride-sharing services leveraging the iPhone 4S's embedded GPS chip as a key inflection point that enabled their business model.

Non-Consensus Insights

Beyond identifying inflection points, Maples looks for startups with non-consensus insights about how to leverage those inflections:

"One of the things about the insight is it needs to be non-consensus and right. It can't just be right. The reason is that if it's consensus, again it's too incremental."

He explains that with Lyft, the non-consensus part was believing people would be willing to get into strangers' cars. This seemed crazy at the time but turned out to be correct.

Current Inflection Points and Opportunities

When asked about current inflection points and opportunities, Maples highlights two areas:

1. Artificial Intelligence - While acknowledging the hype, Maples believes AI represents a profound sea change. The challenge is finding non-consensus insights amidst all the activity.

2. Bitcoin - Maples sees Bitcoin as "the cryptocurrency that's hidden in plain sight" with potential to become as mainstream as gold. He believes there could be interesting opportunities in building financial infrastructure around Bitcoin.

Lessons from David Swensen

Maples shares some insights from working with the late David Swensen, legendary CIO of Yale's endowment:

"The thing that I think a lot of people don't realize about him was he wasn't just a successful, impactful investor. He really was a great person. He had a great strength of character and just some sensibilities to him that I really respected a lot."

One key lesson Maples took from Swensen was the importance of patience as a form of arbitrage:

"Most people think liquidity is good, but actually I think it's as much of a bug as a feature. Because what you realize is that if you're buying assets that you have to hold for a long time, you don't have much competition because not many people want to do that. And so you end up competing less for those assets, which causes them to be systemically underpriced in many cases."

The Potential of AI for Investing and Education

Maples is excited about the potential of AI tools to level the playing field for smaller investors and funds:

"Now I feel like man, it'd be hard to run one of those big firms because just the coordination cost of keeping everybody on the same page is just crazy high. I've got this collection of what I call 100 bagger startups, and so I try to create a time capsule of every great startup, what it looked like in the seed round. And because I have all this data and I study this, it's easy for me to use the AI to do a lot of really interesting things."

He gives examples of using AI to analyze historical data on successful startups, run scenario analyses, and generate insights that previously would have required large teams.

Maples also sees huge potential for AI to democratize financial education:

"The AI tools give me a lot of reason to be optimistic that we could - there's a bunch of problems that we have in education that are about to get to a threshold where the only thing that will stop us is our will to solve the problem. Because we will have an infinite supply of patient educators, there will no longer be an availability problem, there will no longer be an access problem, there will only be a willingness to get educated problem."

The Importance of Financial Literacy

Maples emphasizes the critical importance of financial literacy, calling it "the next civil right":

"Everybody in advanced societies should have financial literacy in the same way that they are able to read words on a written page. It's just such an important life skill, it's so important and impactful to one's success in the world. And not just in terms of how much money you have, but in terms of just your basic understanding of how the world really works and how value gets created in the economy."

He argues that parents have an obligation to ensure their children develop financial literacy, as failing to do so handicaps their ability to pursue the American dream.

Memorable Investments

When asked about his most memorable investment, Maples points to Twitter:

"In the early days it was a podcast company called Odeo. Apple decides to give podcasting away, they decide they don't have a business, and they've got this little side project they're deciding what to call it. You know, are we going to call it voicemail 2.0, twttr? They don't even know if they're going to release it or if it's going to be a company. Then it blows up at South by Southwest and I'm trying to invest in it."

He describes the rollercoaster of Twitter's early days, from constant technical issues to suddenly being featured on Oprah. The moment it really hit him how big Twitter could be was during the Iranian Green Movement:

"The Iran Spring happened and they had to not take the servers down on maintenance because the State Department said 'Hey look, you know, we think Ahmadinejad's trying to steal the election and we want all this stuff in the historical record.' And that was when it hit me that okay, this thing's going to be giant."

Conclusion

Mike Maples Jr. offers a wealth of insights into the world of early-stage venture capital and what it takes for startups to achieve breakout success. His focus on identifying radical differentiation, leveraging inflection points, and cultivating non-consensus insights provides a valuable framework for both investors and entrepreneurs. As technology continues to evolve at a rapid pace, Maples' approach of looking for "pattern breakers" that can reshape entire industries remains highly relevant.

Article created from: https://www.youtube.com/watch?v=EUIDlDprSOI