Mike Maples Jr. - Identifying Startup Pattern Breakers (EP.406)

26:04And it allows doctors to interact with patients they couldn't have interacted with before and get reimbursed for it. And so it was empowering for the patients and the doctors. It was a new thing. Then the question becomes, will those conditions continue to be met? Would the law get reverted back to the old law or will it persist as a permanent new law? And it looks so far like it will. So that's an example of an inflection. Another inflection might be a belief inflection. So, for example, before COVID, probably not as many people thought it was reasonable to spend a couple or three days a week working from home using Zoom.

26:44But now that's a permanent change. I'm not in the office as much as I was before COVID. And that's a permanent shift in my style of work. And so that could be another type of inflection. But the reason that I like technology inflections is that most great ideas come from entrepreneurs tinkering with new technology and experiencing firsthand its new empowering capabilities, its opportunity to create new patterns. and they also encounter barriers to fully exploiting it. And great startup ideas come from building the thing that's missing in the future. If you're harnessing a regulatory inflection, I hope you were involved in helping that law get written because very few laws get passed just out of the goodness of people's heart.

27:30Usually there's a set of people who are lobbying for those laws. Usually they have a reason that they want to exploit those laws. okay, if you're going to exploit this regulatory inflection, why do you have an advantage over the person that was lobbying the legislators to pass that law? Because I bet you they got an angle on this thing. Because living in the future in the sense of a legal inflection would mean that you were involved in writing that legislation somehow. Otherwise, someone else has an advantage in pursuing that future over you. When a founder is coming to present to you and they're talking about potential inflection, how do you stress test whether the inflection someone's talking about is something that'll be transformative to lay the groundwork for the insight and the idea?

28:17This is really important. Fortunately, I'd been lucky in the past. And I think that part of why I was picking some of these good startups is I just had a good instinct about what the founder was doing and just had some kind of an inner knowing about it. But what I do now that's pretty different is what too many people will do is they'll see a pitch and they'll say, do I buy that value proposition? Do I buy the traction? Do I think that makes sense? And quite often it will. But that doesn't mean it has unbounded upside because it may be solving present pain for present customers in a gap in present markets.

28:56And what I've come to realize is I'm not interested in the total available market. I'm interested in the total future market. I want the product to define future market and be the category king of that future market. So what I'll do is I'll listen to the idea and I'll say, that sounds really interesting. one thing I've noticed is that good companies quite often harness inflections. There's some new thing that didn't exist before that enables this product to provide really awesome empowerment. Can you tell me what you think the inflection is that makes this idea possible? And I get varying answers.

29:35If I get a really good answer, that's a good sign. If I get no answer, that's not such a good sign. And sometimes founders will approach me while they're figuring their ideas out and they'll say, do you think this is a good idea? And I'll ask them, what do you think the inflection is? And I'll ask a set of penetrating questions. And sometimes they'll say, it sounds like I don't have a very good inflection. Are you saying that this isn't a powerful idea? And I'll say, look, it's not my place to judge your idea. I'm just saying that knowing what I know, I would be concerned if I were you. And so either it embodies an inflection, you just haven't thought about it enough, or it doesn't embody an inflection, which probably means you're solving present pain for present customers, for present unmet needs.

30:20And you might build a reasonable business doing that, but you're not going to build a great business doing that. You're not going to build a radically transformative business. You're not going to be the next Twitter or the next Okta. How do you think about how frequently sufficiently powerful inflections come along that have the potential to have those massive power law distributions for the winning companies? This is the thing I find so inspiring, Ted. Inflections are all around us all the time, but most people don't know it. Most of us are so used to engaging in the patterns of our everyday behavior, we don't bother to look.

30:57But occasionally, a founder is an outlier, and they realize the implications of the new thing. New things are happening all the time, every week. There's a story I really like by David Foster Wallace. There's two young fish, they're swimming in the ocean, and a big fish swims up to him and says, good morning, boys, how's the water? They swim a little bit more, and once little fish says the other one, what the hell is water? We don't realize that we're surrounded by things that form our base assumptions about how the world is. And so often we're so locked into our base assumptions that we're just not even awake to the possibility of a new thing and its transformative power.

31:39But fundamentally, founders do that. That's where the creativity of being a startup founder comes in, is understanding the transformational power of a new thing. So for those who do and see that there is an inflection, they now have what you call an insight that leads to the company. So let's turn to insights. Yeah. So inflections are important because they provide empowerment. Insights are important because they provide unique value. If we have an idea that too many other people have, we're going to encounter mindless competition. What we want is a powerful idea about the future that leverages inflections to provide empowerment, and that is non-consensus and right.

32:27So if we go back to the Lyft example, so it harnessed the inflection of the GPS chip, it provided ride-sharing capabilities for people, and radically expanded the number of people who could be riders or drivers. and the non-consensus thing was are people really going to want to get in a stranger's car that's crazy it seemed scary to get in a stranger's car and so you had to convince yourself that people would be willing to do that someday and and i had foolishly passed on a company called air bed and breakfast because we thought people would be crazy to want to stay a stranger's house in our defense at the time the host the guest stayed in the house at the same time and the host would feed them pop tarts in the morning.

33:09It was pretty different instantiation of the idea. But we're like, if people are willing to stay in a stranger's house, I'm willing to take a walk on that wild side that they might ride in a stranger's car. Now, why is it so important to be non-consensus and right? Let's imagine that you're picking a stock. You could perform well by buying the index, but you're not going to perform much better than the average. So it's basically a bet that the market will do well, which is usually a good bet, but you're not going to have an extraordinary outlier outcome doing that. In order to succeed as a stock picker, you have to buy individual stocks.

33:47And when you buy an individual stock, let's say we decide to buy Zoom stock. Zoom may be a great company, but that's priced in. The price of Zoom is a function of the wisdom of the crowds. And there's a set of people who think that Zoom is going to go up, and there's a set of people who think it's going to go down. And the price is the equilibrium of what the world believes. So the fact that Zoom is a company, Howard Marks would say, who doesn't know that? And so when you decide to buy Zoom, you're saying that the market's belief about how good it is, is still not optimistic enough. And so in order to justify that, you need to know something about Zoom that the market doesn't know.

34:29But here's the important thing. In order to invest in Zoom and the possibility that you'll be right and outperform the market, there's another chance that you'll be wrong and underperform the market. So it's your willingness to underperform that allows you to create outperformance. They're two sides of the same coin. Nothing comes for free. And in startups, you can't be non-consensus and right without taking the risk of being non-consensus and wrong, but there's no free lunch in that regard. So that's one reason. The other reason though, is that if we go back to first principles, human beings are conditioned to like things.

35:08So if everybody likes your idea, it's too much like the consensus, which means that it's an incrementally better product rather than a radically different product. Non-consensus and right, a recent example would be the Cybertruck from Tesla. When I saw the launch, I thought maybe he was joking. I was like, there's no way he's going to ship a truck that looks like that. Now I'm warming up to it. But what does Elon do with a Cybertruck? He says, I'm going to force a choice and not a comparison. Nobody after seeing the Cybertruck says, how does that compare to a Ford F-150? It's like, live in that future with him or don't.

35:43But there's no middle ground. That's really important because if a customer has the option to solve their problem with an incumbent solution, why would they buy from a startup? They have to buy from a startup because the startup shows up out of nowhere with something radically different that most people dislike, by the way, because it's non-consensus. But a small number of people say, oh, my God, where have you been all my life? Holy crap, this is awesome. And it's those people, those early believers that become the co-conspirators of the startup. But you have to be non-consensus and right to have that polarizing idea that attracts some people strongly and repels some people strongly, at least at first.

36:26What are some of those other examples of forcing a choice compared to a comparison? The way I like to say it is you need at least a Delta IV experience. And so if taxis in San Francisco were three out of 10 good, ride sharing needed to be at least seven out of 10 good. Because if it's seven out of 10 good, then they think you can't compare the two things. I've transcended taxis rather than outperformed taxis. And the other reason you want Delta IV is that when people have a Delta IV experience, they go tell all their friends. They shout it from the rooftops. They get status with their peer group.

37:03Starbs don't have money to spend on marketing. And so they need a bunch of people singing the praises of this new thing that's radically superior. What you want is in a world where everybody's an apple, don't say I'm a better apple. You want to say I'm the world's first banana. You can't reconcile what I do with apples. Now, you may not want bananas. That's okay. Go keep eating apples. But if bananeness is something you value, I'm the only guy that's got it. And so that's where you want to be as a startup. Nobody after seeing a banana says, how does that compare to an apple? And nobody after Lyft said, how does that compare to taxis?

37:37And nobody after the Cybertruck says, how does that compare to an F-150? So if the answer to your product idea as a startup is, how does that compare to X? You're doing something wrong. You're either not different enough or you're not leaning into the difference enough. You're being not courageous enough in communicating the difference and languaging the difference. That's what I mean by forcing a choice. You mentioned at the onset that 80 % of these big winners had pivoted. What is it that makes a pivot work in this framework of talking about inflections and insights? I think I finally understand how that works now.

38:18I'm a big fan of the Warriors and basketball, Steph Curry and all those guys. And the metaphor of pivot comes from basketball. So the way a pivot works, you stay on your pivot foot and you move your body. And in startups, metaphorically, your insight is your pivot foot. And that's what you want to hold fixed. When you have an insight, you have to have an implementation of that insight. So the first implementation of Lyft's insight was Zimride. It was a corporate ride-sharing service. So when you have this insight, you can vary your implementation or you can vary your audience. But what you're trying to do is achieve product market fit.

39:01And product market fit answers a specific but profound and hard question, which is, what can we uniquely offer that people are desperate for? And so if we have an insight, we have our uniqueness. So we want to keep that fixed. Now we need to understand who's desperate and how do I offer this insight in a form of an implementation that will trigger their desperation. If I show my initial idea to customers and I'm getting lukewarm feedback, one of two things is true. Let's assume that my insight's right, because if we don't have an insight, we don't have a startup. But if my insight is right, if I still believe that, I have to do one of two things or both.

39:44I either have to modify my implementation or I have to modify who my audience is. It's useful to illustrate this with examples. So Okta had an insight that cloud customers were starting to adopt a lot of cloud apps and that they were going to have trouble managing that stuff. Their initial implementation was problem resolution. And so they went to a bunch of the early Salesforce customers and said, hey, we think that managing across cloud applications is going to be hard. We have this problem resolution idea. and they showed him some screenshots and the customer said, eh, you know, that's cool, but it's fifth on my list.

40:22And Todd and Freddie said, well, what's number one on your list? And they said, well, identity management is really a pain. An employee joins the company and they get an account on Salesforce and NetSuite and Dropbox or internal employee portal and all this stuff. And then when they leave, we don't want them to have access to the sales forecast anymore or the financials or any of that stuff. So we have to deprovision them from all those different accounts, boy, it sure would be cool if you could just have one single sign-on. So the Okta guys go, I'll see you in two weeks. Come back with demos for that.

40:55So that's an example where they had the right audience and the wrong implementation, and they pivoted off of their implementation. That's what had vexed me for so long. If you have an insight, you have a first mover advantage into the future. And even if your initial implementation is wrong, it's a reference implementation of your insight. You can pivot the implementation by changing the implementation itself or by focusing on a different customer for that implementation. But the art and science of product market fit is holding your pivot foot steady while you pivot your body around the implementation of the audience.

41:31How do you think about when you're working with a founder of what those signposts are to keep moving forward or to be thinking about, okay, we really like your inflection and insight, but maybe this idea needs to change? The way I look at it is a startup breakthrough has a breakthrough sequence. So the first is the insight breakthrough. And the insight breakthrough answers a question that we've been talking about a bunch here, which is, what do we know about the future that's powerful and not obvious? The second breakthrough is the product breakthrough. And this is where Steve Blank and the customer development product market fit comes in.

42:10And we want to answer another profound question, which is, what can we uniquely offer that people are desperate for? And then the third breakthrough is the growth breakthrough. And that answers another question, which is, how can we exponentially grow and achieve escape velocity and dominate the future category? And if you think about it, the reason I call it a sequence is there's an energy transfer from one thing to the next thing. The more powerful my insight is, the more likely it is that I can have strong product market fit because I have something highly unique and highly empowering. And by definition, something that's highly unique and highly empowering should have someone desperate for that empowerment.

42:54The more empowering it is, the more likely and more desperate people will be. And so now if I get product market fit by navigating my product, to the desperate successfully, now energy gets transferred into the growth breakthrough because now I don't have to persuade people to buy. I only have to teach people to buy because people would be irrational not to buy from me if they were desperate for the empowerment that I offer. And so it's like this situation where energy from the inside gets transferred into the product breakthrough. The product breakthrough gets transferred into the growth breakthrough.

43:30And now we're just tearing into the market at incredible speed. And so what we're trying to do at each phase is understand what are the bottlenecks that are preventing us from making this energetic move forward into the future. If we're not getting product market fit, it's like, okay, what is it that's not working about the audience? What is it that's not working about the implementation? Or do we just not have fundamental insight in the first place? But one of those three things has to be true, and we have to pursue the answer to that question in a maniacal fashion to get to product market fit.

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45:00Learn more at srsaquium.com. That's S-R-S-A-C-Q-U-I-O-M.com. And now, back to the show. So, so far with inflections and insights, this is all about the idea. And yet, most of the time, when you talk to someone about the earliest stages of investing, they say it's all about the founder. So you mentioned this founder future fit, what you found from this research on the characteristics of founders that succeed? There are traits that I would say are universal and great founders, like resilience, the ability to be firm on the vision and flexible on the implementation, the ability to be a magnet for talent, fast tempo execution, all those things.

45:46But what I learned is that it's not that simple. So let's take an example, Justin Pond. So Justin Conn, 23 years old, he starts this thing called Justin TV. It eventually pivoted into Twitch. And he was broadcasting his life 24-7 on the internet. One of the craziest ideas I'd ever seen. But Justin Conn wanted to be an influencer before there was a word for influencer. And the whole team was building a system that allowed that to happen, that merged cellular EVDO networks so that he could broadcast from anywhere, even if there wasn't an internet connection. And then he had this backpack that would convert it to an internet live stream.

46:26So he had success, even though the idea seemed wacky, because he was an authentic match to that future. Now, he started another company later called Atrium, Legal Tech Automation. And a lot of people were really excited by that idea. They were like, okay, I could see how AI would improve law firms and a bunch of things. And hey, it's Justin Kahn, and he's already had a near billion dollar exit. What's not to like? The problem was Justin Kahn wasn't passionate about the legal field. He was starting Atrium largely because he wanted to be a higher status founder. And I really appreciate the fact that he's open about that.

47:02So he wanted to be in the pantheon with Patrick Collison and Brian Chesky. He thought that just a billion dollar exit's not the same as being like Stripe or Airbnb. And so he wasn't an authentic match to that future. Justin was the same person. He was arguably more experienced than before. But it turns out that you want to be authentic to the future that you're pursuing. You want to be intrinsically motivated by it. You want to be tinkering with what's new about it. And you want to be someone that early believers would believe in. when you live in the future that way, you're more likely to notice what's new about it.

47:41These founders are obsessed with this tinkering of new technology that they're with. And so their instincts about what to build are far more likely to be right because they're encountering firsthand the limits of the capabilities and they can't stop thinking about it. It's the last thing they think about when they go to bed at night. It's the first thing they think about when they wake up in the morning. And so now when other people, kindred spirits, also want to live in that future with then they're more likely to find that person believable than just some random person who's doing it because they think it's going to be a hot space.

48:14This idea of repeat founders, as you described with Justin, there is an idea that if you have a founder that's success, they've learned a lot. There's a lot that they demonstrate. And yet, in this case, it was almost like the motivation was misaligned. How do you think about repeat founders? So first of all, I think repeat founders do have better odds. So a lot of people say, very few people could do it again. That's true, but very few people could do it at all. Very few people ever have a breakthrough. And so why are some founders able to do it? I think it does come back to founder future fit.

48:48So for example, Elon Musk, he doesn't start any companies anymore that don't take on grand challenges that most people think are impossible. And because of that, he goes after a certain type of problem that most people won't go after. And he's able to attract certain types of people. Very often, he can even monopolize the expertise in a certain field because there's no other meaningful company trying to do something that meaningful in that field. And so I would say that Elon is an example of someone who does it multiple times, but partly because he pursues ideas for which he has great authenticity as a founder.

49:27And that was the mistake that Justin made as he pursued an idea that would endow him with prestige as a founder more than it would represent the type of future that he was intrinsically motivated to pursue. So Elon is also unique in that a lot of founders, once they get rich, having a breakthrough, do they really want to get on a plane to Germany to solve the problem for the angry customer? Well, when you're a poor entrepreneur scraping by and you're desperate, that's one thing. But now if you're worth a hundred million dollars, it's a different thing. Maybe life is too short for that. And so that's the other thing that you got to believe is that the founder still has the eye of the tiger and that they're willing to do whatever it takes to overcome the inertia of the present.

50:11You mentioned the importance of this founder who has this contrarian idea, finding early believers to create a movement. How does that process work from going from misfit to mainstream over time? William Gibson, the sci-fi writer, said the future is already here. It's just not evenly distributed. And boy, is that true. So I remember, for example, when I was at Silicon Graphics, my job was to try to convince Hollywood to buy our computers to make computer graphics in movies. And at the time, that hadn't really become a thing yet. When I was there, they did Terminator 2 and The Abyss, and not long after they did Jurassic Park.

50:55And the firm that made those effects was called Industrial Light and Magic. They were owned by George Lucas. And every time there was a new movie, they'd buy about$10 million worth of our gear. But it wasn't just our computers that they needed because they'd need to render these dinosaurs, but then they would have to splice it into the film. And so what they would try to do is make the film be digital rather than celluloid film. But there's a whole lot of things that were missing in order for that to happen. You had to integrate that entire workflow and you needed tools that would allow you to render the dinosaur at different angles and at day at night and different layers of skin and all these things.

51:33Nobody had done those things before. What you realized was that industrial light and magic was living in the future. And I realized when I was at SGI, if we solve these guys' problems, they're going to take us to the promised land because everybody in Hollywood is going to want effects like this someday. Every movie is going to have computer graphics integrated into it. And everybody's going to want to know, how did ILM do this? And they're going to see that it's a room full of Silicon Graphics computers with a bunch of software that integrates with all these other products. So Industrial Light and Magic was co-conspirators with SGI.

52:11It would not be correct to say that SGI was inventing the future. SGI was co-creating the future with Industrial Light and Magic. And that's the way these early movements its work, early believers lock on to the insight of the startup. Now, let's imagine IBM or HP had come to Industrial Light Magic and said, I have fast workstations too. In those days, Industrial Light Magic would have been like, the graphics that SGI has are more than 10 times faster than yours. You can't give these machines away and have me use them because I can't make the movie fast enough. I've got a deadline. And so that's the situation you want.

52:49It reveals a lot in so many different ways. Silicon Graphics and Industrial Light Magic didn't have a traditional vendor-supplier-customer relationship. We weren't just selling them widgets. We were saying, we're going to co-create the future together. We're starting a movement together. We have an optimistic conspiracy theory to change the future together. And ILM wanted to make money doing movies, but the people at ILM, they wanted to move to the different future, not just for practical reasons, but for aesthetic reasons. They believed in an aesthetically different, superior future. And that's why early customers move.

53:27They move for aesthetic reasons rather than practical reasons. The same reason that people buy art. They buy into the aesthetic vision of the artist. So if you start with that co-conspirator relationship, it still has to be non-consensus at the time. How do you get from something that people don't believe in to a movement that becomes more mainstream over time. If you've ever seen Rudolph the Red-Nosed Reindeer, I don't think people realize this, but Rudolph is the canonical pattern breaker. He's got this red nose. He gets banished. The only place that will accept him is the Island of Misfit Toys.

54:07The misfits come back and Rudolph saves the day at the end. But it takes time for people to come around to his provocative point of view about the value of a red nose. And so startups are like that. Usually the early people who believe in a startup come across at first like they're misfits. So your early users of personal computers were homebrew computer club alpha geeks. Nobody would have thought in the early days of the personal computer that everybody was going to have one that was fundamental to all business. People thought of it as a hobbyist toy. Even Apple didn't quite know how to market it.

54:42They were like, hey, you can store your recipes on it in the kitchen or something like that. People weren't really sure how it was going to cross over into the mainstream early on, but that didn't matter because the alpha geeks liked it because it was so empowering. It was like me when I was a teenager. That's usually how it happens at first. Then what happens is like any movement. And this happens, by the way, in social movements more often. Let's take civil rights. In the early days, Martin Luther King was viewed by many as a radical. History remembers him differently than how he was thought of at the time.

55:15But Martin Luther King says, I have a dream and people are going to be judged by their character, not their skin color. Well, he forces a choice and not a comparison. You either buy that vision or don't buy that vision. But if you buy that vision, you can't not move. It's a moral question. Are you going to move or not. So at first, that was viewed as an anarchic, blasphemous, non-mainstream way of looking at the world. But eventually, people sympathized with his point of view. They saw how these people were being treated in the South. And over time, he convinced more and more people. So it goes from a heresy to the conventional wisdom over time.

55:59And startup markets, that's why it's more correct, in my view to think of it as a movement rather than a market at first. It's a movement where a set of people move at first. And at first, they're your early believers who believe what you believe about the future. It's a subset of the market. And you can't afford to spend your time with anybody but those people. But as the movement gathers steam, more people join it. And so imagine you're at a dance in high school and two people are out there dancing. At first, it seems scary to get out there on the dance floor. But there gets to be a point where everybody's on the dance floor except for a few people.

56:35And now the social momentum is you look like a dweeb for sitting at the edge of the dance while everybody else is dancing. Startup markets are a lot like that. They go from heresy, only a few people believe, to a few more people say, that makes sense, and then a few more people, a few more people, then it tips. And now all of a sudden, the burden of proof is on the people who are negative about the idea. And before you know oh, and only the laggards aren't embracing the idea. And now it's no longer a startup, it's a company and it has a category and now they gotta watch out for the next disruption on the horizon.

57:08When you've identified a founder living in the future, backed by an inflection, has the insight and idea, but it's the future, how do you think about timing and how long it's gonna take for them to capture that idea as a business? It's funny, when you launch a book, you don't really know how people are gonna react to it. And I was curious about where will founders be enthusiastic versus not about it. And it was really around the inflections and it gets to your question. So inflections are the best way I know how to answer the why now question. If we go to the Lyft example, if you had had the idea for ride sharing before the iPhone 4S at a GPS chip, you could have been right about the future, but you wouldn't have been able to build a system that embodied your idea about the future.

57:57Riders and drivers wouldn't have been able to locate each other efficiently enough. You wouldn't have been able to get network effects. You wouldn't have been able to deliver a good solution. If you waited too long after the iPhone 4S, well, Lyft was in the market. Uber was in the market. You could have been right, but you're too late. And so the inflection is not just a trend. It's a turning point. And what the founders have been excited about is nobody's ever really offered an answer to the why now question before in a first principles way. But inflection theory does offer an answer to that.

58:30It says an inflection is a turning point in the ability for someone to provide new empowerment for the first time ever. And it's like today that inflection just arrived. And now tomorrow is by definition possibly different than yesterday. Right now. That's why I like to have founders stress test their inflections because it helps them sort of dial in the coordinates of how accurate their why now statement is. And I like to say every startup idea has been tried because there's an efficient market for ideas, but all of the good ideas will happen. So the only question is why is now the time for it to happen?

59:09And inflection theory provides us a good explanation for how the why now can be present. So at the onset, when you were talking about your own entrepreneurial experience, it's this wild, the startup is a wild environment. You have all these creative things. All of that happens in the implementation. was after you've gotten this point, maybe you've got this growth curve going, but you still have to continue to execute. So I'm curious what you've learned from seeing these very, very successful companies about after they got themselves situated properly with an inflection and an insight, and we're working on an idea that was breaking out, what it takes to get from there to the promised land?

59:50The number one thing that has surprised me is the idea of surprises itself. And so what happens in a lot of cases is we have a hypothesis of what our product should be and who the customer is. And it stands to reason that you would run an experiment. You'd say, I'm going to go test this idea on a bunch of customers and I'm going to validate my hypothesis. And if I validate my hypothesis, that's a good thing because that means I've made something people want. But what I found is that most of the great startup ideas come from being surprised by your interactions. So about Okta, what if Todd and Freddie said, what am I going to have to do to educate these customers that they want problem resolution?

1:00:36Why don't they get it? Why aren't they buying my experiment here? Instead, they were open to noticing the surprise. Why is that important? Well, breakthroughs by definition haven't been discovered yet. It's almost axiomatic that you should be surprised on the way to finding a breakthrough because you're trying to discover the undiscovered and you haven't yet discovered it either. And so what you're trying to do is not just validate what you think is true. You're trying to discover the unexpected surprise that is open at a new fractal of new knowledge that nobody's encountered before. And so time and again, the best startups that I've worked with, rather than close the gaps and address the objections, they find something that surprised them that the customer was desperate for unexpectedly.

1:01:28And then they say, ah, their idea of how to implement this insight is better than ours. It unleashes the power in a way we had considered, but it's better than the idea that we had. I wonder what would happen if we explained it that way to a bunch of people. What would happen then? Every time you do an experiment, you want not just validation, but you want a surprise. Now I go so far as to, I have a journal and every day I write down what surprised me today. So I try to adopt a lifestyle that says that there's always something in the world that could surprise you. You're in a restaurant, you'd be surprised by what's in a painting.

1:02:06You're driving. You could be surprised by what you see in the weather patterns or a conversation you have with somebody. Let's say that I meet with a startup and I know 10 minutes into the meeting, I'm not going to invest. Well, I'm meeting this person. I might as well see if they have a surprise about the future. We call it savoring surprises. The surprises are the universe's way of rewarding you with earned secrets. And so that's what you want to get to. What are some of the ways you've seen companies go off the rails? Oh, there's so many. I'd say the number one way that people go off the rails is their idea of what the customer wants is just not true.

1:02:52Paul Graham from Y Combinator once said that his first startup, he put art galleries online and thought that people were going to want that. And it turns out nobody did. And he realized in hindsight that he had a mental model of how the world should be that just wasn't true for most people. This is the biggest problem that startups have is they solve a problem that only exists in the minds of the founders and nobody else. This comes back to desperation as well, why it's so important. And one of the things I'll tease out when I was an entrepreneur, if I wanted to find desperation, I would ask, what has the customer already done to try to solve this problem before?

1:03:35Because if they've tried to solve the problem before, I know one thing for sure, and that is that they believe the problem exists. If they haven't tried to solve the problem before, on what basis can I assume that they believe the problem exists? If they were desperate to solve it, they would have tried somehow. And then you show up with a way to solve it where for the first time they believe it's possible. And that's why they'll tolerate your half finished product because they have no alternative way to solve it and they want to solve it. That's the main reason startups fail. There's a whole lot of other reasons, founder conflict, competition.

1:04:11But the main reason is that people don't build something that real people are desperate for. So I'd love to turn to some of the limitations or challenges to inflection theory, and then also some current applications. And so you think of venture investing as this power law distribution, and there's only so many companies who make 100x. So to what extent are you able to map this theory to data that would tell you, even though it sounds right, that, yes, this is a way that companies have a slightly higher probability of success? So far, so good. But let's steel man it for a minute. Let's steel man the possibility that I'm just smoking weed here.

1:04:57When I look at these 100 bagger startups, let's take Zoom, for example. So Eric Yuan started this thing and it was called SASB. And his theory was that consumers would want video conferencing. So he's going to do every man video conferencing. So when it was available to you to invest in in a seed round, that's what you were investing in, SASB and Eric Yuan. Now he ends up pivoting it to Zoom and the rest is history. well would you have really known using inflection theory oh this is the inflection that's embodied in zoom i'm not sure because there were new standards and stuff like that for video conferencing but in many ways zoom was just eric brute forced the problem he knew the domain really well and just all the corner cases and just relentlessly went after it so the part of inflection theory that would have been the best signal for Zoom would have been Founder Future Fit.

1:05:57He'd been at WebEx inside of Cisco for 10 years. He was thinking about video conferencing all the time. But can I honestly sit here and tell you, Ted, that here's the inflection at the time it would have been obvious? I'm not so sure. What I've come to believe is that a good theory should be a good explanation. David Deutsch in the beginning of Infinity says that we're always looking for the best explanation. Newton's theory of gravity was the best explanation we had until Einstein's theory of general relativity. But that doesn't make Einstein's theory right per se. We can never categorically say a theory is right.

1:06:35We can only say it's the best explanation that we know of so far. And so inflection theory tries to offer an explanation for why these things happen the way they do. That doesn't mean that when you look at a pitch, you're going to identify the inflection necessarily. It doesn't mean you're going to identify the insight necessarily. It doesn't mean it won't change necessarily. But what we're looking for is a mechanism to explain why the startup capitalist wins. And inflection theory was the best way that I could make sense of how that happens. Now, having said that, I think that it has been remarkably robust in explaining why a lot of these startups happen, but it's still very vexing and hard to apply the tenets of the theory at the time that you have to decide.

1:07:21There's still a lot of uncertainty. It's still really wild. What are some of the surprises you've encountered in challenges to inflection theory? Zoom was one of them. So I looked at Zoom and I was like, I can't convince myself that this thing harnessed inflections. I think Eric just had a bunch of guys in China and throughout the world. And any time there was something that didn't work or wasn't efficient, he just put that code in there too and just brute forced it. Now, I suppose you could say that the insight was that that inflection wasn't as valid as brute forcing it. But I just don't think you could have known that at the time.

1:07:56I think even if you could ex post say that, I just don't think you could have known it at the time. I don't think the theory would have been useful to you at the time. So the part of the theory that would have been useful would have been this founder future fit, I think. So I do think it happens. The other thing that happens is sometimes you have a startup where it gets acquired for a really big price. Michael Birch, I guess, had Bebo, this social network that got bought by AOL for the gigantic price, and it ended up going to zero. Tumblr got bought by Yahoo for a giant price that went to zero.

1:08:28Well, not zero, but pretty small. So sometimes a startup gets lucky, gets acquired by a dumb buyer who overpays. There are definitely exceptions. But what I say to founders is, what odds do you want to play by? I can't promise you that if you harness inflection, you'll have a breakthrough. I can't promise you that if you have an insight, you'll have a breakthrough. I can't promise you that your implementation will be right at first. But what I can say is I bet you that it's a better bet than not harnessing. We don't know what the future is going to hold. And so why would we want to fight fair?

1:09:03Why would we fight a fight where the odds aren't in our favor? Why would we ever want to do that? Why does that make sense? And so to me, a great startup is pursuing a highly risky but underpriced future that has wildly asymmetric upside. You're making a bet on an underpriced, high upside future that's risky. It's like Buffett and Munger talk about your margin of safety when you buy a stock. Was the intrinsic value of the stock higher than the price of the stock? My business is the opposite. My business is margin of asymmetric upside if it works. Rule number one, don't pass on Airbnb because you would have made 6 ,000x if you'd said yes.

1:09:45And so you could have only lost one times your money if it didn't work out. I'm curious how you'd apply inflection theory to something like blockchain technology. It's a good case study because a lot of blockchain ideas I see are relative to blockchain. It's like recirculated air in an airplane. It's like, well, blockchains are going to be the future, so we need to have blockchains that do X, Y, and Z. Whereas what I would say to a founder is, okay, blockchains are an inflection. They're something new. so what specific new empowerment about blockchains are you harnessing? And why does it empower people?

1:10:24Who does it empower? And so the stress test actually is a fairly robust way of thinking about it. I see so many of these blockchain ideas that don't have a use case. It forces you to be clear about the use case because it forces you to be clear about who's being empowered and under what circumstances they get empowered. And by the way, is this thing going to get legislated out a business, that's an empowerment condition. And so it actually ends up being fairly robust for looking at these blockchain ideas. And for that reason, we haven't invested in very many. I'm really enthusiastic about it, but we've only made two or three investments in the blockchain arena.

1:11:00How about the same thing that applied to AI? AI is really interesting. So I would say that AI is characterized by tons of massive inflections and not enough insights. I'll get pitched by an idea and I'll say, I could totally see why I'd want to use this product, but I can also see why there's going to be 10 just like it. And I could see why when Sam Altman does his next open AI demo, he may ship a model that leapfrogs this and puts it out of business. The AI ideas have to have an insight and not just a set of empowering inflections that people are going to want to use because if we're one of 10 solutions, will get drowned in the noise of hyper-competition.

1:11:43So as you've written this book, done all this thinking and crystallized what you've done, did you come away thinking that you and Anne and Floodgate had succeeded because of luck or skill? I think a combination. Here's what I think I believe now. Louis Pasteur once said, chance favors the prepared mind. I used to kind of know what that meant, but now I get it. People who think all the time about a domain and are intensely curious about it for its own sake and pursue understanding it beyond what seems even reasonable tend to attract luck. They tend to be visited by the muse before it visits other people.

1:12:29And especially people who do that, plus keep their minds open to being surprised. Just like inflections, luck is all around us constantly. The muse is always ready to visit. The muse is always ready to knock on the door. But most people aren't listening. Most people aren't aware of the possibility that the muse is just right there waiting to knock on the door because they're too busy looking at each other. They're too busy looking at how do I get ahead in this organization or how do I succeed according to somebody else's rules or how do I outcompete this person over here? So secrets are everywhere.

1:13:06They're just waiting to be picked up off the ground. But most people are looking at each other instead of what's on the ground. And so they just walk right on by the secret. What I found was that people who find these secrets, they almost feel guilty about it. They weren't being contrarian in the traditional sense. Contrarian means you're against something. They were just looking in an area they were interested in, an area where most people weren't looking, and they were just paying more attention and they saw something. And when you think about it, it's kind of inspiring when you realize that secrets are all around us all the time and all we have to do is look for them.

1:13:40We're all visited by the muse, just some of us are more likely to recognize it when she visits us. So through doing this work and thinking through inflection theory, there's a degree to which you crafted a non-obvious insight about how the venture ecosystem works. I'm curious what motivated you to share it. Because if, in fact, it was right and creates a competitive advantage in how you're looking at startups, it would give you an advantage relative to your competitors in the venture space. In the end, value comes from value creation, value capture. And we're not that big of a fund. And we've stayed small and we want to do seed.

1:14:20And I suppose that I came to believe that the best thing that we could do is help founders, that that would create value if our ideas were good and that we'll see more of the good pitches than we would have otherwise. And we may not monopolize all of them, but if you're a$150 million fund, you don't have to be in all 20 of the top 20 startups. In fact, if you're in one of the top 20 every couple of years, you could be really good. What I wanted to do was make a contribution to the startup canon. If I look back at the great startup books, I think Steve Blank's work, Eric Reese, Lean Startup, you could argue Ben Horowitz, Hard Thing About Hard Things, Peter Thiel, Zero to One.

1:15:03But I hadn't seen anything in the last decade since Zero to One that I felt advanced the discussion about what greatness looks like in startups. In my first 10 years of seed investing, we tried to help invent a new category of venture funds. And we thought, okay, that's not just going to be beneficial to us. It's a movement that we could help start. We started to ask, okay, what should the second act be? And how could you make a contribution to startups on a go forward basis? It felt like helping to understand some of these forces behind startup capitalism would be a worthy contribution to make if it worked out.

1:15:39So far, so good. The entrepreneurs have been very gracious in giving feedback, good and bad, but mostly positive so far. What have you seen of that impact on entrepreneurs? It's interesting to see the language get adopted. It's only been out for a brief amount of time, but I'll get pitches now where they say, here's the inflection, or I stress tested it this way, or somebody will tweet out their stress test for other people to respond to. And I'm like, wow, that's really cool. I knew Eric Reese's ideas were starting to win when people started to say, well, we're going to build our minimum viable product by this date.

1:16:16They were adopting his language to describe it. And so if people start to adopt our language to describe what a great startup is, yeah, some people will benefit from that that aren't us, one of the other 2 ,000 seed funds in the world. But I think that overall, we'll be better off if we're associated with that set of thinking. Well, Mike, I want to make sure I get a chance to ask you a couple of fun closing questions. Sure. What is your favorite hobby or activity outside of work and family? Calligraphy still. And I collect all these vintage fountain pens from the years 1890 to 1930 because they're the best pens to write with.

1:16:53What's one fact most people don't know about you? Well, that might be one of them. I'm reasonably good at yo-yoing. So my dad taught me how to yo-yo when I was a kid. I'm out of practice, but I could still do a few tricks. What's your biggest pet peeve? My biggest pet peeve is when people complain about stuff. And maybe it's because my grandfather, when I was a little kid, he just couldn't stand complainers. If I would complain about something, he'd browbeat me so bad about it and be so ashamed of me that I just almost have a physical, visceral negative reaction to complaining of any sort. Which two people have had the biggest impact on your professional life?

1:17:34I would say my dad. And there's probably not a close second, honestly. There's been a lot of people who've had a great influence, don't get me wrong, but I'd say my dad is just so far ahead of any influence I ever had that it's hard to put somebody in that category. What's the best advice you've ever received? from him actually do your best. And so if you think about it, every human, at least so far, has its own unique DNA and you exist in the world as a node on a network with a set of comparative unique advantages that only you have. And so I think part of the way of showing up in the world is to realize that every day of your life is a gift and that the best way to honor the gift is to do your best according to your unique configuration of skills and interests and desires and capabilities.

1:18:29There are people I greatly admire in this business. I think Peter Thiel is really smart. I think John Doerr is a great biz dev guy. I think that Andy Radcliffe is a great first principles thinker. I think Elon Musk is a great founder who can overcome any obstacles, but it would be wrong of me to try to be like them. I should try to adopt ideas that I think or powerful, or I should learn from their success and admire what they do. But all you can really be is your best self. That's all you can bring to this world. And so every day you have the opportunity, the gift of today, what would it mean to do your best today is what I learned from you.

1:19:05All right, Mike, last one. What life lesson have you learned that you wish you knew a lot earlier in your life? Think for yourself. Most of the times I've spun my wheels, it's because I allowed myself to become hostage to the results of other people's thinking. It's like Steve Jobs would say, the world is built by people who are no smarter than you. You can build things, you could change things. You don't have to buy into the assumptions that are put in front of you for what they are all the time. Well, Mike, thanks so much for walking us through inflection theory and what it means for the startup ecosystem.

1:19:42Well, thank you, Ted, for having me on your show. I've been a follower for a while. Your audience probably doesn't know this. I reached out to you because I've just wanted to have an excuse to come on your show because I've listened to so many episodes. Well, thanks, Mike. Really appreciate it. Thanks for listening to the show. To learn more, hop on our website at CapitalAllocators.com, where you can join our mailing list, access past shows, learn about our gatherings, and sign up for premium content, including podcast transcripts, my investment portfolio, and a lot more. Have a good one and see you next time.