Mike Maples Jr.: Inflection Points and Startup Success

0:00From October 7th to 9th in San Francisco, the Masters of Scale Summit returns. It's where the boldest minds in business, tech, and beyond gather to build the future. And we want you to join us. Hear from the CEO of the New York Times, scientists using cutting-edge technology to find cures, the leader of crypto powerhouse Coinbase, a retired four-star general, and many, many more. They're all on the same stage, and it's not just another conference. It is the gathering for remarkable people. Apply to attend at mastersofscale.com slash remarkable. That's mastersofscale.com slash remarkable.

0:49Hello, I'm Guy Kawasaki. This is the Remarkable People podcast, and we're in the business of helping you become remarkable. So we scour the globe for the most remarkable people, and we found a remarkable person named Mike Maples Jr. And in the prelude, we were just discussing, he and I go way back. In college, he read my books, which is kind of a disturbing thing when people tell you that they read your book in college, and now they're way out of college. But anyway, so he is a venture capitalist today. He's the co-founder of a leading Silicon Valley seed fund called Floodgate. And he has invested in companies like Twitter and Twitch and Okta.

1:35He's really one of the pioneers of seed capital in the mid-2000s. So with no further ado, Mike Maples Jr., welcome to Remarkable People. Hey, thanks, Guy. I've been looking forward to this. I think I've probably known you much longer than you've known me because I got to know you somewhat through your book when I was in college. Wow. Like I said, that's kind of a double-edged sword. Well, as long as you don't think that I wrote Rich Dad, Poor Dad, I call that a win. So I'm easy to please that way, Mike. Yeah. The ones I really remember in my formative years were The Macintosh Way, and then the other one was Selling the Dream.

2:15And I think in Selling the Dream, I was actually at Kepler's bookstore when you launched it. I probably have a signed copy. And one of the aspects of it I remember is I think it had the Macintosh product introduction plan in it. Yes, in the back. So at the time I was a young product manager at Silicon Graphics and you didn't really get trained in marketing back in those days. And so everything I knew about marketing is just what I read in marketing books. That was an actual introduction plan. I was Like, hey, man, I could really learn something from this. And then reading your books led me to Regis McKenna and some of his work.

2:50I always thought that he had some really good ideas around relationship marketing and how do you evangelize ideas. Yeah. So I feel like I've probably known you. Hopefully, I don't seem like a stalker, but I've known you since you were CEO of Asius. Wow. Man, you're going back. You're going back. So far, I was young. So I loved your book and I see so much stuff that I agree with in your book. And let's start with something very basic. Your book is all about getting these inflections and getting insights from the inflections and turning it into ideas. So let's start with a definition to help everybody.

3:32What exactly do you consider an inflection? Yeah, so an inflection is a change event that's actually external to a startup or any business for that matter. And it allows a startup capitalist to compete by changing the subject. So what I like to say is that in startups, better doesn't matter because business is never a fair fight. And if you're a startup, you have to have some form of weapons to wage asymmetric warfare on the present. You have to turn the incumbents' greatest perceived strengths into their biggest weaknesses. And the way entrepreneurs do that is they harness inflections. They use inflections to bend the arc of the present to a radically different future.

4:20And by doing that, they deny the premise of the rules of competition. They show up seemingly out of left field. And now all of a sudden they disorient the incumbents. Airbnb did this in hospitality and Twitter did this in blogging and communication. But nobody ever, when they saw Airbnb said, well, how does that compare to Four Seasons? And nobody, when they saw Twitter said, how does that compare to WordPress? It stood alone as an entirely new thing. I like to say better doesn't matter when you're startup, because if you're better, then the customer is going to have an alternative to your startup.

4:56And why would they pick your product when you're 80 % likely to go out of business? They're only going to pick your product if it can't be reconciled with anything they've ever seen before. And if they say, oh my gosh, where have you been all my life? And so the way that the founder achieves that goal is they harness inflections. They use the power of inflections to offer something that would seem unthinkable before the inflection happened. But Mike, do inflections cause companies to succeed or do companies cause inflections to succeed? Which way does it flow? Yeah, so I like that question. And it is one of these kind of recursively existential questions too, right?

5:36Right. And the way I internalized it was I was like, OK, what should founders care about? And what I thought was, OK, founders need some type of a power to change the subject. And so when I think about an inflection, whether the founder caused it or leveraged it, what matters, I think, from the founder point of view is three things. One is just what is the specific empowerment? Does it offer something that can provide a 10x benefit or something radically unique that's never been seen before? Or is it just an API call that got added to Stripe's API list, right? So a good example of an inflection that was empowering was the iPhone 4S had a GPS chip in it.

6:21And you could have had the idea for ride sharing before the iPhone 4S, but it wouldn't have mattered because you couldn't have implemented a system that embodied that idea. But now all of a sudden you have a GPS chip in the phone, you can locate riders and drivers with an algorithm. So that's an example of something very empowering. The second thing we want to see in an inflection is who does it empower? Who cares? And in the case of the iPhone 4S, a lot of people care because a lot of people have smartphones. And so the potential surface area of the empowerment is very high because if you believe that smartphones will keep happening and they'll keep having GPS chips in them, then potentially that's hundreds of millions, if not billions of people someday.

7:02And then the third aspect of the inflection is, I call it the empowerment conditions. And so we've had nuclear power since the 40s, but we haven't built a nuclear power plant in the United States since the 1970s. And so just because you have a power doesn't mean you're going to use it or be allowed to use it. And there might be political factors, there might be trust factors, there could be a lot of reasons that people don't decide to adopt it. So those are the three things I look for. What's the magnitude of the empowerment? Who does it empower? And under what conditions will people decide to take advantage of it?

7:36And under what conditions will they decide not to? And if you can get all three of those things going your way as a founder, now it's kind of like a Rock and David slingshot against Goliath, right? Now you have something that you can bring to the party that changes the subject. When I read your book and I read that concept, I thought to myself, oh my God, this is such a high fence. In a sense, you're saying that every successful startup either caused or significantly jumped on an inflection. And I got to tell you, I see a lot of startups that I would hardly affiliate them with truly an inflection.

8:18So are you that tough? I mean, if somebody shows up at Floodgate and they just have something better, better, do you just throw them out the door? Well, I don't throw them out the door. I wish them well, right? But what I say to them is, look, do you want to pursue an idea that has outlier, unbounded upside potential or not? And if you're not harnessing an inflection in your startup idea, you're competing in somebody else's sandbox. So the mistake most startups make is they say, I want to go after a big market. And that makes sense on the purpose because big markets have lots of customers and revenue.

8:58But the problem is that the founder often unwittingly buys into a context, which is the market as it's defined as the market. And if the market's already defined, then somebody's defined it. And that person has the advantage over you because they get to define the discussion that occurs and they already have the advantages of the incumbency. And so therefore, it's kind of like if you're competing over territory that's a tiny little municipality in an already discovered city, you're not going to have as big of an upside as if you're Lewis and Clark mapping the Louisiana Purchase territory and discovering the undiscovered land.

9:35And so I'm not interested in the total existing or total available market. I'm interested in the total future market. I'm interested in a product that defines a future market because it harnesses these inflections. And so I just say to a founder, hey, look, I'm not for everybody, but that's what I'm in it for. I'm trying to find startups that harness these inflections in unconventional ways to create a product that radically changes how people think, feel, and act. And to me, that's where the startup wins is when they do that. There's two ways to look at the future. Do you believe it's going to be a new and improved version of the present, in which case the incumbents are going to usually win that?

10:12Or do you believe that the future is not going to be able to be reconciled with the present, in which case the startup can win. And by the way, you work for a guy who's the master at this and he did it even in a big company. So like Steve Jobs, when he comes back to Apple, everybody says, hey, you should license the Mac OS and run it on Intel. And you should have a clone market just like Microsoft and IBM do and all this stuff. Jobs didn't do that. Jobs always found a way to change the subject. With the iPod, he found this inflection in the sense of a tiny a little hard disk that he could put into a music player.

10:46And with the iPhone, he waited until the technology was ready, that the touchscreen was good enough, and that the power in the phone was good enough that he could put macOS in a phone device. But Jobs never competed by being better at something. He always competed by showing up with something radically different and helping the rest of us understand what was important about it. And he did that by harnessing inflections. He just naturally knew how to do that because he knew that was his weapon to sort of change the discussion. So let's talk about what I consider maybe the biggest inflection, certainly in my career, and I might argue in the history of mankind, which is artificial intelligence.

11:29And it seems to me that, you know, I use chat GBT, I use Claude, I use perplexity, I use four or five LLMs. And for the life of me, I cannot tell you why I use one over the other. If you were to talk to the CEO of Claude or Perplexity, and you would tell them, like, listen, you're just doing something better, maybe your model is better or something, but you are not fundamentally changing. How does Perplexity or Claude compete against Gemini in Google? I just don't see how they differentiate. Yeah, it's interesting. And I love this question because it highlights a real challenge, I think, right now, which is, yes, you want an inflection, but you also want to have an insight.

12:17It's not enough to just have a powerful idea. If a whole bunch of other people have that same powerful idea, then the opportunity gets somewhat competed away. You want to be non-consensus and right. So if we go back to the example of Lyft and then we can relate it to AI, I suppose, the iPhone 4S had an inflection in terms of empowering people to locate riders and drivers. But the founders of Lyft and Uber had to have the insight that, oh, that means you could create a transportation network that has network effects. And that's where the creativity of the founder comes in. And now it's obvious.

12:57Now people are like ride sharing, of course. but at the time it seemed crazy like who's going to get in a stranger's car like nobody's going to do that that's crazy just like who's going to stay in a stranger's house that's crazy and so most of the great startups they have to have an insight because if human beings are conditioned to like things and so if everybody likes your idea it's too similar to what they already know which means it's too much of an incremental improvement it's too much competing on better versus different. So the best startup ideas I've seen have this quality of most people don't like it at first or don't think it's going to work or they think it's irrelevant.

13:35But there's a small subset of people who are like, oh my gosh, where have you been all my life? I've seen the light. This is amazing. You want that. You want to be non-consensus and right. It's not enough just to be right. You have to be non-consensus and right. So when I think back to perplexity and Claude and these guys, I don't really think of them as startups in the way that maybe you and I think of startups. The way I think of perplexity and those guys is I think of them more as like small versions of big companies. And if I think about those companies, they're not really trying to, in a capital efficient way, create some asymmetrically radically difference.

14:14They're partnering with the big tech companies to create scalable technology. And I think it just happens to be that right now, small versions of big tech companies. But I don't think of ChatGPT and Claude and those guys as like startup capitalists. I think of them as probably someday a large division of a big tech company. We just don't know which one yet. In a sense, even though what they do is so exciting, it sounds kind of boring when you put it that way. I think what they're doing is great. I just don't think of them as startup people in the same way that I thought of the Lyft guys or the Twitter folks, right?

14:51I think of them as more like back in the day when you'd have these joint ventures between IBM and Apple, or when you'd have big companies spinning off divisions and stuff like that. I think of it as more like that than I think of it as classic startup capitalism. So with all this talk about the entrepreneurs, the true entrepreneurs who are creating or riding this inflection point. I guess my big question for you, Mike, is how do you separate the nutcases from the pattern breakers? Because at the time you hear some of these pitches, you must think these people are nuts. And then five years later, you say, oh, they were so right.

15:32So how do you figure that out? Who are the nutcases and who are the breakers? Yeah. And it's funny, like some books are born of experience and competence and expertise. This book that I wrote started more out of embarrassment, right? I'd passed on Airbed and Breakfast, which became Airbnb. And I would have made like thousands of times my money if I'd done it. And then I noticed that 80 % of my exit profits had come from pivots. So Twitter had started as a podcasting company called Odeo. Twitch had started out as a terrible idea called Justin.tv. And so I'm looking at this and I'm like, what business am I even in here?

16:11What am I doing? Am I just throwing darts? Should I just retire before I get exposed? And what I started to realize was that these startup ideas that were working, they were harnessing inflections and they were non-consensus and right. Now here's the tricky part. And it gets to your question, I think, which is when you're non-consensus and right, you don't know that you're right at first. You only know that you're non-consensus. If you knew you were right, it would be too obvious. And so the less obvious it is, the less you can know for sure that you're right. So on some level, you have to try the idea.

16:43You have to decide, I don't know if I'm 100 % right yet, but this is a non-consensus area that's worth pursuing. It's worth my energy and time to figure out. And if I'm not 100 % right, I might pivot. So how do you tell the difference? What's the right kind of crazy? What's the wrong kind of crazy? The question I like to ask is, is this from the future? And I think William Gibson, the cyberpunk author, was right when he said the future's already here. It's just not evenly distributed. For example, when Mark Andreessen worked on the Mosaic browser at the University of Illinois, he was in a supercomputer lab with a really fast network and powerful computers.

17:26his idea of what networks were going to be was a better version of the future than Microsoft's top-down or AOL or the US government or AT &T or Time Warner's view of a tops-down network. I think that the way you know that a non-consensus idea is worth pursuing is the authenticity of the founder to that future that they're pursuing. I think that if you're living in the future before other people and you're harnessing powerful inflections before other people, the odds that you're going to build the right thing are much higher to be correct. And so that your intuition about what to build is far more likely to be right.

18:07And so that's what I really look for is I want to know, is this founder living in the future for the rest of us? Are they intrinsically motivated by that future? Are they just pursuing what they think is hot? And do they have insights about what to build because of their authentic obsession with that future? And I believe that that causes you to be more likely to build the right thing, but it also makes you more credible to early believers. It causes other people to say, I agree that this guy, Kawasaki guy with this ASEAS relational database here, I think he's noticed something that others haven't noticed.

18:46And I want to join that movement. And I remember this from when you were a founder, I think in your database at fourth dimension, tell me if I'm wrong about this, but your contacts, you would have a tag next to them. And one of the tags was like true believer and Joe, Joe Leemont, my roommate college, you had tagged him as a true believer. And so that's like these early startup markets are animated by belief, not utility, right? People buy from startups for aesthetic reasons, not practical reasons. And they do it because they co-create the future with the founders. It's the early believers that do that with the founders.

19:23And it's the belief in a different but aesthetically superior future that drives people to move the present to a different future together. And so that's what I'm looking for, right? I want the idea that's not a consensus, but I want to believe that the person comes by the idea honestly, that they come by it by authentically pursuing a future that I can get

20:03So today, in artificial intelligence, do you have any examples of this non-consensus kind of inflection idea? Yeah. So I'd say that AI has been really challenging for me because I see inflections every week, but somebody shows up and says, I have this great idea. And I'm like, I would totally use that product, but I don't know why there's not going to be 10 just like it, which means it doesn't have enough of an insight. So I'll give an example of one that I think does. So I'm involved with this company called Applied Intuition, and they make autonomous vehicle simulation software and software-defined platforms for the car companies.

20:50And so let's say you're General Motors or Porsche or you're one of these big car companies. Tesla has a software-defined car, and you don't really. And you don't really know how to build it. And you don't really know how to, you know, the electric vehicles are more like a software platform architecture versus a supply chain with a bajillion suppliers that you've all done business with for 50 years. And so Kasser Yunus started this company with some friends of his from Google. And so they'd grown up in Detroit. Kasser had worked at General Motors after graduating from undergrad. Then he went to Silicon Valley, was at Google for a while, worked on the Google Maps team, knew all the guys at Waymo.

21:32And so he can go to the CEO of a company like Porsche and say, hey, if you want to have a software-defined car, I'm your only path to getting there. You don't have the internal talent. I have the best developers in the world tackling this problem. And you can only get this talent if you do business with me. And now is Sam Altman going to release a new version of ChatGPT that does that? No, right? Because he's not in the business of creating software to find cars. Those are examples of businesses I like because it involves deep technology, but it involves a multidisciplinary approach. You have to not just be good at the AI, but you have to be able to speak the language of the car companies.

22:14And you have to be able to implement systems at global enterprise scale and help the customer reach the promised land, and it's very strategic to these car companies, they know they have to move in the direction of being a software-defined car. And so that's the kind of stuff I've been seeing lately that I get excited about. But what if somebody says there's only 25 major car companies in the world? How big is the market, Mike? Yeah. And in that case, you have to be able to get giant contracts, right? You have to have individual customers in the hundreds of millions of dollars to make that business work.

22:49But you can, right? Bosch doesn't have that many customers in the car industry, but they probably do about $50 billion a year selling to the car companies. And so if you become the complete answer to something that company cares about, you can do pretty well. But companies aren't just going to give$100 million to just some bozo, right? They're not going to give you a giant contract unless they think you can really do the job and you're the only guy that can do it. And so you have to have a particular set of skills that people buy into or it's going to be hard. I don't want to really catalyze PTSD in you, but can you discuss the cases where you had a false positive?

23:27In other words, that you thought someone was a pattern breaker, but after all, didn't. Oh, sure. In fact, it's most of the time. You know, my business is very strange. Warren Buffett, I've heard him say, rule number one, don't lose money. Rule number two, don't forget rule number one. for me, rule number one is don't pass on Airbnb. If I'd been wrong about Airbnb, I could only lose 100 % of my money. But if you're right, you can sometimes make a thousand times or more. Buffett talks about his margin of safety. What I care about is my margin of asymmetric upside. I care about how big could it be in the rare event that it works.

24:07I have this really weird way of coming up with an investment thesis. I'm like, okay, given that it's 80 % likely I'm wrong, how big does it need to be if I'm right? And if it can't be big enough, no matter what the odds are, I just can't invest in it because I have to get paid for the risk I take, right? I'm taking crazy high risk. And so I'm like, you know, unlike say Buffett who never wants to lose money, I'm saying to myself, okay, given that it's 80 % likely I'm going to lose money in the 20 % case, how big does it need to get? Which is just a different way of showing up in the world, right?

24:43It's a different way of thinking about success. So I don't look at risk as the chance of success or failure. I think of risk through an expected value lens. I'm like, okay, in the 20 % case, it's right. How big does it need to be to be a good expected value bet, even though it's risky? What if at the moment of making an investment, it's really not an assessment of how big can something be because you don't know what this company is going to pivot to, right? So when you talk about Justin TV, you couldn't do an analysis of how big Justin TV would be. But when Justin TV pivoted to Twitch, then you could, but that wasn't at the point of investment.

25:28So how do you factor in the pivots? Yeah. And so the way I do it is I like to say, I don't want to study the total addressable market for the reason that you mentioned, right? What I believe is that companies that harness inflections define new markets. And I can't size a future market, right? The future hasn't happened yet. So what I need to do is it reminds me in physics, you have potential energy and mechanical energy. And what I'm looking for is a future potential market. And I believe that big future potential markets happen from powerful inflections. So the more powerful the inflection is, the more capacity it has to change the future and the more capacity it has to impact the future in a broad way.

26:14And so what I do is I take a leap of faith. I say, based upon this inflection, based upon this insight and based on the founders authentic match to the future they're pursuing, I think the odds are in my favor. I don't have to know exactly how the dots will connect. I only have to think that the odds are highly probable that the founder will find a way to connect those dots. I love this job saying you can only connect the dots looking backwards. And I think that's what he was getting at, right? You're pursuing opportunities that are ambiguous, but that doesn't mean they're not a risk worth taking.