E29: Mike Maples on Building Successful Startups and Venture Funds

28:14Like startups are just freaking impossible. And I think that you've got to be, you've got to have gone so far down the idea maze rabbit hole that even though people are skeptical, you know, like Reid Hoffman, he ran the idea of LinkedIn by Elon Musk. and elon musk said i don't think that's gonna work but the reasons that elon gave for it not working were reasons that reid understood that reflected that elon didn't have as much knowledge of the idea mace as he did so you want to seek out contrarian views from people that you really respect and you want to be able to summarize those views in a way that honors their perspective but you also want to be able to find ideas where you're like holy mackerel this amazingly smart a person, they don't even get it.

29:03We mentioned earlier that founders in many ways have to think like investors when picking their ideas, even more so because they only have one shot on goal. So let's talk about some investing mental models. One of which is yours, which you say you get paid for the risk that you take. So what risks do you tend to be more comfortable taking than others? There's team risk, there's market risk, there's product risk, there's technology risk, timing risk. How do you sort of think about the risks you're comfortable taking or the risks you're not comfortable taking? Yeah, the main risk that I don't want to take is risks that suggest the founders aren't all in.

29:42And so when two of the three founders are still working at the companies that they're at, or if the best startups are going to happen even if they can't raise the money. and they're like, look, we're doing this and we'd love to have you long for this, but make no mistake, this is happening and we're looking for the best co-conspirator we can find. And so I look at it just like with a founding team, you only want to start something with people you want to go to war with. I want to fund companies, or startups in this case, where we're going to be in the foxhole together and we're going to go to war together and we're going to show the world that our crazy idea is the right kind of crazy.

30:25And if those folks punk out and quit, they're not my peeps. I like people who are just like, if our insight turns out to be right, this could be my life's work. We see a lot of companies come in and say, hey, should I raise a$500K,$750K pre-seed? Or, hey, the market's good right now. Should I raise$2 million,$3 million? What's your sort of take on lean startup versus heavy startup in terms of how much money people should raise and be operating? Yeah, well, I think every company is its own snowflake, right? So every company should have its own capital strategy and investment thesis. So one company that I think you guys might be involved with us is Applied Intuition, right?

31:04Kasser Yunus. Well, he's building software that customers are paying millions of dollars for that simulates autonomous vehicles. You can't deliver half a loaf to those customers, right? And so you're going to have to have a team of very technologically deep people, and you're going to have to have a product with a pretty large footprint, and you're not going to get many turns of the crank. So it's pretty reasonable that you're going to raise$10 million, even before you've done anything. Well, at least before you have product market. it. Whereas there are other things where the problem I see is the entrepreneur has a really great insight, but they haven't really found the product yet.

31:47And then the first thing they do is they go raise$3 million. And what they don't realize is now they've committed themselves to three to five years. They don't know that yet, but the seed funders aren't going to say, oh,$3 million, easy come, easy go. So these days I'm doing a lot more projects where I say to the founder hey why don't you take a quarter to half a million dollars in six to nine months and if it doesn't work out it's not a failed company on your linkedin profile but like why why not raise money when you're willing to just go all in and you're just positive that your insight's right and just you've gotten way better data than you could possibly have now so like i find a lot of companies they're just doing a startup and it like you said it's easy to raise money so they go raise three million dollars and now they're now they've committed themselves to three to five years behind a mediocre idea.

32:33Yeah. Let's get into the venture landscape a bit. One thing you've been pretty active in supporting and being helpful to is the operator angel movement. So a lot of these micro funds emerging from people who are either full-time operators or running small funds. How do you think about that movement? What does that movement mean for venture? And my question is, how do these firms, what happens to these firms in a few years? Do they transition into institutional capital and become full-time or can they run their small funds forever? How do you think about this? Well, I think it's a really interesting phenomenon.

33:09So how many scouts are there out there now in this world? Probably, I would guess if you took what Sequoia has done in first round and with Dorm Room Fund and a few others of these groups, General Catalyst, Spark, all these people, let's imagine that there's on the order of a thousand scouts. so these operator angels or some people i've heard call them super angels 2.0 they've crossed an important line of demarcation they've decided that they don't want to just invest a firm's money but they want to raise enough money to start to build a reputation for being an investor and i think some of these folks will have it continue as a side hustle and some folks will say i just want to keep doing this and maybe they'll maybe they'll keep doing it until they stop doing it.

33:53And I think some people will say, I have ambitions of setting up like a bonafide seed fund,$25 to$100 million and having it be my career and building a track record with LPs. And so I've decided that spending a lot of time with those people and helping them as best I can is the right idea for us. And I think that when you're kind of in our position, you have two fundamental choices you can make. One choice is you can be a vertically integrated multi-seed firm. And the problem with that, there's strengths in that for sure. But the weakness of that strength is you have to become greedy about ownership.

34:35And you think of ownership as a zero-sum game and you don't want angels to get their pro rata and you do all this stuff. Or the other extreme is kind of what we're pursuing, which we can do because we have a small fund, which is being an open systems VC firm. And so I think I've surprised some of the operator angels because I've carved allocations for them and deals that we've done that they haven't seen yet. And then I'll just say, hey, look, if you want to invest in this company, that's great. If you don't, that's fine. And then I'll tell the entrepreneur if they don't want to invest, I'll just fill out the rest of the round.

35:07But like, I think too many of the VC firms right now they say to all these super angels or operator angels yeah we want to work with you we think you're awesome and then it's like so start showing me deals and i think that that it's better to to give before you try to get and just kind of expect that karma will work its way out right and you know there are dozens of them forming um you know five ten years from now are are they merging or Or can all of them grow? What happens to the surplus? Is there a great reckoning that's going to happen in the next five, ten years in sort of the micro fund or micro seed market?

35:47How do you see it playing out? I'm not really sure. I think that what will happen is… Because you do believe there's too much capital, right? Oh, yeah. But like too much capital vis-a-vis operator angels is the least of the problematic part of this, right? But I guess the operator angels that win will have to do what everybody who wins does, which is come up with a strategy that's congruent with the amount of money they manage and that is reality-based. And what's happening with a lot of operator angels right now is they're trying to get into every deal that's hot any way they can. But if you're investing$50 ,000 in a company that's valued at 50 post, there's almost no circumstance where you can return any meaningful amount of capital doing that right and so they're gonna the ones that win will have to decide that they really are investing and not just writing checks for hot companies and some of them will right that's that's the that's the challenge that faced me and josh koppelman and steve anderson back in the day when we were getting started with with our seed funds and so i think i think some will succeed but it'll be more of a function of what they do, I believe, than what the market does or whether there's some shakeout or anything like that.

37:01Venture is one of those funny businesses where if you have a legitimate strategy and you execute it every day, competitors just kind of go away because they don't. Most people just don't. So I want to tell you, there are two sort of, or there are a couple, or there are a few, sort of heresies in venture. One is the, not heresies, but controversial topics. One is sort of concentrated versus diversified portfolios or broad portfolios. Two is, you know, follow on versus putting all up front. The first one, and we've talked a little bit about this before, but I have a new angle on it. So AngelLess just came out with a post basically saying that if you're not in the best performing seed deals, seed investors would increase their return by blindly.

37:41You'll get beat by people who blindly index into every credible seed deal because, you know, the amount of the percentage of getting outlier is very small, et cetera. And so, you know, people always give counters to that. But my one sort of example, YC does this effectively, right? They index their early stage market. They do 400 deals a year. They've built a platform. My question is, would you rather be YC or benchmark or YC or first round? Or obviously, you'd rather be floggy. But yeah, well, there's a few things embedded in that question, right? So the first thing is there's a subtlety in that AngelList article, which is if you can't get into the very best seed deals, you'd be better off indexing.

38:20And I'm sort of like, okay, well, hang on a second. That is a very big if. Because I'd say if you're a seed fund and you can't get in the very best seed deals, whatever you're doing is not what I call a business. You may be a benefactor, but if you're a seed fund and you don't have an explicit strategy to get into one of the top 20 outcomes of the year in the seed round, you don't have a business. And so it kind of doesn't matter how you compare with anybody else because you're still a loser. and now it's just comparing degrees of loserliness right and so like which is fine like like my dad um he does angel investing but he doesn't care what the returns are he just he just puts money into companies where he likes the team and just hangs out with them right but how explicit is the strategy other than how the gps are good pickers and they build brands and they've been doing it for some time because it's not like company building where you have data moats and you have all these proprietary technologies and stuff.

39:13But it's funny because the thing in common with benchmark and YC is not their strategy, but the fact that each strategy does one specific thing, which is gives them an unfair advantage into getting into one of the top outcomes of the year. And it's like, if you don't have an unfair way to get into one of the top outcomes of the year, you simply will be unsuccessful, period. And people don't want to hear that because it's an inconvenient truth, but it's the truth with no tricks. And so any strategy that's compared to other failed strategies is no longer all of a sudden a good strategy. You want to have a strategy that finds a way to get into the top 20 deals of the year because power law is real and that's how you get paid for the risk you take.

40:02Yeah. Well, there's hundreds of firms, right? In reality, are there only like 10 or 20 firms that have an unfair advantage? And is the only unfair advantage brand? I think brand is important. So one of our LPs said at one time that VC is like a lottery game where a small number of people seem to keep getting the winning tickets. And so I think that's right. And why does the entrepreneur care about the VC firm's brand? Well, startups are impossible. It's impossible to recruit employees. It's impossible to get customers is it possible to get PR and so a VC brand is like a bridge loan of your brand to the startup and someday the startup will have its own brand Lyft has its own brand now it doesn't need floodgate one iota but I think we're probably helpful in the early days in terms of them recruiting and stuff like that and clearly once they raise a series a and beyond and so I'd like to say like the founders care about the brand of the VC firm because it helps them overcome all the impossible odds on the way to saying no to impossible.

41:08Right. And there have been a lot of people who've tried to build moats sort of beyond brand. They've tried to build proprietary sourcing strategies, proprietary data around recruiting or proprietary ways of diligencing using software, using big platform teams like Andreessen. I mean, 10 years from now, do you still think about the future of venture capital? And Angel has had all these big dreams of disrupting venture capital, and I don't think it has. I think it's been a sustaining innovation for venture capital. 10 years from now, are we still sort of playing a similar game where it's a small number of firms and they're probably pretty – it's you, it's Keith Reboi, it's first round, it's Sousa, and maybe some new entrants, one of these operator angels who goes pro, but it's still more or less the same game?

41:50Or is there something that's radically disruptive? It's funny. A lot of people thought YC was disruptive or AngelLess was disruptive. But I would assert that Benchmark and Sequoia's power increased during that phase of time. So I really do think this is a business about what is my strategy to get to the top 20 companies. Execute that strategy every day with integrity. Execute and you win. And it's like because most people don't and people come and go. but most of the people who come and go it's not because of some macro industry level stuff it's because they just took their eye off the ball of what it takes to win and what they needed to do to do what it takes to win going back to an earlier point I like to say VC isn't poker because we're not playing the same game it's about your ability to basically rig the game that you get all the best deals and maybe now more than even 10 years ago So it's less that Sequoia picks WhatsApp and more that WhatsApp picks Sequoia.

42:55There's a lot, especially in the later stage, a lot of these things happen to be obvious. And now it's more about winning than it is about sort of picking and see that it's different. But one thing I'm curious, most of these operator angels are probably saying, hey, I want to be first round of Floodgate or I want to be, you know, benchmark Sequoia one day. I think they're less saying I want to be YC. and there's no positive version of spray and pray metaphor in Silicon Valley, yet YC is the highest portfolio in the Valley and I think has the highest guarantee of being one of the 20 best outliers.

43:30And yet, why is no one trying to compete with them? Yeah, well, there's a couple of things there. So first of all, I think if you look at the number of billion-dollar realized outcomes, I think that the very top VC firms still are the champs. And so the thing that YC got right is they came up with a way to scale making a large number of bets. So like, for example, typical angel, if you invest$150 ,000 checks and you're investing in this company at 10 to 20 post money, you have to pray if you have$100 million under management. But YC, because they have this deal where they put in a tiny amount of money for 7.5 % of the company, they can scale the number of companies that they invested.

44:20So from a funding point of view, YC invented the first model where you could scale the number of companies you invested in and not spray and pray. Now, the thing that I think is the, I think YC has two interesting questions. One is, can they provide the same level of service and insight if these batches get super big? And then the other, I think, is when YC becomes a brand, are you able to attract as many of the rebels? And are you attracting sort of the conformists who want to have it on their resume and who kind of want to get it for the status as much as they want to get it for the reasons people originally did it?

45:00But I'm rooting for YC in both dimensions, right? So without YC, I wouldn't have been in Twitch. I wouldn't have been in Weebly. We wouldn't have done Clever. We wouldn't be involved with Rappi. And so I have, like, I'm an open guy, right? I'm a lover, not a fighter. And so, you know, I'd love to see YC bring as many talented entrepreneurs out here as they can. And I hope that they want to do stuff with us. Yeah, totally. I did Rappi as well, so I'm grateful. One thing I'm curious to go deeper with you on is something that's not super well understood. And it's the relationship between VCs and LPs.

45:33We hear a lot about the relationship between founders and VCs. You know, there's this critique of some people say that founders and VCs are there's some misalignment because VCs are going for home runs or busts. And sometimes founders want to be able to sell their company for 100 million or have some optionality for life changing outcomes for them that might not move the knee over VCs. And I think what people don't understand is that VCs incentives also come from their LPs incentives. Their LPs want their VCs to go, you know, bigger bust in some sense. Like LPs, everyone is diversifying upon someone else's concentrated strategy, right?

46:09If VCs said, hey, I have a strategy that reliably gets you a 1x or 2x every single time, and it's investing in hundreds of companies, they're like, no, no, we want you to shoot for a 5x or 10x because we're investing in a dozen VC firms. So there are a few questions to make them there. One is if you can unpack sort of what's less understood about how LPs think about investing in VC, could you envision sort of like an indie VC for the LP world? And then also I'm curious, like, why are the people who are investing in seed funds, you know, fund-to-funds and LPs and not you? Like, you have a better chance of, you know, identifying the next floodgate or the next first round.

46:50Or in the same way that founders are, you know, the idea between scouts is that they're better at identifying the next founders. They're closer to them than VCs. Why aren't VCs investing in other seed funds? Well, I think some are, right? Right. But I don't really look at it that, so first of all, I always go back to the first principles. Like our business is hard, but it's not complicated. There's a set of LPs, and the very best ones have super long-term time horizons. And this is why some of the best fund of funds and certainly a lot of the endowments are sought as LPs because they think in terms of decades.

47:27They're slow-money people rather than fast-money people. And so the reason they invest in VC if they're doing it right is they don't really even look at it as an asset class. They look at it as a tiny fraction of their large endowment portfolio or their large fund funds portfolio that is super risky, but that needs to have a higher return to be compensated for that higher risk. and if they're doing it right they they also believe that there's a small fraction of firms that can deliver those outsized returns relative at higher risk probably the biggest mistake that some LPs make is they get in a state of denial they think that they can invest in firms that have no chance at getting those top 10 out 20 outcomes and you're simply not gonna make money if you invest in those firms.

48:15It just will not happen. And so, but I think that, you know, RLPs would be folks that you recognize as fairly typical of what you would see with Benchmark or Sequoia or some of the, you know, Kleiner Perkins or some of the other major firms, but they're investing in us for a different reason. You know, they believe that we have a different way to access those top 20 companies. But like, if you can't, if you can't convince those people that you're going to get your share of those, like it's, it's hard for them to justify continuing with you. I guess my sort of, my question is you can imagine a world where there's too many middlemen, right?

48:52There's, there's founders, there's scouts, there's VCs, there's fund to funds, there's fund to fund to fund to fund. Like you, you could, um, as the world sort of, um, you know, founders create the value. Uh, do you imagine a world where sort of some middlemen get cut out a little bit? Like where, why isn't the capital just going straight to the founders? Um, how do you, how do you think about that? Well, I think if you're one of these endowments, or if you're one of the top fund of funds, you probably think that Peter Fenton at Benchmark is going to continue to do better at winning that lottery game than you would.

49:25And let's say you had amazing data. Well, if you're one of these endowments or one of these fund of funds, are you really going to find the next Jack Dorsey? And so you might find the current Jack, Can Jack Dorsey go to Stanford and raise much money for, and maybe this is the promise of incubators or studios, is founders going directly to LPs? Yeah, I'm just, you know, it's funny. I think it has been surprisingly consistent that the best outcomes have raised money from the best firms, no matter how many people are out there, no matter how much noise there is. And, you know, it's a little bit like fish stories.

50:01You know, there's always somebody who caught a big fish that surprises you. but what you find is that usually it doesn't happen as much as you think and it's not as big of a fish as they said. It is more of a story than you thought it was. So I think that there's still a huge amount of noise but I think that what it takes to find the signal is surprisingly consistent. And a lot of this is about just not lose sight of the signal in spite of the fact that the amount of noise is higher than I've ever seen in my life. And this capital comes from endowments. It comes from pension funds. It comes from family offices.

50:43Are there ways that that sort of macro capital situation could change or be in different hands in the next decade or two that might change how venture is done? I think it could. But right now, with interest rates so low, there's a lot of temptation to find yield throughout the world and so startups are a pretty appealing place to try but having said that the way this stuff ends badly is if a whole bunch of things go wrong at the same time so like right now sass public companies they're valued at like 10 hundred revenue last time i looked the way these things go south is not only do you have a recession, but the multiples go from 10 to 1 to 2 to 1.

51:27So like now your stock price is way down, your employees all have their options that are water, or the companies that you're selling to are delaying their purchasing decisions. And so not only are you values a function of your revenue at 2 to 1 rather than 10 to 1, but now your revenue isn't as high. And so what happens when things correct is you have a chain reaction, a whole bunch of things multiplying badly at the same time. And that's what people always fail to anticipate is the impact that has. The conventional wisdom would be like there's so much money in venture capital in public markets that even if there was a recession that money's got to go somewhere.

52:01But that's what people don't understand. Yeah. And you somewhat related as software continues to eat the world, software is now getting to businesses that didn't have software before, i.e. they're non-tech businesses. And they've sort of different, maybe blitz scaling doesn't work for something like WeWork or things with not as good gross margins. How do you think? But obviously, if you were a seed investor in WeWork, you did okay. Well, I'm not sure. If you didn't cash out, you got zero. If you cashed out. How do you think about investing in, quote unquote, non-tech businesses? Yeah, so I wouldn't invest in anything non-tech.

52:36So, like, for example, some people wrongly believe that Lyft was just like what taxi should have done because you could have just had a ride-hailing app. And what people don't understand is Lyft has an entire data supply chain that lets you locate cars on a map in real time and lets you locate riders on a map in real time. And data flows through the entire pipeline of the company. And you have data enlightened employees doing A-B testing. And I mean, it's very sophisticated. And so I do believe that, you know, traditional vertically integrated corporate centric industries will be reimagined around software defined networks.

53:10I believe that. But that doesn't mean that I believe that a non-tech company is also the tech company. So I just basically believe that software-defined network-centric models will displace vertically integrated traditional models. And the trick is to have a valid software-defined network, which I would argue that WeWork has not yet made the case that they are. So you wouldn't have been asking WeWork? Well, it's not like I was offered the chance. But like, yeah, it's not something that was on any thesis I had, but hard to know. Maybe the guy would have put the Shazam on me. Who knows, right? Who knows?

53:46Totally. I mean, it is interesting. I'm seeing a lot of, because I'm a community guy, I'm seeing a lot of these sort of social communities. Sort of Soho House is valued at$2 billion. You know, Soho House for X. You know, in-person communities for old people. And I keep thinking, what's, you know, why is this venture scale? What's the technology behind it that's going to enable? I don't know if you've seen these sort of. Yeah, and I think most of them won't. But the other thing is some of them will have good exits anyway. And people will take the wrong lesson from that too. So I think that it's sort of like, that's why I think mental models are so important.

54:21It's like, I think success in this business comes largely from understanding what type of game you play well and are repetitively successful at playing. and I think it's okay to stray from your game but you ought to be very clear when you're doing it and you ought to be clear about why you're doing it right and the wrong lesson is hey you can have a nice exit but you won't have a great exit like or it's like okay wow I I didn't think dollar shave club was gonna be capital efficient but they had a billion dollar exit so my thesis was wrong I need to go find the next dollar shave club and I'm like no um you know good for them but but you know do i all of a sudden not believe the theory behind our thesis uh if i don't then that's the valid reason to think about the next dollar shave club but it could just be that unilever just didn't know what to do and they just overpaid which is probably what happened right so you're not investing in the warby parker for x i mean i wish him well but it's not you know it's just not i i haven't yet constructed a framework that where that makes sense for me to do in the c round so uh we were talking about Balaji earlier.

55:28Balaji has been talking about how he believes long-term crypto is actually going to disrupt VC in some months. And one of the ways he talks about it is basically regulatory. Many industries are propped up by regulation. He says VC is no different in some ways. One is accredited investor who can and who cannot invest, who can and who cannot start a fund or because of solicitation, you can't advertise your starting fund. So it's pretty hard to fundraise unless you're pretty well connected. And then the cap table is limited to, you can't have hundreds of people. It's pretty hard to get on a cap table unless you have some serious capital.

56:01How do you think about regulations as it relates to VC or how potentially crypto can disrupt VC? Obviously, ICO has had a moment in the sun, and who knows if something like that will exist in another form. Here's the thing that I think is interesting about all this crowdfunding stuff. So a lot of people say, okay, we should make it so that more and more people can invest in startups and i'm like okay let's think that through we already know there's a world where there's a tiny number of startups that end up really making money for investors and so the the problem is not that we don't have enough money to invest those companies so what what are the odds that a quote-unquote normal person with no information advantage with no access advantage with no brand is going to get into one of those companies i would argue it's pretty low right so i think so i think that most of the crowdfunding stuff is an invitation to lose money which that's up to them to do to me the more interesting question is why aren't there more valuable assets to invest in so like for example um would would i be interested in owning a share of uh a second year stanford mba student maybe and they might be interested in selling it to me if they wanted to have certain kind of liquidity early in life without sacrificing their long term.

57:23So like, I think it's kind of interesting to think about what things in the world are valuable and productive that the markets have no way to make a market for right now. And so like, I think that that's where the unlocked value is more than it is, hey let's have anybody in the world who wants to invest in startups that's interesting i think about it in a different way of or frame it a different way which is well one problem we have is obviously this huge uh well tech lash tbd if it's manufactured by journalists or how real it is but i wonder if a way to improve it would be uh giving people or ideally you know thousands or tens of thousands of people would have had equity in facebook or hundreds of thousands or millions rather than get it on the back end via taxes.

58:12And when it's taxes, it sort of zero sum, hey, you made money, now it's mine. When it's equity, when it's on the front end, it's like, oh, let's make this as big as it can be because we're all going to get rich. And I think that's where crypto with tokens can potentially present a legal or mechanistic way to give millions of people little bits of equity in your startup. Yeah, and I just don't know why in the end. Okay, so I'm Mark Zuckerberg. And I've got a choice to take$10 million from Jim Breyer. Well, I think you do both. I think you still take Benchmark, you take Jim Breyer or whoever. It was Benchmark, Excel.

58:48But you're trying to disrupt Mark Zuckerberg. You're trying to make the next Facebook. You need to break network effects. And you give little bits of$10 of equity to thousands of people. And I think that the problem that some people have in formulating those arguments is that the very best startups quickly are able to raise money at will from whoever they want to raise it from. And so a value proposition that says, hey, guess what? I'm going to let a whole bunch of people that you've never met or heard of invest in this company. Well, you can raise money at will. And so you've got to decide who you want to raise money from.

59:25Do you want to raise money from those people? Like, do they understand the risk they're taking when they invest in a startup? Like what What happens if they call you angry because the stock goes down someday or they can't sell it? And so I'm more interested in kind of saying, hey, there's a set of things we take for granted, like shares in a company or bonds or stocks or real estate investment trusts. Why can't we make every productive asset in the world something that I can buy a fractional share in? that's what I would be more interested in using crypto for. And then the other thing I'd be interested in using crypto for would be creating businesses that need to overcome a cold start network effect from day one.

1:00:11But I generally look at new trends through the lens of what new abundance does it create rather than what middleman that exists does it replace. ClearBank is a pretty interesting innovation. And some people are saying that, you know, venture should go back to its roots, which is funding technology risk and different forms of capital should, you know, fund your, you know, marketing spend or things like that. How do you think about that? Yeah, in general, I'm a big believer that we're looking for these exponential change events. And so I like ideas where you can light a forest fire with just a match.

1:00:49And I think that on some level, the true measure of the disruptive power of an idea is the degree to which it can make change without throwing money at it. Now, there are some companies where you can have a logical real growth strategy that involves raising a lot of money, like Lyft raised a lot of money, so did Okta. So I think that there are times when growth mode requires a lot of capital. Usually it's because the whole market is energized to want your product. And if you don't satisfy the needs of the market, your competitors will or incumbents will. But for the most part, I believe that capital efficiency is a proxy for how novel the idea was.

1:01:35Right. I'm curious how you think about going back to fund construction, follow-ons and the percentage of first check to follow-on. Because what we're seeing at the path from pre-seed to seed is that the price is rising faster than the company has been de-risked. And so we're thinking more and more up front. How do you think about that? Yeah, the way I look at it is every investor has to ask, how do I get paid for the risk I take? The way Floodgate believes it gets paid for the risk it takes is we take that risk before the Series A guys. And so now we have to take smart risks or otherwise we'll just lose our money.

1:02:18But we need to take that risk when we're not competing with those guys. If you're Benchmark or Sequoia or Excel or Greylock or these other folks, the way you might think about risk is different because now you're looking at early signals of product market fit or success metrics or just demonstrable proofs of early growth. But in the end, you have to figure out how do you convert that insight that you have and the access that you have to those companies into getting paid for the risk you take. Now, so the reason that we invest more of it up front is because that's the only time when our money is competitively advantaged.

1:02:58There's only one other time, and that is if the company starts succeeding at pro rata rights, and pro rata rights are a right. That's dollars you can invest that other people can't invest. But for the most part, I think that seed funds are particularly bad about this. I think if you went to most funds and said, show me the return on investment of your follow-on dollars compared to the return on investment of your first checks, follow-on investing has been scandalously bad. like if I were if I were the LPs I would be like starting to put more pressure on firms to quantify their follow-on dollar returns versus their upfront dollar returns because like every dollar is a dollar if you're an LP that that dollar you spent regardless how you spent it it's it's either gets a return or it's gone right and if you're putting you know one-third of your bets at series Series A and two-thirds follow on at Series B, you're basically a Series B firm.

1:03:56Correct. And you're a Series B firm with low ownership. And so, great, that's fine. But who are the very best Series B firms in the world and what talents and capabilities have they built and how do they compare to yours? You know, hey, some people may want to make that bet. That's up to them. Is there a meaningful difference between thinking about the world in terms of ownership versus thinking about it in terms of multiples or probability weighted multiples? Or is that sort of pedantic? Because most people sort of view it in an ownership perspective. Well, I think that there's a relationship.

1:04:34So the way I look at it is if you're going to have a successful fund, let's imagine you want to have a 3x fund. If you want a 3x fund, your best exit, because of the power law, has to return 1.5x the fund in profits by itself. And so you could get there a couple of ways. You can own a small fraction of a really huge outcome or a big fraction of a not as big outcome. But the reason that ownership matters is at the limit, right? If you have a$500 million fund and you want to be a 3X fund, your biggest exit has to return$750 million in profit. So you own 10 % of$7.5 billion, 5 % of$15 billion. There are ownership and outcome dynamics that must be present for your fund to achieve that hurdle.

1:05:21And so the bigger your fund gets, the more you simply have to care about ownership. Not caring about ownership just isn't an option anymore. And so is there a way by which – let's say an operator comes to you and says, hey, my fund one is$3 million,$5 million,$1 million. And fund three, I want it to be$50 million. I want to have converted and I want to transition into the next floodgate. There can only be so many floodgates and floodgates not going anywhere. are there what are you sort of advising is it because basically you go to lps and other firms who've been around and say i've done this before i will do it again for people who haven't done it before and and even buy fund three aren't likely to have you know a ton of obvious track record what is important for them to prove out like because what i'm trying to assert is it doesn't seem that there are that many strategies or legible strategies for getting in the top 20 companies other than I've done it before?

1:06:14Or how do you sort of think about? Yeah, well, it's funny because I don't, if some of these folks create the next great seed fund, God bless them, right? God bless America. I got no problem with that. And I'm really grateful when I first started to get involved in venture, people like Bruce Dunleavy introduced me to Phil Horsley at Horsley Bridge, and he didn't have to do that. And I kind of, the way I look at it is a little less macro. There are certain individuals where I think if they were successful, it would be a better ecosystem. And so I just do the best I can to be one of the good guys that helps.

1:06:54And I just expect that karma will work its way. And if it doesn't, then that's okay too, because entrepreneurs will still be better off. So I don't, but where they'll go and whether they become a fund that competes with ours or whatever, I don't think about that too much. Because I figure if they're talented and good for the ecosystem, they're going to find their path to the light regardless. And so we might as well be friends and me look at them as a fact rather than a threat. Totally. And I've talked to a number of them who've said that you've been immensely helpful. So if you're a micro GP and you have a great deal flow, do work with Mike.

1:07:32I want to close with some sort of mental models around company building or venture investing that you believe perhaps are no longer true or not as true as they once were because maybe market dynamics have shifted. What question I have, you know, Zach Cantor going back said, once the book has been written about it, it's too late. And so blitzscaling is his example of that works for things like LinkedIn, Facebook, things with immensely high gross margin businesses. Maybe it doesn't work for WeWork and maybe not even Uber. I don't know if you have a take on blitzscaling, but then broadly startup tropes or philosophies that were true that are maybe not as true today.

1:08:12Well, so I look at blitzscaling as a type of a growth strategy. So like when you're startup on the way to becoming a company, you hack insights, then value, then growth. And then someday you become a company that's hopefully profitable. So blitzscaling is a certain edge case of growth. And blitzscaling basically says there are certain situations where Jeffrey Moore's technology adoption life cycle is not as relevant. So in most markets, you have early adopter customers. They try your product. They get value from it. They convince pragmatist buyers. You cross the chasm. You go to the mainstream.

1:08:50But it takes time. It just takes time for people to like new things. But like with Lyft, the second people tried it, they're like, I'm done with taxis. And so we got in this situation where Travis Kalanick was going to raise crazy amounts of money. He was going to come after us with UberX. Everybody who was exposed to Lyft immediately said, this is a game changer. And so we knew in a situation like that, the market will be satisfied. And so you just have to ask, is it going to be us that does it or somebody else? And so in those cases, and I think this is what Reed's getting at, in those cases, it's irrational not to try.

1:09:29to cover the whole market. And you have to blitz scale in the same way that metaphorically the Germans blitzkrieged in World War II. You're right. The supply chains are more narrow as the tanks go forward faster. And you're trying to overwhelm the enemy through speed and agility in your growth. And sometimes you're going to do some things inefficient at the edge to achieve that growth. But the larger goal of capturing the most meaningful share of the market is so overwhelmingly dominant compared to all other goals that it's worth doing that. So do I believe that every startup in Silicon Valley that it's capital efficient, high margin, should blitz scale?

1:10:07No, I don't. I think most should go through the technology adoption life cycle. But I think there are times where it goes from zero to Main Street. And it's like the question is going to be who gets it? Is it you or the other guy? Okta had to go through this too in identity management. The market got energized to the idea that everybody needed identity management for the cloud. The question was, is it going to be Okta or Microsoft? Yeah. And Microsoft has worldwide distribution. And so you've got to decide to grow at hyperwarp speed or Microsoft just out muscle you. Does anything come to mind in terms of things that were once true, but no longer true or in famous startup tropes?

1:10:45You know, the funny thing to me is how true the fundamental lessons have remained. most of the stuff that people are saying isn't true are untrue things where people are saying there's a new truth and i think fundamentally you know a startup is all about harnessing exponential change to create a unique novel value proposition that people are desperate for that changes people's point of view and it grows at a hyperwarp speed and uh and it's done by people who live in the future. And like, I think that it's been remarkably true for remarkably long. And when I've spun my wheels or gotten off track, it's when I believed, oh, my business has somehow changed from that.

1:11:29Two last questions. One is, you know, I'm obsessed with how to create more entrepreneurs, reducing the barriers to entrepreneurship. One is this thing we've been talking about, which is VCs have portfolio diversification, founders don't. Is there a way to give founders some diverse portfolios either by, you know, making them scouts or by founder pooling. Keith or Boy came after me and he said, it's a terrible idea. And Keith, they're friends. But founders, you need to be all in. And if they have diversification, maybe they won't be all in. I'm curious what you think about that sort of founder diversification or founder pooling idea.

1:12:03I'm more on Keith's side. And then I get the other thing. I don't know if Keith said this, but I remember when I was at Motive, one of our venture firms said, hey, we're coming up with this idea to pool shares among all the firms in the portfolio. Would you like to do that? And maybe we were arrogant, but we're like, why would I want anybody's shares but our shares, right? And those are the founders you want to back. And so, like, here's the thing. Like, too many people, I believe, are now thinking of being a founder as like a career move. And the types of founders I like are people who think like Alex Honnold when he was climbing Yosemite El Cap without a rope.

1:12:40And they're doing it not just... they're doing it because they are obsessed with doing it. And they're not doing it because it's a stop along the way on their career or they're just looking to have that experience. It's like, and there's no shortcuts to hack your way up it. There's like, in order to climb it without a rope, you have to climb it hundreds of times with a rope. You have to know every nook and cranny of that rock. And the great founders don't view that as a chore because they're obsessed with their passion. And they want to understand something in a level of depth that nobody's ever understood it before.

1:13:16I guess my premise in terms of wanting to reduce the barriers to entrepreneurship is because I think sort of maybe there's some great founders out there who accidentally find themselves into it. And if the barriers were higher, then they wouldn't have accidentally found themselves into running a successful – the way that some people accidentally find themselves in Afghanistan and are successful there perhaps. Do you dispute that premise? Because Keith Reboy would have disputed a premise. You'd say, no, no, we want the barriers high so that the great people separate themselves. I agree with Keith.

1:13:42So I believe that entrepreneurship is more democratized today than ever. And it will only continue to do that. What is still rare and valuable is people who want to achieve true greatness. And I just don't think that's going to change. And I think that those are the people that animate the companies of tomorrow that are going to be amazing. And, you know, greatness isn't something that happens to you. It's a decision. And I just think that the decision to be great trumps all, right, as it comes to this. You have mental models for what makes a great founder or founding team. Do you have any mental models or frameworks for what makes a great investor?

1:14:25As, you know, when Benchmark looks to hire a GPU and Flowgate looks to hire another investor, is there anything that you're sort of have a unique take on? The best investors I've known are as interested in the intellectual content of what it takes to be a great investor as product people are and building a great product. And so the number one worry I had when I started investing after being an entrepreneur was product fun was done. I had to get ready to have a new kind of fun. And I had to become intellectually curious and competitive about a whole new set of things. And so you look at guys like, say, Charlie Munger, who's Warren Buffett's investment partner.

1:15:09The thing that he says is that without fail, the very best investors, regardless of what their strategy is or what they invest in, are incredibly well-read, super curious. And they're obsessed in the field of investing as Mark Andreessen was in building the Mosaic browser at the University of Illinois. Right. And it's like, if you're ever going to be truly great, I think that, that you have to have that passion for it. My guest today has been Mike Maples. The podcast is Starting Greatness. Take a, take a listen. Mike, thank you so much for coming to the podcast. Thanks for having me, Eric. It's great to see you.

1:15:43Turpentine BC is a podcast from Turpentine, the network behind Moment of Zen and Econ 102. If you liked the episode, please leave a review in the Apple store or rate us on Spotify.

1:15:57Thank you.