Finding greatness in non-consensus startups, the story of Twitch from Justin.TV, and why great companies need insights and inflection points with Mike Maples

0:00Welcome back to another episode of Venture Unlocked, the podcast that takes you behind the curtain of the business of venture capital. I'm your host, Samir Kaji, and today we're rejoined by a previous guest, Mike Maples of Floodgate, as we discuss his new book, Pattern Breakers. Mike was first on the pod in January of 2021, and it was great to catch up with him again, this time to discuss the importance of identifying founders that are pattern breakers in order to generate successful returns. In the scope of thinking about Pattern Breakers, we went through concepts such as Founder Future Fit, the winning formula of inflection plus insight, and his experience that so much of their returns have been from companies that have had some level of a major insider pivot.

0:42For those that are interested, you can find Mike's book, Pattern Breakers, and additional insights on his Substack at patternbreakers.substack.com. This was a fun one, so let's get right into it. Samir Kaji is the CEO and co-founder of Allocate. Allocate and Venture Unlocked are independent of each other. Any statements or references made by Samir or his guests regarding third parties, investments, or securities are solely their views and opinions and are not intended as investment advice or an endorsement of such parties or securities by Samir, his guests, or Allocate. Allocate or its clients may maintain relationships with or investment positions in guests, third parties, or securities mentioned in this podcast.

1:21This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions.

1:51subscribe to it. Mike has some great articles and discussion about this, but maybe talk about what is a pattern breaker? How did you come up with the idea and what is the book about? Yeah. Like why even do a book in the first place? So about 10 years ago, Twitch was acquired by Amazon for$970 million and we made 84 times our money on that investment. And that's on the balance a good thing. But it was unsettling because I had forgotten until very recently that I was even a shareholder in Twitch. And so I had invested in a company called Justin TV, and it had pivoted into two companies, SocialCam and Twitch.

2:32SocialCam was acquired by Autodesk for$65 million. And I just figured that was the company. So I just kind of forgot about Twitch. Next thing I know, we have this big windfall. So I have to go to my LPs and fund one and explain to them, I'm sorry, this hasn't been in any of our financial statements. I haven't ever written anything down to reflect the fact that we own this Twitch stock, but we just had this exit with Amazon and 970 million. We made 84 times our money. What would you like me to do? Would you like me to restate my financials? Do I need to do the audits again? And every single LP said, nope, we're good.

3:07Just send us the money. I've got some champagne and everything else. Not the worst thing. Not the worst thing. But then here's what started to feel unsettling about it. That same week, I helped a founder shut his company down. And he'd done all the stuff you're supposed to do. He'd done the business model canvas, and he'd done great experimentation, and had a very experienced team of lots of skills. And it seemed like it would have been one of the most likely to succeed. And it would have been a Harvard Business School case study, other than the fact that it failed. And then I zoomed out a little bit and I realized 80 % of our exit profits in my first 10 years in the business had come from pivots.

3:50You know, ODO and Chegg went public within a week of each other in 2013. Both of them were crazy pivots. And then at the very time that Twitch was acquired, Lyft was starting to blow up. And it had pivoted from Zimride and it had launched an illegal service in San Francisco. And so I'm like, okay, what's going on here? You know, am I just a lucky fool? You know, Nassim Taleb in Fool by Randomness talks about this idea of the lucky fool who attributes their success to their skill or their planning or something that they got right, but they don't realize that it's mostly due to just luck. And so I thought, OK, if I'm a lucky fool, maybe I should just retire before I get exposed.

4:30And, you know, just there's all kinds of things to do with this world. So I went on this very long journey of trying to figure out, OK, what's going on here? And so pattern breakers is kind of the results of what I came to understand. So there there is a lot of randomness to startups, but it's not all an accident. That was kind of what I learned. And so I wanted to sort of capture my thoughts and I thought they could be helpful to founders and to investors and to people who wanted to understand startup capitalism a little bit better. Before we get into the components of what a pattern breaker is, and we can talk about insights and flexion points.

5:09And you mentioned companies like Lyft, for example. Lyft is not what it is without GPS on your phones. You know, you had other companies, Airbnb, like would not be a company if it didn't have something very similar in terms of this adoption of the sharing economy. Certainly, just in TV, I mean, the thought I remember looking at back and it was like this guy just live streaming his life and you're like, okay, who cares about those things? And yet there was some kind of unique insight. You talk about pivots first, and I really want to go back to this word pivot. Part of me thinks that pivot, there's a version of it, which is just learning as you go along.

5:47You have a hypothesis of a startup, and then you learn, and then you kind of make micro-pivots. But it sounds like what you're saying is a pivot that's actually material, where the business that you looked at up front is very different and almost sometimes fundamentally in a different industry than when you started. Brex was an example of one like that, where it was an AR, VR company, and then became, you know, a financial services company. Yeah, or, you know, ones that I never saw. Like, so I'm, when it comes to startups, I'm a little bit of a train spotter. I get irrationally interested in the minute details of these things.

6:20And we did this teardown of Zoom. And we tried to understand what did it look like at the time you would have decided to do the seed round. Well, the thing was called SASB, and he wanted to do a poor man's video conferencing that worked on mobile phones for consumers. And eight months later, he decides to pivot to B2B. There's just no way if you'd invested in or judged the product for what it is at the time you had to decide, there's just no way you would have invested. There's no way you would have. You would have had a failure of imagination and not seen it. And so then you start to say, well, what are you investing in?

6:52What I concluded is that you're investing in the authenticity of that founder to the future they're pursuing, along with the insight that they have about that future, and then their ability to pull it off. If you get too attached to the product for what it is, you'll miss where the real signal needs to come from. From an investing standpoint, you look at what is the TAM? What is the traction? What have they done before? What is the founder market fit? Is this going to work? Where do we see things? You kind of have this pattern of like things that you pencil out to. And maybe we go back to that Justin TV example.

7:26I actually didn't know that you hadn't had it on your financials and then obviously a great return. With Justin in particular, what got you excited to actually invest in a company, which at the time, I remember you telling me that you thought it was a crazy idea at first. Oh, yeah. And not just think it was, right? So, I mean, even Justin now knows it was a crazy idea. So it was a pretty random circumstance. So I was hanging out with the guys from Weebly and had just decided to invest. And I'm in a coffee shop. I don't think it's there anymore. Cafe Doge in Palo Alto on University Avenue. And then all of a sudden, this guy casts a silhouette in the door of this place.

8:06And you couldn't have missed it because it was this guy with a backpack and a camera on his baseball cap and wires going into this backpack. And it was wearing a hoodie. and I was like, man, that's a strange looking getup. Not thinking that I was going to meet this guy, and he walks in the place, and I'm still talking to Rusenko and Chris and these guys from Weebly, and they said, oh, by the way, did you get your email? I said, what are you talking about? What email? They said, well, we were wondering if you'd be willing to take a pitch from Justin Kahn. He's a friend of ours. We think that you might vibe with this guy.

8:39Right as they're describing that, Justin sits down at the table with us, And he's got me on the screen of his laptop because his camera is pointing right at my face from his camera on his baseball cap. And he says, I'm Justin Kahn. I've got this thing called Justin.TV, and I'm going to do a 24-7 reality show in my life. And I look at him, and at first I thought he was kidding me, right? I thought that there's no way that anybody thinks that that's a company. And I said, okay, Justin, what's the real idea? He goes, no, that's the idea. See, you're on the camera right now. I'm live casting you. and I'm like come on dude that's just that's stupid like that's just like not a business at all like it's not even reality tv what you're describing you know reality tv they record somebody's life for a whole week and condense it down to 20 minutes nobody wants to watch anybody's life 24 7 so you don't you don't even have the concept right that you're describing it with and so he's like come on you're supposed to be a seed investor why are you crapping all over my idea.

9:38Like, this is a terrible idea, but like, what, how does this even work? Right? Like, how did you get me to stream on your laptop? And like, what's, what's in your backpack? And so he says, well, we got this guy on our team named Kyle Vogt. He ended up starting Cruise later, Cruise Automation. And he goes, he's this technical genius and he's a super builder and he can build anything. And he's figured out a way to marry EVDO cellular with the internet. And, And, you know, we need EVO cellular because there's going to be a lot of places where there's no Wi-Fi. And I use the cellular network to stream and then I combine it with the capabilities of the Internet to stream.

10:14And I was like, yeah, that sounds like that would be hard to build. You know, that's interesting. But still, I was like, this idea is crazy. So I said, hey, look, I just need to sleep on it. So that night I go home. I read about Justin. And I find out that his prior company, he created an Ajax calendar called Kiko with this guy named Emmett Shear. And Google had decided to release Google Calendar. So they're like, OK, we're out of business. And so they decided to sell their company on eBay. And they sold it for$250 ,000, two guys 18 months out of college. And I remember thinking to myself, who does that?

10:52Like, how does it even occur to you to sell your company on eBay? Fortunately, like I didn't have the language to describe pattern breaking yet, but fortunately, I was just like, you know, I just kind of think this is the kind of guy who's going to make stuff happen. You know, I just think he's going to do wacky stuff that just might work. I think I'm going to give him some money. And so we did, you know, but like for the longest time, it was a little bit like Twitter with 140 characters or less. People would look at me and say, what on earth were you thinking giving money to these guys for this idea?

11:24That's the dumbest thing I ever heard. Some of the best companies of all time started off with things that at the time, people, everyone thought was stupid. Like no one agreed with it. And that's actually why they were able to build in a white space that no one saw. So it's almost looking into the future and having a unique insight. So you go back to Justin, this guy sells his company on eBay, which is, I've never heard of you. This is the first time I've heard of it to either of anybody doing that. But that goes down to the fundamental human level of what makes somebody tick and what are the things that you can look at to be able to say, is this somebody that has a unique insight or has the capacity to have a really interesting insight that others don't?

12:06If you look back at the 80 % that you mentioned that had these major pivots, was there anything that you could point to about the individuals? You can now say that now looking back, I could tell their pattern breakers based on what I know now? What I like to call founder future fit. An example that probably all of us will know is Mark Andreessen with the Mosaic browser. So he was a student at the University of Illinois in a supercomputer lab with a really fast network. And people probably don't remember this now, but the internet had just basically barely been made legal for business. It had only worked for government universities.

12:44And so Mark is tinkering with these early technologies of the World Wide Web, and he builds a browser, and it ignites a revolution. And what's interesting about that is a couple of things. The first is that people following the pattern were all talking about the digital superhighway. Everybody was saying, should the government build the digital highway? Should Time Warner build it? Should the telephone companies, maybe Microsoft Network, AOL? Mark didn't even know enough about business to know there was such a thing. He didn't know anybody was trying to build a digital superhighway, right? He'd never had a real job before outside of academia.

13:21So he's building this thing. Well, what was really happening was Mark was living in a time machine and he was living in a world that was going to be common to lots of other people pretty soon. So if you're Mark Andreessen, you're like, of course, everybody's going to have a computer with Pentium class processing or better. And of course, everybody's going to have graphical windowing interfaces. Of course, everybody's going to want to be able to hyperlink between websites. And so he just built the thing that was missing, the thing that he wanted to use for himself. How does that relate directly to your question then?

13:55In order to succeed in changing the future, you have to notice it better than other people do. You have to notice something other people don't notice. And this is true in any field. It's true when Einstein figured out general relativity. It's true when Van Gogh figured out how to paint with his kind of impasto style. Artists and people who live in the future notice things that other people don't notice. And the reason that they do is because by directly tinkering with these technologies, they experience firsthand the new ways of thinking, feeling and acting that's embodied and enabled by the technology.

14:32and as a result they're able to escape the patterns of the familiar they're able to escape the conventional because they're trying to implement the unconventional and so to them it doesn't even feel like they're being contrarian to them it feels obvious because to them it's like the the barrier that's in front of them that needs to be solved is what they do and so most people the mistake they make is they try to think of a startup and like when you try to think of a startup it's just kind of your opinion about the future. And so I get this all the time. I get last week, somebody pitched me on a mental health startup and they said, I believe in the future, mental health, mental health is a crisis.

15:09Somebody should solve that in the future. Somebody will solve it. And I'm like, okay, I agree. Why are you from the future? And they would say, well, in the future, you know, mental health needs to be solved. I said, look, I'm not interested in your ideas about the future. I'm interested in whether you're living in it. I'm interested that, you know, William Gibson, the cyberpunk author said the future is already here. It's just not evenly distributed. Why are you in a valid future before the rest of us? What specifically future are you in? Mark had an answer to that question, just like Bob Metcalf when he was at Xerox PARC and invented the ethernet.

15:45And just like Eric Yuan when he'd spent 10 years at Cisco WebEx before he started Zoom. And what people often don't realize is they don't just have a flash of insight necessarily. It feels that way to them, but the reason they have the flash of insight is because they think about it all the time, and they have thought about it all the time for a very long time. It's that authentic match. And then the other thing that's important here, there's the pattern-breaking ideas, but then there's the ability to start movements that catalyze that different future with early believers. Early believers are much more likely to believe an authentic person from the future, someone who really lives it, somebody who lives, eats, breathes, and sleeps that future, somebody who's a train spotter of that future, that person is going to attract early believers more likely than just somebody who's just doing a startup or thinking of a startup.

16:38And so having authenticity to the future is really important, I think. And it's one of the earliest detectable signals. You know, the product can change. The insight, I found, can't really change. and the insight usually comes from living in the future and building what's missing in that future. It's so interesting and I love the notion of founder future fit, which is of course different than what I mentioned earlier, which is founder market fit, i.e. they have experience. And one of the things that sometimes comes with founder market fit and we as human beings tend to reason by analogy, we have patterns and we kind of think about what happened in the past and try to apply it to something else that we believe is true and needs to be solved today.

17:19How do founders, like if you're talking to a founder, I would say most people do fall into this category of pattern matching. How do you think about breaking that habit and what kind of advice do you give for founders to be able to look at the future and not actually build for the past, which so many startups do and fall into the trap of? Yeah, so it's interesting. So the first thing I should probably note is that I don't think that pattern matching is bad per se and pattern matching breaking is good per se. Right. There are two different kinds of intelligence. And so, like, I don't need to reevaluate first principles when I brush my teeth in the morning or when I, you know, there's certain things that the way I do it is good enough.

18:01And in fact, the cognitive load of trying to come up with a new way wouldn't be justified. When we were cavemen and we didn't want to get eaten by saber-toothed tigers, it was good for us to know that when you hear one growling, run the other way. Don't say, well, is this the time that they're not going to try to eat me? You don't have time to reason that way. The human mind is a pattern matching system. And it's good that it is because it helps us survive. It helps us fit in communities. It helps us figure out who we should marry. It helps us figure out what career we want to pursue, how we achieve things, all that stuff.

18:36So the problem, though, is that there are times where there's a bias introduced by pattern matching that causes us not to see the possibility for the other pattern. The Wright brothers were not aero engineers. In fact, they weren't even really engineers at all to speak of. The New York Times, 69 days before they flew at Kitty Hawk, had an article that said it would take a million years to create a flying machine. And they had all these experts in academia and in the technology field at the time saying why it was a fool's errand. And so what happened there, it was the expertise that they had that blinded them to the possibility of a whole new way of thinking about something.

19:20But the Wright brothers weren't encumbered by that. They had a beginner's mind. They were a couple of bicycle mechanics. They just kept trying different things and tinkering until one day they showed how they had to revise our understanding of the science. to comprehend the fact that these guys made a flying machine. So quite often that happens. What I've come to learn, Samir, is that in business, it's the same type of thing when it comes to capitalism. Most of capitalism that happens is corporate capitalism. And corporate capitalism is about persistently compounding a set of advantages and correcting competitive barriers and having competitive moats that persist for a long time.

19:57And a lot of people invest that way and get really rich by doing it well. Buffett is one of the richest people on the planet by doing that. But Buffett doesn't bet on pattern breaking. Buffett bets on the fact that the pattern will persist longer than you think it will. You know, Geico is still the same business basically that it was in the 30s, and he's owned it, you know, for decades. But there's another way to do business, another way to create value, and that's to change the subject. A startup Capitalists doesn't win by persistently compounding, doesn't win by making things better at all. They win by denying the premise of the rules, throwing out the playbook and creating an entirely new playbook in its place.

20:42If we are a startup, we need to understand that at all costs, we need to avoid the comparison trap. We need to force a choice and not a comparison. Better doesn't matter in startups. They have to be radically different. And so that's part of what I learned is that a lot of these founders who weren't succeeding, they were following the best practices. They were executing their business as well, but they were doing so in pursuit of ideas that were an extension of the present rather than a radically different future. Often when you are investing, however, you're meeting the founder maybe for the first time or you've got to know them a little bit through a series of meetings.

21:20And sometimes it's hard to get the exact signals of determining, is this person a pattern breaker? Is there that founder future fit? I'm curious, just kind of looking back, were there situations where you backed somebody thinking that they weren't maybe necessarily the perfect pattern breaker, but they grew into it? Or conversely, the other way around, where you made an investment in somebody thinking they were a pattern breaker, and then ultimately they became conformist through time and maybe external factors and advice? I think so. Although it's part of my job is to try to cut through their attempts to convince me one way or the other.

22:00I'm trying to find who the real person is, right? So it's like there are a couple of things I've seen about pattern breakers that I think are important. The first is that they have pattern breaking ideas. And we touched on a couple of the elements on it, but we could drill down. You know, these ideas tend to embody inflections. And you want an inflection because it's the thing that allows you to change the subject. It's kind of like the rock in the slingshot if you're David. And then you want to have an insight. You want a non-consensus and right idea about the future. And ideally, that insight comes from directly living in the future because you discover the insight by identifying what's missing.

22:35The insight is the thing that allows you to be radically different rather than incrementally better. And so I think that what a lot of founders miss is that better doesn't matter with startups. Because if you're just better, then the customer won't be desperate enough for your empowerment. They'll be able to get a close to good enough solution from a pre-existing option. What we want is something that can't be reconciled with what's come before, that can't be compared with what's come before. When people took a Lyft ride for the first time, nobody said, how does that compare to taxis? Even the Cybertruck, this is why I like it.

23:12Not everybody does. You can say that Cybertruck is goofy. You can say it's stupid, ugly, whatever you want to say. But nobody after seeing a Cybertruck says, so how is that different from an F-150? You're either on Team Cybertruck or you hate it. But like it polarizes and great startup ideas have that quality. Most people don't like them, in fact, but a tiny number of people who are inclined to live in that same future as the founder are like, oh, my gosh, where have you been all my life? I've been waiting for something like this. Let's go. And it's these early believers that co-create the future with these founders.

23:49And so that's the second big part. Right. You've got to think different, come up with a different idea by living in the future and harnessing these powers. but then you have to act different. You have to start a movement that at first attracts only the early people ready to believe your insight. It doesn't make sense to spend time wasting time with people who won't believe yet. And you need to create a movement of the minority against the status quo of the majority. And so that's where being disagreeable comes in. And that's where good storytelling comes in. And that's where, you know, starting movements as the mechanism for change comes in.

24:23So like when I look at the founders, I'm like, okay, is this idea from the future? Do they have a valid insight? Did they come about it honestly? And then do I think these founders have the stuff to move people to that different future? Are they going to succeed in the real world getting real people to move in a real direction? In that scenario, you know, I think about, you know, some of these founders where they have a very different and maybe distinct view of what the future should be around whatever they're going after. And yes, you are looking at the person and are they really kind of that pattern breaker mentality.

24:57But one of the things that I've always thought about is like sometimes you're looking too far in the future as a investor doesn't work either because it's just too early. It's not ready. So think about Webvan, for example. Webvan was way before its time. Instacart was not. I feel like you still need to pair that insight with something that is inflecting right now, whereby it's not too far in the future and it's not going to work because you're too early? I love this question, right? And this is what perplexed me for so long. And inflection is a very intentional word here. You'll notice I didn't say improvement curve.