Talk about ardent moments. Mike Maples, founder of Floodgate, a $75 million micro-VC that focuses on primarily seed-stage investments with $250,000 to $1 million per investment, opened up the Venture Shift keynote by sharing his first 18 months in the Valley, in his attempt to be a VC. He was turned down by two top-notch VCs and turned down an investment in Aggregate Knowledge, founded by Paul Martino, who is now a partner and co-founder of Bullpen Capital, a co-producer of the Venture Shift events. Even though Maples passed on Aggregate Knowledge, which was eventually funded by Kleiner Perkins, Martino ends up making Maples an advisor - a hopeful moment that Maples will never forget.
In his most excellent keynote, Maples talks about Moore's Law, exponential thinkers and spotting Thunder Lizards.
Bambi Francisco: When you hear the words Thunder Lizards, I think you all probably associate that with Mike Maples and that’s because he coined the terms which is now become analogous to basically outsized exits and I really love that – I love the term, Thunder Lizards because it’s become his branding.
And it’s great branding and in a world where you have to differentiate yourself I think, he’s pretty smart to figure out I am going to term Thunder Lizards and there’s no – you’re not going to be mistaken about by what you’re looking for, right? You’re not looking for small bets.
The other thing is that, I think, it’s really refreshing so I started covering this industry in 1999 and back then, everything was big, big home runs, and big was beautiful. And fast forward and it’s become really the norm over the last several years, to think of making smaller bets and making more frequent bets and you’ve heard the last panel, the last couple panels, thinking about exits for aqua hires or going to second base or third base. There’s nothing wrong with having companies with those exits, but it’s not that inspiring.
You don’t want to have an aqua hire, you want to think big. So I think it’s really refreshing that even though Mike is doing seed stages investments, he’s only doing about a five a year and your partner’s probably doing five a year, but it’s not Google Ventures doing 80. No, it’s not a number of bets. And so, when you’re doing – when you’re that selective, I think you have to dial in to what you’re looking for.You really have to have a strategy and philosophy around what makes you choose and find that entrepreneur that you’re going to invest in, and that’s his Thunder Lizard philosophy, I think you’d really be inspired to think big so, I’m looking forward to his presentation. Thanks, Mike.
Mike Maples: Okay, thank you very much. Thanks for having me. I suppose, Paul, are you in the room right now? There you are, okay. And I think I saw Chris Law as well, behind that light, okay. The reason why I bring that up is, we’ve had some pretty good luck in recent years, but there was a time – so I moved out to Silicon Valley in 2005 and I thought I wanted to be a VC and the only challenge with that was that no firm would hire me to be a partner and so that’s a little bit of a hurdle and so Foundation Capital was nice enough to indulge me for nine months and so I hung out there as an entrepreneur in residence but they sort of said, “Hey it’s not going to work out, but we’d sure would like to work with you. We’re still good friends.” So I went over to August Capital and it turned out that wasn’t going to work out and we’re going to stay friends. I was like “okay, hmmm,” and you know sometimes people will say to you, you know, you’re pretty good entrepreneur and now you’ve been unsuccessful at winning the affection of two firms.
Has it ever occurred to you, you don’t know what the heck you’re doing? And then not only that, to add insult to injury, I had been talking to Paul and Chris for several months and every time I saw their deal, I passed on it. The first time I passed on it, I think it was called like Start Page 2.0 or some random name and they had some directory web surfaces and I was like I hate that name and the second time I saw them, I think they were going to call it Aggregate Knowledge and I don’t even think I like that name, but I said I don’t think you’re close enough to the money and then I get a call from Paul one day, a week after August Capital had said it’s a no go and he said, “Hey, well guess what, we just got funded by Kleiner Perkins,” and I just thought, “God you know, this just sucks, man. I’m a loser. And you know, maybe I’m just not cut out for this,” but then he says, “No, no, that’s not what we think at all. We really enjoyed our meetings and thought you were a good guy and so we thought we’d make you an advisor to Aggregate Knowledge.”
And I was like okay, you know, sure I’ll be an advisor to Aggregate Knowledge, but I always remembered that. It was like one of the first good things that ever happened to me. There were only two good things to happen to me in the first 18 months of trying to be a VC, that, and Kevin Rose letting me invest at Digg after I threatened to go on hunger strike in his apartment, if he didn’t let me. So you know, I guess everybody faces sort of that moment of death and the moment of truth. And Paul, “I always remembered that we would have the entrepreneur’s back. So I thank you guys very much from the bottom of my heart.”
Okay, so the topic at hand, Thunder Lizards. So who knows what a Thunder Lizard is? Just to level set. Okay, so not that many people. When I went to business school, people tended to use a lot of terms that were sort of high minded MBA jargon sounding. For example, people talked about disruptive ideas or people talked about synergy, you know, that fancy sounding MBA kind of words and I was always looking for a term that captured the huge startup that came out of nowhere and destroyed markets and changed the world and did legendary things. And so I got the term Thunder Lizard, from Godzilla. And I don’t know how many of you have ever watched a Godzilla movie, but Godzilla was hatched from radioactived atomic eggs and then swims across the Pacific Ocean, emerges with an attitude, and then begins to create disruption.
And so, the boat here is representative of initial startup competitors, followed by this building here which represents larger companies and markets that the Thunder Lizard dominates and then eventually the Thunder Lizard wildly disrupts even the encumbrance, which are, then represented by these sausage link train cars. And so to me, it’s all about the Thunder Lizards. To me, the high tech business is one of exceptionalism, period, the end.
What I find remarkable and awesome and fabulous about today’s world is that the capital requirements to start a company have collapsed in the last ten years, and so it lets little guys like me compete for the opportunity to invest in federal reserves. To me, that was the insight that I started to have about seven or eight years ago. One of the things I think a lot about, especially in conferences such as this, we’re going to talk about a lot of things, I’m sure, the Series A Crunch, you know, the next new incubator model, the new accelerator model. Is it going to happen outside of Silicon Valley? Is it going to happen outside of the US? All that kind of cool stuff, but what I often think about is why aren’t more entrepreneurs trying to build Thunder Lizards and why aren’t more seed funds focused on finding them? I thought I would share some ideas that I thought might be useful for people who are interested in getting involved, either as an entrepreneur or as an investor in some of the outsized totally, wildly, asymmetric outcomes.
I would like to say these insights are based on me being smart but for the most part these are based on me being lucky enough to hang out with some people that were smart and I just took careful notes. The concept that I really want to get across is this idea that I like to call Exponential Entrepreneurship. I have to admit, I’m a little bit nervous about this speech because you’re kind of watching sausage being made. I’m not really sure that my ideas are very well formed. Part of what I am hoping is that I get a lot of criticism for some of these ideas so that I can refine them and make them better. If parts of it look a little bit rough, it’s not just you thinking that. Part one of Exponential Entrepreneurship, two basic laws. The first law is one that we probably all know pretty well. It’s called Moore’s Law, and Moore’s law was coined by Gordon Moore of Intel and it basically states that the performance of computing doubles at the same unit cost every 18 months.
You know, a lot of people, they know Moore’s Law and they blow right passed it, because it’s just so obvious and fundamental, but Moore’s Law to me animates the magic of the tech industry. We forget how lucky we are sometimes. There is bubbles all the time. There have been tulip bubbles. There have been financial services bubbles. There was a mortgage bubble. There was even an internet bubble once, but the thing that is true about our industry that I have never seen in any industry ever, and I can’t think of any industry like this in human history, is we get to ride the wave of doubling performance every 18 months. That guarantees us a couple things, that guarantees us that no matter how powerful any company is in the world, there will always be a startup someday along the line that can disrupt their incumbent advantage. Over a given amount of time, there will always be a new supply of awesome companies. It’s guaranteed by Moore’s Law, as long as Moore’s Law happens.
You’re going to always have a PC wave that displaces the main frame as the most important computing architecture. Then you’re going to move to client server. Sorry the Mac didn’t translate too well. And then the Internet and social networking, but any situation where you have a doubling of every 18 months, no matter how powerful an incumbent is, give the tech business as long as you would like and it will displace it. That’s the first thing. Now the second law is, I think, less understood. Just a show of hands, how many people know what a power law is? Okay, whereas, how many people knew what Moore’s Law was? Okay, everybody, right? This is the more counter intuitive of the two laws in my opinion, the power law. So the power law states that the biggest outcome is bigger than all the others combined and so on. For example, this is the power law in practice, 10,000 to 20,000 companies will be funded by Angels in a typical year. 1,000-2,000 will get VC funding. 50 to 100 of them won’t suck and we define don’t suck as exits is more than 50 million. Ten plus or minus five will be special, but this is the one that blows my mind.
In a typical year, the best exit of that year is more valuable than all of the companies combined. I would bet you that if you looked at the Facebook exit, it was more valuable than all 9,999 companies combined that were started in 2004 and people say okay, yeah well that was Facebook, but who comes next? I don’t know, maybe Linkedin. It was probably more valuable than all the rest combined. Who’s next? I don’t know, maybe Workday, but isn’t that wild to think about? I mean it’s kind of interesting to intellectualize, but it’s just so counter intuitive to our existence to think that the best company of the year will create more wealth than all other companies started that year combined and that is a feature of our industry that I think we often overlook. Most of us think, like when I went to business school, we talked about normal distribution of outcomes. And so most people, let’s be honest, even most Angel investors or most VCs think in terms of, well I have a set of investments and I got my average muddy middle, maybe I make money to break even a little bit, sort of, and then I’ve got the losers and I got the winners.
The winners are the companies that perform a standard deviation better than anybody else. That turns out to be wrong in my opinion. Let me just give you a sense of this. In my Angel portfolio, one of my investments was Twitter. Twitter right now is probably about 250 times in the money from the time that I invested. None of the other Angel investments matter. It doesn’t even matter if the other ones were good. It doesn’t matter that another one of my Angel investments was Yume Networks. It doesn’t matter. It will be a good return too, but if I had gotten YuMe and not Twitter, the fundamental dynamics of my Angel portfolio would’ve been different and all of my other Angel investments could’ve been good, but not having Twitter fundamentally changes the character of it. By the way, if I had just done Twitter and everything else sucked, I would’ve had an awesome Angel portfolio. In the first fund that I raised on my own in 2006, demandforce by itself returned almost three times the fund at exit. And so does it matter whether I have a couple two baggers or five baggers or I get dual track exits?
Yeah, I mean it kind of matters, but not really. What really matters is, I got into demandforce. Paul Graham wrote a piece and I thought maybe that’s just true for my funds or maybe that’s just true for Angel’s stuff, or maybe that’s just true for limited situations. You know Paul Graham wrote an essay a few months ago that said that Dropbox is worth more than all 500+ other Y commodator companies combined. And the next best one, Airbnb, is worth more than all the subsequent ones combined, and so on, and so on. What I find to be the most important question for any startup is, can I leverage the asymmetric power of Moore’s Law to create one of the ten best companies of the year? To me that is the fundamental assignment of an entrepreneur. That is the objective function of an entrepreneur who’s trying to create a really great company and too many startups have entrepreneurs who are just doing entrepreneurship but they are not asking that sort of basic fundamental question.
Okay, so the second thought, Exponential Reasoning versus Linear Reasoning. Linear thinking is kind of intuitive. Linear thinking is what I use when I brush my teeth every day or when I drive to work every day. Like when I get in my car to drive to work, I don’t say, “Huh, I wonder existentially, should I go to work this way? Should I even be in a car? Why are there cars?” I just get in the car, I go to work, I brush my teeth, I go to my first meeting – Linear reasoning, linear thinking.
Exponential thinking is not and this is why I like to use the Einstein analogy. For example, intuitive Linear Reasoning is observable. Like F=MA – You know, like if I drop this clicker from 20 feet tall, it’s going to hit the ground at a faster rate than if I dropped it from two feet tall. We can kind of intuitively grasp that the speed that it’s going to fall is a function of time square. Once you hear that formula you’re like yeah that makes sense to me. F= MA. You can prove it also with an observable experiment.
Einstein, some of you may remember this -- a lot of the things he used to talk about, when he talked about the general theory of relativity were thought experiments. They couldn’t be proven in a lab. In fact, when Einstein came up with the general theory of relativity, a lot of people thought he was smoking weed because they were just like it makes no sense to me and I just can’t see it. I can’t see quantum mechanics in the way that I can see an object falling from the ceiling, for example.
Some of you may remember his thought experiments were he’d say like, pretend you are in an elevator going at the speed of light, you know, that kind of stuff. I can’t remember exactly – my science grades weren’t all that great but one of the things that I remember was a lot of the people in the world didn’t believe Einstein until like 1919. He said, “Well, the way that I can prove that I’m right is there is going to be some kind of eclipse in 1919. If Newton’s right, the rays are going to bounce in this part of the ocean and if I am right they are going to bounce at this part of the ocean.” I can’t remember exactly. I’m probably butchering the story, but it turned out they bounce the way Einstein said it would bounce and from that point on he was a world-wide celebrity. He went from being an esoteric people person that a lot of guys thought might be right and a lot more thought was smoking weed to the most important scientist and theoretical physicist in the world.
Okay, so, this is one of the problems that I see happening with entrepreneurship sometimes, is that people tend to reason by analogy rather than reason up from first principles. I talked a little bit about reasoning by analogy. It’s the characteristics of linear thinking. Let me give you examples of reasoning by analogy and I’ll give you some more in a second. When somebody says, “What pain do you solve?” That’s a great example of reasoning by analogy.
Whereas, reasoning by first principles is when Bill Gates says, “Computers aren’t going to be expensive someday, so the relative importance of software computers will flip flop. That’s a different thought process than what pain do you solve when you launch the company? The other really important point and I will get into this-- when you are reasoning by first principles, you can’t prove anything in the real world yet. What you have to do, is you have to solicit negative feedback as it relates to your first principles, not do I think I’m going to get traction or not?—a set of more mundane questions.
Reasoning by analogy number one, this by the way, is why I think, when I went to Harvard Business School, it was a great experience, but I had to unlearn a lot of things in terms of how to think about tech entrepreneurship. The case method literally is the pattern matching paradigm and pattern matching I think is useful, but only after you have the winning idea. Pattern matching won’t tell you what to start. It might tell you how to get there better once you started the right thing.
Here’s another one I like, Lean StartUp Customer Development Religion. I’ve had startups pitch to me before that say, “We’re going to be a lean startup.” That’s how they start out and I’m like, “Great, what’s your basic idea? What is the contrarian idea that you have that’s going to change the world?” Well, you know, we’re lean and we can bob and jive and weave and do all this stuff, and so, it almost doesn’t matter if we have the right idea at first because we’re so fast and lean that we can pivot just like you read about. I’m like, “Okay that’s great!”
This one is one of my favorites of recent times, glasagram, companies by analogy. This is something that you’ll get different opinions on. Sometimes when you go to the Internet and you look at how to be appealing to an investor or an Angel investor VC. You need to have the tagline. You need to have the phrase that pays and VC’s understands stuff that they already understand, so we’re this for that. Come up with your shorthand. Now in my personal case, if I see a we’re this for that pitch, I eliminate it immediately because I know that entrepreneur is engaging in a thought process that isn’t compatible with what I’m looking for in a startup.
I’m going to give a few examples that I think are good. I gave the Bill Gates example for a second. Bill Gates—I saw him dedicate the computer science facility at UT, so I took this picture of him. He said something that I thought was kind of cool. He said, “When I was in high school, everybody believed that computers were expensive,” and he said the important thing to understand is not that everybody was stupid or that everybody was even wrong-headed because if you had grown up in the world before he was a high school student playing with personal computers in the mid-solitaire, you would not have been able to conceive the idea that computers could be cheap.
I mean computers were being expensive was as common understanding as the Law of Gravity. It was just truism at the time. Bill understood that they are not always going to be expensive. In a future world that they are not expensive, whole new types of companies are going to be valuable that nobody thinks is valuable today. Software used to be the thing you gave away to sell a mainframe, but someday computing is going to be roughly free, then software is going to become the thing that matters the most.
Diagnostic test number one, most people believe X is true but the truth is not X. This is one of the things I like. This is Peter Thiel’s rendering of the statement. My rendering of the statement is why are you non-consensus and right? It is kind of the same insight. Nobody ever has unconventional success with conventional thinking, ever. You can be unconventional and wrong, in which case you’re hosed, but having some kind of unconventional idea about the way the world is about to be is a precursor to great success. We cannot allow ourselves to invest in a company that cannot articulate that clearly.
The second point, Evan Williams—I kind of had a Forrest Gump like first year and a half. In spite of the fact that I got bounced out of every venture firm that I talked to and nobody would hire me, the first investment I ever made was this company called Odio and I thought podcasting was going to be a big deal and a week later Apple decided to give podcasting away on Itunes. I was like, “Oh, crap. We’re out of business.” Ev was the founder of Odio and he tried really hard to make it into something, but after about a year he said, “Look, we just don’t have a business here and I’m just going to give all the investors, their money back.” I was like, “You don’t owe me anything. I took a risk, whatever.” He said, “No, some of my investors are kind of disenchanted and I kind of have to give the money back and so I need you to take it back.”
I said, “Okay, twist my arm right? But under one condition, you let me invest in your next company. I don’t care if it’s a massage parlor, right? Just I get to invest in your next company.” He says, “Well I don’t have a company, but I got this side thing and I don’t know if it’s a product, much less a company.” I said what is it and he goes, “It’s called Twitter.” At the time, he said, “We’re not sure what to call it.” It was spelled Tweeter or Voicemail 2.0. “We’re not sure what to call it yet.” I said, “Okay what does it do?” “You say what you’re doing.” “Okay, cool. Yeah, I’m with you so far.” He says, “140 characters or less.” I’m like, “Okay then what happens?” Then he goes, “That’s it. That’s all it does.” I said, “So, what’s the roadmap?” “There is no roadmap.”
“What is the revenue model?” “There is no revenue model.” “Okay, so why do you think this is a company then?” He said, “Well I don’t know if it is,” but he goes, “You know, here’s my thinking, when I invented Blogger, we got a million people to write blogs and then I did podcasting and it was harder to do a podcast than a blog. You had to know you had to know something about audio. You had to put things together. You had to do RSS stuff. He goes, “I decided to go in the opposite direction. If a million people write blogs, maybe ten million people will write microblogs, and if ten million people wrote microblogs, I’m not sure how to monetize that, but I’m pretty sure that the burden of proof would be on the people who are negative at that point.”
And so I was like, he’s right, I still had no idea what promoted tweets would be. I didn’t know that they were going to be behind Arab Spring or that they would be on Oprah or any of that stuff, but it was that first principle idea that if I can get an order of magnitude of more people doing this form of blogging, then I think I have something, then I think I have a real business.
This is another diagnostic test, therefore. Ev knew that he understood blogging. He had authentic wisdom about it. He knew that nobody else was doing microblogging and he knew that he could do it well and so this is the diagnostic, the intersection that Venn diagram is what valuable company is nobody building today?
Okay, third example, Elon Musk. This is my favorite one. The reason this is my favorite example is because people misunderstand the profound greatness of what he is trying to do with Space X. Most people, I think, believe that Space X is a way to fill the vacuum of leadership by our under investment in our space program in NASA and there’s an element of truth in that. You can argue that Space X a lean NASA, but that’s not the big idea in my view. The big idea is that, Elon had the insight that 0.3% of the cost of space travel is the rocket fuel, which gets burned up obviously and the rest of it is the cost of the rocket, which gets destroyed. If you make a reusable rocket, you impact the cost of space travel a hundred fold or more. That is an example of first principle thinking applied even to space travel.
So it’s like what is your big secret, is the third diagnostic test that I have. It’s related to being non consensus, but it’s an insight that you have that’s exponential that the rest of the world has not quite discovered, is the third one. It can’t just be what’s your secret because it may not be big, so it has to be what’s your big secret? Anybody interested in this, by the way, I highly recommend listening to Elon Musk’s fireside chat at Ted. He talks about some of these ideas with a lot more clarity than I do.
Okay, last part, exponential outcomes require fundamental advantages. Most people when they think of capitalism, in fact, I think if you talk to most people and said “what is capitalism?” they would say it is characterized by a world of limited resources and perfect competition for those resources and customers or something like that. I actually think the reverse is true. True capitalism and competition are opposites, which is very counterintuitive, but in my experience the better way to think about it.
A real capitalist gathers capital based on their unfair advantage, in my view. A real capitalist doesn’t compete. A real capitalist leverages their unfair advantages to avoid competing. I call it Jerry’s Law of Capitalism. Jerry Garcia was a local philosopher, someone that I was a disciple of, even back from my days at Stanford when the Grateful Dead used to play concerts at Stanford. I look back on that, that was so freakin’ awesome. Thank God I went to those concerts because I would’ve really regretted not going, but Jerry’s Law of Capitalism is: don’t be the best, be the only. One thing I’ve seen happen so many times in Silicon Valley is the pitfall of mindless competition. I don’t care what we’re talking about. I don’t care if we’re talking about startups. I don’t care if were talking about incubators, accelerators, whatever the new investment model d’usure is, mindless competition and following an imitation is endemic to a lot of what goes on here.
Whenever I look at a startup or ever think about what should Floodgate be doing, I’m always thinking be more like Jerry. You know, be more like Jerry Garcia and less like Attila the Hun because it turns out the perfect competition is not perfect, in fact, and that I got to be careful here. I say transcend competition because my dad used to work at Microsoft, before that IBM. The government sued him when he was at IBM and then he goes to Microsoft and then the government sues Microsoft for being a monopoly.
He always warned me about not using that word. He said that you know when you use that word, it could come back to bite you someday. You can offend people, and so don’t ever say that your goal’s to invest in a monopoly. Just to be clear, on the record, I do not want to invest in monopolies. I only want to invest in people who transcend competition and that means usually you got to be at least ten times better in some area where with a defensible long-term advantage and it also means in my experience that the distribution strategy is usually congruent with the advantage somehow.
Okay, so that is probably all I have to say except for one more thing. One of the reasons I used Al was not just because the fact that he’s exponential compared to Newton who’s more linear but also he’s an immigrant and I don’t know many of you remember this, but Albert Einstein for a while had a hard time becoming a citizen of the US, which when you think about it in hindsight it’s kind of crazy. Thank goodness that it actually happened and that we were able to benefit from his wisdom in a lot of ways.
I’ve been spending some time in this idea of immigration lately, and I think we have a pretty broken system right now. I don’t know what everybody’s politics are. Some of you may disagree, that’s fine. We agree to disagree, but for those of you that happen to think we have a broken system, for those of you who get pissed off like I do when we send PhDs from Stanford and kick them out of the country when they want to stay and start awesome companies, I think the conditions are in place to do something about it and not just talk about it.
I’ve been working with Mayor Bloomberg and a bunch of other folks on this idea of MarchForInnovation.com. Some of you may have heard of it before, but if you’re interested in getting involved in anyway just go follow those links and hopefully those of you who are interested in this can play a role because I think it would have a huge positive impact if we made something happen and didn’t just talk about it, bitch about it, but if we just got it right.
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