How to Become a Pattern-Breaking Founder
How to Become a Pattern-Breaking Founder
If you can be compared, you can be conquered
Scroll down for 23 actionable, pattern-breaking insights from Mike’s bookAt OSV, we’re betting big on my belief that the collapse of the old models presents enormous opportunities for those savvy enough to seize them.
That’s why I was delighted to speak with Mike Maples, Jr., whose book Pattern Breakers: Why Some Start-Ups Change the Future (co-authored with Peter Ziebelman) articulates a new model of foundership, one built on the simple premise that transformative startups upend rather than improve current practices.
Mike, a co-founding partner of the VC firm Floodgate, is the veteran seed investor behind 21st-century success stories like Twitter, Twitch, and Applied Intuition. I had a blast quizzing Mike on the nuts and bolts of pattern-breaking foundership, from finding true believers to waging asymmetric war on the status quo.
We’ve provided Apple/Spotify links and shared the transcript below. You can also watch the full episode on our YouTube.
We’ve also distilled 23 specific, actionable, often counter-intuitive insights from Mike’s book for the aspiring pattern-breakers among you.
As always, if you like what you hear/read, please leave a comment or drop us a review on your provider of choice.
How to Become a Pattern-Breaker
(The below quotes and insights are drawn from Mike’s excellent book, Pattern Breakers: Why Some Start-Ups Change the Future)
Different Beats Better
“The real difference between ordinary and extraordinary start-ups is their ability to deliver pattern-breaking products that change the rules rather than simply finding gaps in markets and solutions according to the rules as they are currently defined.”
Defy Your Inner Caveman: Over hundreds of thousands of years, humans have evolved into Mother Nature’s great pattern matchers; able to use tradition, routine, precedent, and convention to pluck order from chaos. But breakthrough innovation requires you to defy these evolutionary impulses, challenging the patterns you are primordially compelled to follow.
Forget Unmet Needs, Create New Ones: Filling the gaps left by the incumbents means you’re playing their game. Transformational impact comes from changing the rules entirely, not playing within them.
If You Can Be Compared, You Can Be Conquered: Inviting comparison to competitors makes you vulnerable. Even if you're better, your upside is capped. True breakthroughs don't compete within categories; they create new ones. Startups should invite a choice, not a comparison.
The Inflection Imperative
“When I ask something like ‘Can you help me understand the inflections that are happening outside your start-up that have enabled you to do this just now?’ I often get a blank look. I’ve learned to recognize this as a sign that the start-up solves an incremental problem in the present instead of offering a breakthrough with the potential to radically change the future.”
Find the Inflection, Find the Future: Pattern-breaking startups are born from inflections, i.e., “external change event[s] that creates the potential for radical change in how people think, feel, and act.” Inflections can be technological, political, social, cultural, regulatory, or a combination of different factors.
The Breakthrough is Found, Not Forged: Inflections arise from forces outside of your control. You can’t create them, but you can harness them.
No Inflection, No Innovation: If no specific, identifiable, and powerful change has occurred to make your startup’s solution possible, you’re just rewriting the same old script.
Examples: The printing press, the telegraph, the financial crisis, Brexit, the incorporation of GPS chips into the iPhone 4sIn[sight][cite] the Future
“Some start-up ideas are based on insights; others aren’t. When an idea successfully embodies an insight into a product or service, it harnesses the power of an inflection to radically change how people live. An idea that fails to embody an insight lacks the transformative potential that inflections provide.”
Insights Bridge Inflections to Solutions: An insight is “a nonobvious truth about how one or more inflections can be harnessed to radically change human capacities and behaviors.” They bridge the gap between fundamental shifts and tangible products. To paraphrase Daniel Plainview, they're the straw through which your solution drinks from the milkshake of the future.
No Insight, No Inflection, No Innovation: Ideas unconnected to inflections merely polish the present. True breakthroughs require insights that harness fundamental shifts.
Bad Idea + Good Insight > Good Idea + Bad Insight: A flawed idea based on a solid, inflection-grounded insight is fixable. The fundamentals remain strong. A brilliant idea disconnected from an underlying change is like building a castle on sand.
Novelty & Insight Are Not the Same: Just because an idea is new doesn’t mean it’s insightful.
Examples: AirBNB identified that users would book rooms with locals rather than using hotels. Lyft identified that riders would be happy to take rides with strangers. Timing Matters, But Not How You Think
“I’m often pitched by people who describe the accelerating improvements in the cost of sequencing DNA. I agree that such improvements are significant and will most likely continue. But an improvement curve is not the same as a turning point that introduces something specific and new.”
“Has this been done before?” is the Wrong Question: Chances are, your idea has been tried before. What matters isn’t whether it failed; it’s whether there has since been a fundamental shift that means it is now more likely to succeed.
A Timely Idea Does Not Mean the Time is Right: Even if an idea feels timely due to, e.g., news coverage of a social or technological phenomenon, if it’s not supported by a specific, identifiable inflection, then it will not be pattern-breaking.
Example: “Ironically, many of the ideas that formed the foundation of the iPhone were tried over a decade earlier at a company called General Magic, which was staffed with some of Apple’s earliest and most prominent technical leaders. But the technology wasn’t yet ready to enable the right capabilities at the right price to achieve the type of revolutionary success the iPhone enjoyed. In another ironic twist, many people from General Magic came back to Apple, ready for the right moment for the iPhone to become a phenomenal success.” Live in the Future
“The pattern breaker seeks to build for a future that will break from what we know today. They are living in the future. They reject the path of refining what already exists. They focus on creating a radically different future and commit to discovering inflections and insights that enable them to deliver a pattern-breaking solution.”
The Future is Not an Improved Version of the Present: If your model of the future is an extrapolation of the present, then you continue to be bound by the patterns of today. If you’re solving today’s problems, then you’re already too late.
Don’t Extrapolate From Today; Reverse-Engineer From Tomorrow: “Some problems deserve your love more than others. The best problems to chase are those that exist in the future. Pattern-breaking ideas are less about conjuring up the next big thing for tomorrow and more about genuinely understanding tomorrow’s problems before others are exposed to them.”
Example: "Bob [Metcalfe] likens his experience at Xerox PARC to living in a 'time machine.' Even though the computers at PARC were expensive, it was clear to him that someday everyone would have computers quite like what he was working with. In his efforts to network computers at the lab to share one of the world's first laser printers, he came to believe that his insights into interconnectivity would be valid someday for most computer users. This led him to start 3Com, one of the first major PC Ethernet companies." You Will Be Lonely
“The very qualities that drive groundbreaking change are the same ones that can sentence us to a form of social and emotional isolation. As you build your breakthrough, you will alienate others and occasionally feel alienated from yourself when you experience the pain of self-doubt.”
If No One Disagrees, You’re Doing it Wrong: Counterintuitively, a uniformly positive reaction to your idea is a negative signal. It indicates that you are operating within the obvious. If your idea is pattern-breaking, you should find that it offends some people’s pattern-matching impulses.
Be Unreasonable: You are changing the game to work for you rather than sticking to the rules that came with the box. This is not reasonable behavior. (Imagine if someone did this in Monopoly!). Prepare to be judged accordingly.
Find the Goldilocks Zone of Disagreeableness: Excessive agreeableness means compromising your convictions and kowtowing to consensus. Excessive disagreeableness is just reverse conformity: contrarianism for its own sake.
The Goldilocks Zone is Probably More Disagreeable Than You Think: “Disagreeableness buys freedom. Perseverance and conviction keep your non-consensus idea whole and inspire others to join your movement. The more you seek approval from others, the less free you will be to pursue the remarkable.”
Find Co-Conspirators
“The best start-ups I’ve seen have a set of co-conspirators who all believe the same insight and go to battle together to convince the nonbelievers of the world that they’re right. Everyone involved—the team, early customers, and investors—share the right kind of crazy. This is the energy you want. Spend your time with the people who value your advantage, and don’t waste your energy and angst on those who aren’t ready to move.”
Hire the Jazz, Not the Marching Band: Your ideal teammate is improvisational, non-hierarchical, resourceful, and quick to riff off their teammates.
You Probably Aren’t Spending Enough Time Talent-Hunting: “I’ve never met a start-up founding team that didn’t say, ‘It’s all about the people.’ I’ve met far fewer teams who hired as if their lives depended on it.” A fifth of your time should be spent hiring, regardless of whether you have an open role you’re looking to fill.
The Customer is Not Always Right: Don’t allow yourself to get blindsided by the feedback, positive or negative, of a customer who resolutely clings to today. Your early customers should be true believers, i.e., they must be willing to live with you in the future rather than constantly wrestling you back to the present.
Not All Investors Are Equal: Some investors won’t believe in the future you are living in. They will waste your time, dilute your messaging, and anchor you to the present. Don’t waste your time trying to persuade them. “As far as you’re concerned, in the early days there are two types of investors that exist in the world: those who are ready to believe your insight and those who aren’t. Only the first type matters.”
Transcript
Jim O’Shaughnessy:
Well, hello everyone. It's Jim O'Shaughnessy with another Infinite Loops. I have been looking forward to chatting with today's guest for a long, long time. My guest today is Mike Maples Jr., a legendary early stage investor, actually one of the first to do seed stage investing. But today we're going to focus mostly on his outstanding book. Right up front, anyone who wants to be an entrepreneur or a startup or wants to invest in potentially profitable startups, you've got to buy Mike's book, which is called Pattern Breakers: Why Some Start- Ups Change the Future. Mike, welcome.
Mike Maples, Jr.:
Thanks for having me. I've been looking forward to this too. I've been an avid fan of your podcast for quite some time. So when you DM'd me on Twitter, that was a really pleasant surprise.
Jim O’Shaughnessy:
Well, there's just so much, and maybe this is me being guilty of paying too much attention to my priors, but it seems that we have a really similar vision for how to go about not only companies you start, I started O'Shaughnessy Ventures after selling O'Shaughnessy Asset Management, but companies that you invest in. And one of the things you said that really resonated with me, and I want you to get your take on it, you said it so I'm sure I'll get a much better take than my own is, "If you take one thing from this book, I hope you realize that in different ways, all of us unwittingly let our own self-imposed limits, govern how we think and act throughout our lives." I read that and I was like, "Holy shit is Mike ever right?"
Mike Maples, Jr.:
Yeah. And it's interesting, and that comes from the observation of the book Jonathan Livingston Seagull, right? So there's a-
Jim O’Shaughnessy:
Great book.
Mike Maples, Jr.:
... seagull. The metaphor is you've got this seagull named Jonathan, and he wants to fly faster than any seagull's ever flown. In fact, he wants to achieve perfect flight. And all the other seagulls are like, "What are you talking about? We're just seagulls and we're meant to eat scraps off of the surface of the ocean on a good day. And we're not meant to fly fast. We're meant to be ugly and smell bad," and all that other stuff. And eventually they decide he's so crazy, they banish him from the flock, but he does achieve perfect flight.
And I just think that Richard Bach just has a way with words that's just so compelling, that book and Illusions and a bunch of other things. And so Jonathan Livingston Seagull kind of reminded me, is it like a metaphor for the great startup founder, the person who's willing to depart from the consensus to achieve perfection and mastery. And it's like most people accept the world for how it is and what the rules as they're framed. And that creates a limit, whether we realize it or not, sometimes unwittingly, we embrace a bunch of limits that we don't even realize exist all around us.
Jim O’Shaughnessy:
Yeah. And that's been a constant theme of mine for a long time. I just finished a book by this guy, Dr. Bernard Ketzler, who is a radical self-experimenter. And he had the hypothesis that most of us live almost 99% of our lives on autopilot, and that autopilot is imposed on us both by ourselves and by others. And so his radical experiment was he literally quit his job, left his relationships, sold his apartment, sold his prized collection of 5,000 books, he's a science and math guy, and went and lived without any media, with as little contact with other humans as possible, in the Austrian Alps.
And one of his takeaways was essentially he thought, "Oh my God, I'm programmed 99% of the time and how can I break through that programming? And that seems to be like one of the themes of your book, that essentially there are lots of good ideas, there are lots of good entrepreneurs, etc. But there are very, very few great ideas that really break with past tradition, past playbook. One of our themes at OSV is all the old playbooks are collapsing, and the things that we want to look for are for those pattern breakers as opposed to pattern matchers. And yet another great quote that I love, "That allows you to wage asymmetric warfare on the present," expand please.
Mike Maples, Jr.:
Yeah. And this might be, I imagine that your audience is probably a combination of people who are startup types, but a lot of people who are more into the traditional corporate sort of Fortune 500 or bonds or kind of more mainstream asset classes. And what I've come to realize is that there are different ways to create value in capitalism. And maybe we'll get to this in a little bit later, this notion of worldly wisdom that people like Munger talked about. But a lot of people would think of capitalism the way that Buffett and Munger do, which is you want to create an ongoing, persistently compounding business. And when you buy stock in a company, you're betting that it's going to compound more persistently and have a longer lasting moat and more durable advantages than the rest of the market, than the wisdom of the crowd's beliefs.
And what I realized was that a startup capitalist is a different kind of capitalist. So there's nothing to compound when you have a startup, because you have nothing. All you have is founders and an idea. And so then you say, "Okay, how does a startup capitalist add value then?" They add value by changing the subject. And so if the future is going to be an extension of the present, then the incumbents are going to win more often than not. Business is never a fair fight. The only question is who's going to fight unfair? And the default assumption is that the present will fight because the present has all the advantages of the incumbency, status quo has the word status in it. And so people fight to protect the status that they've earned, sometimes over decades. And so if you decide to play on that playing field where the future will be an extension of the present, you're going to be buying into a context without realizing it, which is that you're going to compete according to the rules of the incumbents.
And so the argument I try to make in Pattern Breakers is that startups win when the future can't be reconciled with the present, when it's radically different. And that we have to assume, rather than forecast, which is a forward projection of the present, that's what the future will be. We need to backcast, we need to say, "It only makes sense for me to pursue opportunities that will create radically different futures if they work, because then and only then can I wage asymmetric warfare on the present. I'm not interested in negotiating with the present. I'm not interested in accommodating it or meeting it halfway. It's either we go with my vision of what the future is, or we go with the default status quo version of what the future is." But you can't reconcile the two. You have to decide. And so therefore you have to decide up front to wage an unfair fight and use asymmetric weapons and asymmetric warfare right on the present.
Jim O’Shaughnessy:
Yeah. One of my favorite sayings when I was talking about just traditional asset management and successful investors was successful investors do not comply with the present or with nature. They defy it.
Jim O’Shaughnessy:
I just wanted to bring good old Bucky Fuller in here because in many ways he was like a prophet way before his time in understanding this. And he had this great quote, which is, "You never change things by fighting the existing reality. To change something, build a new model that makes the existing model obsolete."
Mike Maples, Jr.:
That's right. You don't beat the competition when you're a startup. You transcend the competition, right? And so you create a different future that compels in the early days, your first believers to self-actualize by moving to that different future that they can't unsee. But a great startup idea defies the comparison trap entirely, and pattern breaking can extend even outside of the realm of startups. So the Tesla Cybertruck is one of my favorite examples. You may think the Tesla Cybertruck is ridiculous. When I first saw it launched, I thought maybe he was joking, but nobody after seeing a Cybertruck says, "How does that compare to a Ford F-150?" It's like Elon is basically saying, "Come with me to this different future or don't." But you can't reconcile the two things, you're not going to... And the startups I've worked with that have won, Lyft, when people first took a ride in a Lyft, they never said, "Oh, well, how does that compare to taxis?" Or with Twitter they never said, "How does that compare to blogging?"
And so I like to say you're trying to force a choice and not a comparison. And comparison doesn't work because if you can be compared, that means you're too much like what already exists. And why would you buy from a startup if you can get an incrementally similar solution from an established incumbent? You won't, you want to be desperate for the unique empowerment that the startup provides, and you need to feel like there's no other way to get it than to do business with the startup. And so you have to transcend competition or there's no other way for you to succeed.
Jim O’Shaughnessy:
Yeah, could not agree more. There's a couple of quotes that I love, the first of which is, "Crazy is a numbers game." And then the other person says like, "If enough people do it," and then the main speaker says, "Yeah, then it's not crazy anymore."
But you've got to find a way to find your people, right? And your early adopters. And an author I love who actually wrote a really good book on capitalism called The Genius of the Beast: A Radical Re-Vision of Capitalism, to make it even better than it is, he gives this great example that I think you'll love. And he says, "Look, take a beaker. Put 12 ounces of water in it, boil it, put five ounces of table salt into it. When it cools, it will appear to be clear water. If you brought it out," it's a great parlor trick, which I highly recommend. "Bring it out, set it on a table, ask your friends, 'Hey, what do you see there?' And they say, 'I see a pitcher of water.' You take one single grain of salt, drop it in. And what you see is all of the other salt molecules are attracted to it, and suddenly the beaker is filled with this massive salt rock, right? So I think about that a lot with like how do you find your people? How do you find your movement? So you need some kind of beacon, some kind of scenius, some kind of attractor, right?
That's where your work comes in, I think, really, really well, because you talk us, and I'm going to ask you to walk us through how you create a movement, but some of the things you mentioned are substance over style. Attack the status quo. Don't say me, too. It's like how many pitches did you get that we are the Uber for, right? Like right in the wastebasket.
First off, we know that there are other people who are living in the future, like you recommend, and there are potential fan base, but like the beaker, before you put that single salt in, it looks like there's nobody there, right? And yet there's tons of people there. Elaborate on the movement, if you would.
Mike Maples, Jr.:
Yeah. So basically if you want to have a breakthrough startup, if you want to succeed as a startup capitalist, you got to get two things right. You got to get the idea right, which would be a pattern-breaking idea, and that requires you, in the words of Steve Jobs, to think different. But then you also have to act different because the status quo, the present is going to fight back, and it's not going to fight back fair. It's not interested in negotiating with you.
You're sitting out there in the future by yourself, and the future of your design isn't going to happen if you're the only guy sitting there. So you've got to attract, you've got to move other people to that future with you, and there's this paradoxical reality, which is most people aren't ready yet. Most people like the present. Most people are creatures of habit. They like what's familiar to them. Even… their flaws, people are comfortable in their present pain quite often.
But there's always a tiny subset of people who, when they see your pattern-breaking idea, are like, "Oh my gosh, where have you been all my life? This is incredible." Those are the people you care about.
So the paradox and what's challenging for founders is it's tempting to want everybody to like your idea, but human beings are conditioned to like things. If everybody likes your idea, it's too similar to other ideas. It's too similar to what they already know.
So the best startup ideas are polarizing. It is like we're talking about the Cybertruck earlier. The people who like the Cybertruck think it's awesome, and people who don't like it are like, "This thing's a joke. I'd never want to drive in one of these things. I'd never be caught in one of these things. It's ridiculous." But it doesn't create a neutral opinion in the observer, right? So what you want to do as a founder is you want to spend your time only with those people who are prepared to move to that different future with you. And by doing so, by moving them, you create a movement.
This is why you want to create a sense of grievance against the status quo in the same way that a social movement does. You want find a set of people who believe they've been enlightened by this different future, who believe in that future with you, who want to move to that different future. Then you, with your early believers become co-conspirators, and you co-create a different future.
So it's actually not true that founders create the future. It's more accurate to say that founders co-create the future with their early believers. What starts out as a heretical idea starts to become the conventional wisdom as more and more people embrace the different future of that founder's design. But it's co-created by this gathering groundswell of people moving to that different future and then people watching and noticing a better way to live.
Jim O’Shaughnessy:
Yeah, I always say to my teammates at OSV that we are all co-creators, right? It's a mistake to think, "This is the best idea and I know it," and then clinging to that? That's a huge mistake, the need to be right.
There's a great quote from a thinking philosopher that I like a lot named Jed McKenna, who said "The smartest thing I ever did was stop being smart." And, literally, when you are willing, and I've had a long enough career to have reality punch me in the face many, many, many times, and I think that's fabulous because it shows like, "No, I'm not right." And I often say, like, "Here's my idea. I'm probably wrong."
Because by getting yourself into that mindset, you can pivot, you can change. You can say, "Hey, we started with this, thought it was a great idea, but look at what everybody is actually embracing over here." The ability to change your mind and move over here is I just sometimes think vanishingly small among entrepreneurs.
Mike Maples, Jr.:
Yeah, and you know it sounds like you and I both share an affinity for reading a lot of books. There's a book I really like that kind of gets to what you're saying called The Beginning of Infinity by David Deutsch and-
Jim O’Shaughnessy:
Oh my God, sorry, I have to interrupt. One of my favorite books in foundational, and I've been chasing him to get him on the podcast forever and ever. I'll get him. But anyway, sorry to interrupt.
Mike Maples, Jr.:
Yeah, yeah. So I love the book and maybe you internalized it similar to how I did, which was the truth is something that we should always seek, but we can never claim to have absolutely the truth, you know? So there's a few things that I think are interesting about his book, right?
One is, you should seek truth more than you should seek validation. Because like a lot of founders, when they have an idea and they show it to a customer, they're trying to convince the customer that they're right. Yes, you need to convince and persuade people, but in your ongoing interaction with people, you have a choice. You can say, "I need to talk this person into validating what I believe." But the problem with that is you're not learning anything when you do that. You're only doubling down on what your preconceived idea of what's true.
What David Deutsch says that I think is inspiring is that just because we don't have absolute truth, we should still seek it. But we seek it in a way where we say we're going to honor the best explanation we have to explain things today that's a theory, but there's always a better possible explanation down the road. It's like we're at the beginning of infinity of our knowledge, right? All knowable things can be known by us, and that however much we know now, there's an infinite amount more to know, but it can be discovered if we continue down the path of being authentic truth-seekers, right? All conflict happens because of a lack of knowledge, right?
I think that startups, the great founders I've worked with are very similar that way and then I've read about, too. You hear about Steve Jobs. He'd be super firm on something and then somebody had convinced him that he was wrong, and he would do a 180 and act as if his original point of view never happened. That's because he wasn't really attached to being right. He wants to be right in the sense that he wants to have the right products and he wants to get to the right answer, but he's not attached to being right as a person, right? He's attached to getting to the best answer he possibly can. And if the facts of the evidence suggests that his way of looking at the world isn't the best way, he'll do a 180. He doesn't even take the time to acknowledge that the prior way of looking it was wrong. He is like, "Who cares about that? I've found a better answer, better explanation. That's what we're going with now."
The best founders that I work with, I've noticed that about them. That every time they engage with the world, they're prepared to be surprised by something because only by being surprised will you ever find the breakthrough. Breakthroughs have never happened yet, they've never been discovered. So if you're trying to discover the undiscovered you to be surprised ultimately. So people who show up in the world wanting to be surprised often find that clue in a discussion that the average entrepreneur wouldn't find.
Jim O’Shaughnessy:
Yeah. I love his passage in there where he says, "What were people saying about the internet and quantum physics in the year 1900?" They weren't saying fuck all about it-
Mike Maples, Jr.:
Nothing. Yes, exactly.
Jim O’Shaughnessy:
... because we haven't invented it yet.
But it seems that part of our human OS, we are all operating the same human operating system, and there's this bug in it, in my opinion, which is everything we know as of right now is everything there is to know and we will... and like it just seems to me so bizarre, right? Because if you just know anything at all about history, you just know that that is patently untrue.
Another point that you bring up that slides in here with Deutsch's thing is the ability to pivot, move onto the newer, better truth, right? So the old bromide, the customer is always right and you cite it in your work, that's bullshit. No, the customer is not always right. Like Henry Ford's famous, "If I'd listened to my customers, I would've made faster horses," right? Like, no, but they couldn't conceive of the idea of this thing being a much, much better version. And one of the things that happened with us at O'Shaughnessy Asset Management and an earlier company I founded like really illustrates this.
In the late 1990s, I started a company called Netfolio, which was going to be the world's first online investment advisor where you could customize your portfolio just for you, right? Whole new class of category. We did the ads not comparing. We did compare, but derisively to mutual funds because they were the top of the heap back then.
But I was too early, and one of your things that you underline is you really need to get your timing right. You got to have the right inflection point. So Netfolio didn't work because the tech wasn't ready, people, it was way too radical for that particular time, but we kept it on the shelf. One day in, I don't know, 2017, my son Patrick, you've been on his podcast, Patrick is the true podcast king. I'm the eccentric father. But anyway, he walks into my office and he goes, "Hey, you know that whole thing, like Netfolio and all that?" I'm like, "Well, of course, yes, I founded that company that failed spectacularly." And he goes, "We can do it now. We can do..." and then he used a different analogy. He said, "Just like Amazon with AWS, we have the tools and tech that we have built for ourselves that, like we built the Death Star to kill a mouse. Why don't we repurpose this and offer it as truly innovative new asset class?" Which he dubbed custom indexing.
I love that combination for a variety of reasons because what he did was take a well- known way of investing, indexing, that had a lot of mind share. Everyone loved it because indexing had been working so well. Then he put the word custom in front of it and created a whole new category and people were like-
Mike Maples, Jr.:
Wow.
Jim O’Shaughnessy:
One of the things that we learned was that people, once they got exposed to it, literally, all of the clients that we had, which are registered advisers, brokers, et cetera, said they won't go back.
And the interesting thing, I was thinking about it when I was getting ready for our chat, because one of the things that I remember is nobody compared us to ETFs, to mutual funds, to any of the other big categories. The closest they came was, "Oh, isn't that just direct indexing?" And that gave us the launching point to say, "Oh, no. Not at all."
But another thing that we learned that you highlight in your book, and we did and much to our benefit, is don't go into something thinking that your priors and your idea about what people are going to love about it is right.
So what we did was we took in a very small group of advisers, I think we had a dozen, and we said we had a list of what we thought they were going to love. The features of what we now call or then, it's still called Canvas, which allows for custom portfolio creation. We had a long list of what we thought people were going to love. Guess what, Mike?
Mike Maples, Jr.:
Wasn't...
Jim O’Shaughnessy:
None of the things we thought people were going to love ended up being at the top of the list.
But the point is, what we learned from that is you've got to listen. Once you've got a minimal viable product, put it out there, see who the natural customers for that is, and then listen to them because they won't be talking about faster horses.
Mike Maples, Jr.:
Yeah. The other thing, Jim, I think that's kind of profound in what you're saying is one way to come at this would be to say, if I asked the customer what they wanted, they wouldn't know how to tell me because they can't visualize the future. But the other thing that I learned is that the opposite is true, too, that the customers that are actually living in the future will take you to the promised land, like they know features that should be in your product.
So I remember early my career, I worked at Silicon Graphics, and at the time, we had the fastest 3D computers on the planet. This is before Nvidia took off and stuff. In fact, most of Nvidia's execs came from SGI, and we decided that we wanted to sell our computers to Hollywood. Industrial Light and Magic did special effects for like the Star Wars movies and Terminator and the Abyss and all this stuff, and so we sold a bunch of machines to them to model the dinosaurs in Jurassic Park or to model the Liquid Man in Terminator 2.
At the time, film was still on film. You spliced and cut film. Only recently had digital video editing even come out. So we were helping them render these dinosaurs, and then they would splice it, they would merge it onto the frames digitally, and then they would create the film.
There was a whole bunch of problems that they had to solve to do that and I realized, as we were working with them, if we solve their problem, they're just going to take us to the promised land, right? Like everybody in Hollywood is someday going to want to use computer graphics and film, and everybody's going to want to solve the exact set of problems these guys were solving.
So you learn as a startup not all customers are equal. Some customers are future-led in the sense that they believe in the radically different future that you believe in. And this is the thing I learned is they're not motivated by utility. They're animated by belief. They buy because they believe what you believe.
But the other thing is they're facing the corner cases of that future in ways that you don't, and they're facing of the corner cases of the future that the details of the new pattern emerge, right? So those customers are experiencing firsthand the different ways of thinking, feeling and acting that this radically different future affords them. They're also encountering the barriers, the limits of where the technology doesn't quite work yet or where it's not performing well enough yet.
As a startup founder, that's your opportunity. That's where insights come from. It doesn't come from a vision at a distance looking over some mountain. It comes by spending time with the innovative customers who are living in the future and encountering difficulties. What you end up doing is you build what's missing in the future. Then because you build what's missing in a valid future, a whole bunch of people are about to live in that future, and they're going to show up in the future right as you have the exact right product at the exact right time. That's how startups win.
But if you build what's missing in the future, your intuition about what to build is much more likely to be right. So you want to be spending time with customers, only those customers living a valid future. You don't want to listen to the objections of people living in the present because they'll take you off of your strategic goal. You'll implement features to please them that aren't additive to the strategy that are burdened by the present.
Jim O’Shaughnessy:
Yeah. When I was reading your book, the thing that just kept coming back to me was this idea that... You know, I, for a long time, have been trying to figure out how to take the Big Five, which is the only psychological test that actually replicates, right? I was trying to figure out like how can we do this to kind of identify great investors, great ideas, et cetera, the people that asked for them, and one of them was disagreeableness.
It's really funny because I had always thought of myself as a very agreeable-type person, and then I took the Big Five, and guess what? I scored very low on agreeableness, i.e., disagreeable, and I was really just like trying to figure that out.
So I went to an expert psychologist that I knew, and I'm like, "Do I appear disagreeable to you?" She laughed, and she's like, "We probably could have picked much better language. But what we mean by that is like if you see something that you just think is stupid or like 'God, there's got to be a better way,' you're not motivated to fit in. You're not motivated to say, like, 'Oh, yeah, of course. This is the way we've always done it, and that's why we'll continue doing it that way.'"
But talk a little bit about that because I really liked that part where you just highlight, "Hey, you want to be high on disagreeableness."
Mike Maples, Jr.:
Yeah, I think so. And I struggle with this because I'd probably score pretty high on agreeableness, actually, and it led me to believe that I'd be better off investing in disagreeable founders than trying to be something that I wasn't. So maybe I'm an agreeable person, but because I know my own tendencies, I'm able to spot the opposite tendency and honor it in others.
Where am I going with that? Well, a startup that's going to have a breakthrough is proposing a different future. It's proposing a grievance with the status quo so, therefore, it's a provocative act, right? A great startup idea is a provocative act that disagrees with the present, and so not everybody's going to like that.
In fact, most people are going to dislike that, and some people are going to dislike it because they just don't like it, like legitimately. Some people are going to dislike it who wish you well, your parents, your mentors, advisors, because they're living in the present. They don't see the future the way you do. And some people aren't going to like it because they're like the taxi lobby to Lyft, and they're just not interested in whether your future's better. It's just their status is embedded in the status quo. They have something to protect, and they're not interested in having an honest or fair discussion about how to protect it. They just want to see you go away. They want to kill you.
So, therefore, in order to make that different future real, you've got to decide whether you care more about fitting in according to the rules of conventional wisdom, according to the rules of the conventional status dominance hierarchy, or whether you care more about fulfilling the goals of the mission. And whenever those two things are in conflict, the best founders choose the latter, and that requires them to be disagreeable, right?
Disagreeable can take many forms. Like with Lyft, it was, "Okay, how do we feel about launching a service that we know is illegal in San Francisco?" Well, what's your alternative? Your alternative is to go to the San Francisco local government, say, "We have this great idea. We'd like to launch it. Can we get the laws modified?" Well, it's never going to happen, right? To ask permission in that case would be to seek denial. They would just say, "No, you can't," and so there's no Lyft in that set of circumstances.
So what you have to do if you care about the mission is you have to launch a service that's illegal, and you have to get customers fall in love with it. And now when you're talking to the government, the question in their mind is, "How good do I feel about taking something away that my citizens like, and how good is my explanation for taking it away going to look to them?" Now all of a sudden, we can have a rational dialogue about what the law should be and how to change it. So in that case, they had to be disagreeable enough to launch something illegal.
Now, most people wouldn't do that. Most people would say, "Hey, look, I draw the line at breaking the law." But not all laws are morally-based, right? Some laws are arbitrary rules, like a lot of other things in this world, but like most founders are not willing to take that step.
Disagreeable could also be pursuing unconventional tactics that most people would think are unthinkable. You know, Brian Chesky selling cereal boxes to fund Air Bed and Breakfast, which became Airbnb, or Justin Kan selling his prior company Kiko on eBay for $250,000. So part of disagreeableness is refusing the premise of the current rules as they're defined and to say, "Look, I just deny the premise and I'm going to zig when the rest of the world zags. Because if that's what it takes to fulfill my mission, that's what I'm going to do."
Jim O’Shaughnessy:
Yeah. And it's like, I can't remember the name of the mission, but where Kirk in Star Trek cheats. The training exercise is meant to get them to understand that there will be certain situations that they just have no winning formula or no winning strategy to win, and Kirk wins by cheating by... Well, that's the not caring that there's a law against doing what Lyft did.
From my own history, I was thinking back, and I've grown much more mellow with age, but when I started my career with my first company, I was kind of a bomb-thrower. One the key moments I remember was, this is in the early '90s, and so not many people had heard about factor investing, I mean, unless they were an academic, and I wrote a book, What Works on Wall Street, testing all the various popular strategies.
I was on this panel at Morningstar, which was still kind of in its infancy back then and, literally, the person seated next to me was a traditional regular asset manager and got to do all the research, got to do everything the way it had always been done on Wall Street. I turned to them and said, "Well, you do know that if I have access to all of your portfolios, I can put them on a computer. I can see what your most significant deviations from the general stock market is, and then I can basically clone you. And my guess is the clone is going to perform better than you because we humans are really shit at making decisions under emotional uncertainty."
And the crowd was kind of like gasped. They looked at me like-
Mike Maples, Jr.:
Yep. Probably didn't go over so well.
Jim O’Shaughnessy:
No, it did not. It, in fact, did not go over terribly well. But I did find that the people who came up to me afterwards, they're your version of the co-conspirators and true believers. Because they were like, "Hey, you got some time to talk some more about this?" And, in fact, many of them became our earliest clients.
Mike Maples, Jr.:
Yeah. And if you tried too hard to water down your discussion, your speech, you would've never resonated powerfully enough with those people for them to come approach you later, right? They wouldn't have understood your difference enough, and they wouldn't have understood your provocative point of view enough to provoke them to approach you, right? And who cares about the other guys? They weren't going to buy, anyway. So it's like you got to find some way to get the people who care, who believe what you believe, to raise their hand.
The tragedy I see with some founders is they get a lot of advice like, say, on their pitch deck or on just how to pitch investors, and they get it from a whole bunch of different people, and they create what I call a Frankendeck, which is a slide that anticipates every possible objection.
The best pitches I've seen are more like what you described where you say, "Look, I have an opinion about how the world is changing, and I'm going to express that to you. But if you just don't believe that or aren't prepared to believe that, I can just save you a bunch of time because nothing else I'm going to say is going to make sense to you for the rest of this discussion. But if you're prepared to believe that this different future could happen, here's what flows from that, and here's what we're doing."
I find that to be a lot better than you're going to pitch 30 people, and you're going to try to get as many hits as you can, right? There's only going to be a tiny subset of those 30 people who believe what you believe. It's way better to not know that going in who they'll be, but to pitch in such a way that the people who believe what you believe will understand what you're saying and raise their hand and say, "Yes, I believe that."
Jim O’Shaughnessy:
Yeah, and that's a great point to dive into. Many of our listeners and viewers to the podcasts are investors. We do have a pretty high amount of founders, etc.
So if they hired you as a consultant and they were like, "We've got a Frankendeck here, how do we fix this thing," how would you go about helping them fix it so that it really sang to the group that they're trying to reach?
Mike Maples, Jr.:
So if it's a startup, and I should be careful here, like I have a particular set of skills. So my skills are startup that's going to break the pattern, try to be an outlier, create a different future, right? That's how I show up in the world, and that's who I work with, right? So what I say to founders is your first slide- I'll just say what you do as if I literally know nothing. And so, let's say you're Airbnb, you want to say something like, "We're Airbnb. We let you rent an extra room in your house." You don't want say, "We're Airbnb. We're a marketplace for unused residential real estate."
But what happens is, you'll get advisors, they'll look at your slide and they'll say, "VCs love marketplaces," because they have network effects, they have attractive business model, and residential real estate is a category.
But the problem is, as a normal person, I don't know what that is, "A marketplace for unused residential real estate." I don't know what that is. I can't tangibly connect with that. But even worse, most VCs will act like they understand. They don't want to say, "I don't get it. I don't know what you're talking about."
So they'll say, "Okay, you're a marketplace for unused residential real estate, and so, I still don't know what you do, really". And now we're onto the next slide. Whereas, if you just say, "We let you rent an extra room in your house," I'm like, "Ah, I know what they do." And it's like...
So I've been in a lot of pitches before where I'm 15 minutes into the meeting, I still don't know what it does. If you'd asked me, after meeting watercooler, what did that startup do, I wouldn't be able to describe, in a tangible way, what it does.
Then, the second slide I recommend is something related to your insight. So, I'm about to tell you something that you might not have heard before about the future. And you might believe it, you might not believe it. If you don't believe it, you shouldn't invest. But if you're prepared for the possibility that I'm right, we can keep going.
So that's what you want in the second slide. So with Airbnb it might have been something to the effect of, the strength in hotels, i.e., their uniform, well-understood, experience is the weakness in their strength, because people traveling, especially millennials, are going to value living like a local.
When they're embarrassed, they're going to want to live like a Parisian, when they're in Austin, Texas, they're going to want to live like they're in Austin, but if you're in the Four Seasons, it feels the same way in both places. And so, we believe that there's going to be a set of people who value this way of getting hospitality in the future.
And it's only now possible because everybody's online, everybody's connected, you can have ratings and reviews, you can use online mechanisms as an alternative to trust, which has been created traditionally with brands.
And so, you could believe that or not believe that, but it's an insight, it is a point of view about the future that's non-consensus. Maybe it's right, maybe it's not, but it's non-consensus. So that's the second slide I recommend.
So first slide, what do we do as if I know nothing, second slide, what do we know about the future that's not obvious? And then the third slide I recommend is, if you have any traction at all, explain what it is.
If you have customers, how many do you have? If you have revenues, how much? If you've won awards, what awards did you win? If you have celebrity founders, who are they? But just anything tangible that normal people would believe, "Oh, that's tangible progress," that's tangible traction.
And then, after that, there's a lot of variance, but if you can establish those things upfront, what we do, what's our insight, what's our traction, I find that people will listen to the rest. Now they're leaning forward at the table, now they're asking questions with the eye towards learning more about it because they're interested rather than asking questions because they don't know what you're talking about.
Jim O’Shaughnessy:
Yeah. And what I like about that too is, if you look at the psychological literature, and I know a lot of it doesn't replicate, but if you look at the ones that replicate, it seems to be endemic among men especially. We certainly learned that in asset management.
We would have conversations with potential investors that were looking to us to manage their money. And in our earliest days, we took direct from high net-worth individuals. We moved away from that.
But when we were doing that, one of the things I always noticed was, when we had a couple, generally a husband and a wife, in our offices, and we would use terms of art that honestly were jargon. And you get so used to using them that you don't even think about the fact that a regular person might not know what a CAGR is, for example.
Mike Maples, Jr.:
Right, right.
Jim O’Shaughnessy:
And one of the things that I noticed, and I'm a copious note-taker as well because I just think that it's really important to be able to go back and notice a pattern or find a bad pattern and break it, and one of the bad patterns I found was, we used way too much jargon.
Because when you get used to talking back and forth with your colleagues, you say CAGR. You say, "Well, what's the longer-term base rate," and they all know exactly what you're talking about, but why can I expect this well-to-do couple that might have made their money in a completely different way to know anything about that?
But here's the thing. I also, when I noticed that, I noticed that it was never the man who stopped me and said, "What's a CAGR?" It was always the woman, it was always the woman. And so, one of the things that we decided with... And the other thing we did was, we offered way too many choices.
We are quantitative firms, so we offered everything from large cap growth to small cap, micro cap value, because it's all algorithms that we had tested to select those securities. And we would offer, in our original brochure, we had separate things on each portfolio. And when we started it, we would put all 12 in there.
And people would, when you offered that many choices, it was like, " I don't know, I, I... You're confusing me." And so, we corrected our laziness, did our homework on the couple, and realized, okay, this one or two portfolios are going to be the ones that are going to be right for them. Our assets under management soared.
But also, another thing I did was, I told all of my salespeople, we've got to talk to people like they have no idea what investing is all about. We've got to purge all of the jargon. We've got to purge all of the, like, "Well, if you really wanna look for a great strategy, what you really wanna focus on is the standard deviation below zero because you want a big standard..." Holy shit.
And you change that to, "We try to focus on portfolio strategies where most of the surprises that you get are to the upside. It doesn't mean there won't be some to the downside. There will. And in fact, here, we'll show you some [inaudible 01:05:35]. But the change to real language was another just huge unlock.
Mike Maples, Jr.:
Yeah, and it's interesting, because the value of real language is not in dumbing it down, it's in clarifying your own thinking, right?
Jim O’Shaughnessy:
Exactly.
Mike Maples, Jr.:
It turns out people use fancy words and jargon as a substitute for clear thinking because their own thoughts aren't.... So I get this a lot too where I'll be in a board meeting and there's a ton of financial slides, but I can't tell if the business is doing that well.
And I realized that we're getting lost in the numbers. We're getting so lost in the numbers because we're substituting having a bunch of numbers for clarity about what we're really trying to do. So I accidentally got this right when I raised my first funds.
But my first slide, well, the first slide was, like, we're this new thing, it's a seed fund, we invest $500,000 at a time instead of 5 million at a time, and we want to have better returns than the bigger firms. And then, the second slide was incredibly simple.
At the bottom there was a rectangle, and it said, "Less than $200,000." And at the top was a rectangle that said, "More than $5 million." In the bottom rectangle I said, "Angels," and the top rectangle I said, "Series A VC firms." And then I had a circle in between them that said, "Gap." And I was like, "Right now, you can't raise a million dollars in Silicon Valley." If you want to raise money from a VC, you've got to go to a $5 million Series A. And why does that matter? Because right now there's a revolution happening in how startups are being built.
And so, 500,000 is the new 5 million, because you can use open source software, Amazon's coming out with some new things, which turned into AWS, and so, you're going to be able to accomplish in $500,000 what used to take 5 million, and you're going to be able to do it faster.
And the angels aren't going to be able to come up into it because they can't even spell LP. They don't know how to manage portfolios, they haven't thought about financial strategy. And the big VC firms, the only ones who are going to want to come down are the ones who aren't performing very well.
Because if you're Peter Fenton at Benchmark, why do you want to leave Benchmark and start a seed fund? It doesn't make sense. You're doing great, life is good. And so, I'm going to compete against the guys who aren't that good at Series A, and they're going to be competing on my turf.
And it was interesting because like, I showed that slide to Phil Horsley at Horsley Bridge, and I wasn't even trying to raise money from him at the time. I was just like, "I'm just interested in your feedback on whether I'm making sense or not."
And I learned this with LPs, that if an LP objects to your strategy, one of two things is true. They know something you don't know, which is valuable, it makes you smarter, you learn something, or they know something that isn't so, and you can't convince them, in which case you don't want their money because it's not going to be a good relationship because you don't believe the same things.
And so, it's a lot like a startup, you want LPs who believe what you believe. You want to start a movement for a new style of investing, because ideally, if you're really investing, if you're an active investor, you should be doing something different than what the market does.
And so you should be enlisting the support of people who believe what you believe, and together you create that different future. Like Horsley Bridge, they funded us, but they also funded Baseline, Steve Anderson. They gave Roger Ehrenberg money at IA Ventures. They helped create the category of seed funds, First Round Capital eventually.
They helped create this category of seed funds with those managers because they believed what those managers believed. But it made no sense to try to get somebody to invest if they just fundamentally disagreed with your assessment of the world, because you'd always be arguing about the first principles of what you were doing and you wouldn't be having a sincere discussion with those people.
Jim O’Shaughnessy:
Yeah. And there's just so much truth in that. Also true in the world of public market investing. One of my loves is micro cap stocks. There's thousands of these tiny companies. Now, the problem is, most of them are garbage, absolute garbage.
However, there are diamonds in that rough, and so it's uniquely great for quantitative investors who can take the various factors that we've found have high efficacy for identifying those diamonds in the rough and buying them, and they don't have analysts, et cetera, et cetera, et cetera.
And I loved this, but basically, we had a situation where people would ask us, "Why do you even have a micro caps fund, because aren't they limited to the amount of assets that you can take?" And I went, "Yes, that's exactly what's brilliant about them. That's why they're so incredible, and that's why BlackRock ain't going to start one."
And yet, one of the things that I found was, like you, you would see instantly, when you were talking to somebody, whether they would like that kind of thing to invest in or not. And so it was this great clarifying force. And obviously, you don't want to be rude and be five minutes into a meeting and say, "Well, thanks for your time, we're just not a fit."
And so, how do you go about deciding which investors, which founders are worth pursuing, worth investing the time and trying to understand what they are doing, making, et cetera? Obviously, I'm asking for your specific guidance that might help some of our listeners and viewers.
Mike Maples, Jr.:
Yeah, it's pretty different between investors and founders. And so what I learned with... I learned a little bit of this with Enterprise software. So what I learned at enterprise software, so enterprise software, you're trying to sell crazy expensive software as a startup to people. And that's not easy to do.
And so, what I learned is that you've got to find the innovative customers, you've got to find the Industrial Light & Magics of the world, or if you're Todd McKinnon at Okta, you find the early adopters of Salesforce Cloud Software, and you tell them what you believe and you decide you want to create this different future together.
But this is another really important part of it is, you do the best you can to tell the truth with no tricks. So if ever a thought goes in your mind of, "How am I going to explain this to my LPs," that's a bad sign. We've had funds that have been spectacular, we've had some that weren't good.
And I remember visiting Dave Swensen at Yale, and saying, "Hey, look, here's what I think we got wrong in this fund. Here's what I think we needed to do different. Am I making sense?" And if you just are honest with him, first of all, you're going to get great feedback because it's Dave Swensen, but it's also, you're having a discussion where you're not trying to sell something.
It's like, "We're trying to do this together, and I'm not doing my part the right way in certain ways. Is this the right course correction? Here's what I think it is," I always found is really good. So if you pick the right early believers, you can maintain that truth with no tricks in the dialogue. And it's not even about being shrewd, it's not some calculating strategy, it's about honesty.
It's about, "Hey, we really do believe in this different future. We may not be prosecuting it the best way we could all the time, but that's why we're partners, is to talk about how to win this different future." And I find that's true in entrepreneurship as well.
When I would work with Industrial Light & Magic and something was really wrong and we screwed up, we were much better off just saying, "Okay, we screwed up. Here's why that happened. A lot going on, we made a mistake here. Here's what we think the issues are, here's how we think we should fix it. Are we making sense? Are we smoking crack?"
But if you're just incredibly straightforward... Because most people are used to businessy-sounding jargon, they're used to corporate executives or investment managers who don't talk like normal people, they talk like a press release. And you can persuade people with that kind of talk, but you can't get to that authenticity.
And I just find that the more radical your strategy is, the more it diverts from the mean, the more you've got to have that relationship where you're willing to say, "Look, there's a lot of things I don't know. I'm going to make mistakes. I'm gonna have some wins, I'm gonna have some losses. I'm gonna try to be honest with you the whole time. I need you to keep me honest."
I find that's a lot better way to show up in the world with these types of people. And so, I'd say that's true for fund managers and for founders. I'd say that when I'm looking for founders, I'm probably looking for much more sharp-edged, uneven types of people.
Most of the LPs that I work with are probably more agreeable than most of the founders that I work with, but I'd say that the similarity is that they're animated by belief more than features and benefits and the normal business jargon that people talk about.
Jim O’Shaughnessy:
Yeah, it reminds me of a funny conversation I had with my son, Patrick, who runs a venture capital firm called Positive Sum. And I was telling him about my next adventure after retiring, after we sold OSAM to Franklin Templeton and what became Oceana Seed Ventures, and that we were going to have a fairly significant venture vertical as well.
And he just started laughing, and he goes, "Dad, one of the things that I'm really happy about is that by our agreement with Franklin Templeton, you can't have LPs." I just thought that was really funny, because he was right.
In venture especially, it's very different than public market investing in many ways. And so, I really wanted to be able to do things that LPs would say, "What, in God's name, are you doing? Why are you putting that money with that particular company?" And I found it incredibly freeing because it allowed us to find those types of non-traditional people living in the future and solving the problems of the future. What do you look for when you're looking for that kind of person, and what advice would you have for a youngster who came to you and was like, "I wanna live in the future. Like, how do I do that?"
Mike Maples, Jr.:
Yeah. So I think that there's a few ways. Some people are already in it. So when Mark Andreessen was at the University of Illinois, he was writing programs in a supercomputer lab that the NCSA had funded.
And it's one of these buildings where they lower the supercomputer down first and then they put the walls around it. So they lowered the supercomputer down with this big crane. And then they had these really fast networks.
And people forget this, but at the time, the internet had just become legal for business to use at all. It had only been used by the military or academics. And the technologies and the standards of the World Wide Web had just come out from Vint Cerf.
And so, Mark is making minimum wage as a programmer, and he creates the browser so that people could make use of the internet. But he wasn't thinking about a market for browsers. He didn't know anything about the digital superhighway that everybody's talking about. He didn't really know anything about business. He was just living in the future.
So that's an example of, I call it "living in a time machine." It's like when Bob Metcalfe was at Xerox PARC, and every computer had a WYSIWYG display and a mouse, and no other computers in the world had those things outside of the Xerox PARC lab.
And he's trying to make all those computers share a laser printer, which nobody had ever seen before. And he's like, "Well, if you're gonna make all these computers share a laser printer, of course you should have an architecture for networking that looks like the ethernet."
And so, some of these startup ideas come from living in a time machine. You're in a research lab, you're somewhere where you have exposure to cutting edge technologies before the rest of the world, but the things that you're exposed to represents what the state of the world will be soon.
And so you build what's missing in that time machine, and then that thing that you built becomes valuable more broadly. Once the browser came out, it became broadly valuable. Once more and more people got on the internet, more and more people saw the value of it.
So that's one way. A lot of times people who are living in that kind of future find themselves there. They don't set out to go there. They're just pursuing something that they're just uniquely, genuinely passionate about, in the same way that Picasso liked the smell of paint. They're just doing something just for the love of it, and they like to tinker. Wozniak did this with the Apple, original Apple computer, for example.
And then the next category would be spending time with innovative customers. So I've mentioned, in the early days of cloud computing, most of the innovative customers of cloud computing were using Salesforce and they were using Workday and they were using other early cloud apps.
And so, Todd McKinnon at Okta had the insight to talk to those people and only those people when designing identity management for cloud apps. And that was the right move. I talked to people like Industrial Light & Magic to sell computers for special effects in movies. But I call those people "lighthouse customers."
So, when you're living in a time machine, you're usually in some kind of a research-oriented lab, you're tinkering with technologies of the future you're solving your own problem for yourself. When you're spending time with lighthouse customers, you're talking to customers who are pushing the edge of what's possible with technology.
Usually, they're trying to capture some type of business advantage, like, Lucasfilm wanted to have the best special effects in their movies, so they were using ILM to do that. And then, the third way is to catapult yourself there.
So Maddie Hall at Living Carbon was trying to think of startup ideas and realized that the best thing that she could do is get a job as Sam Altman's Chief of Staff at OpenAI, and so she followed him around for a year and a half. And if you follow Sam Altman around, you're going to see a lot of future dwellers.
And so she saw that Microsoft wanted to spend a lot of money on carbon takeout, and she saw that the science was progressing in such a way that it was almost becoming possible to genetically modify trees so that they could grow faster and have harder wood and take more carbon out of the atmosphere, and so that's what led her to starting Living Carbon.
But the number one advice I give to people is, don't try to think of a startup. If you try to think of a startup, you will try to think of problems that exist in the present. You'll try to think of present pain for present customers in present unserved markets, and then you'll build a product that meets that unfulfilled need, but you'll only carve out a niche within the markets that currently exist.
What you want to do is get out of the present and live in a valid future, and then build what's missing in that valid future. And by doing that, your intuition about what to build is far more likely to be right.
Jim O’Shaughnessy:
Yeah, it resonates with me so deeply. And as you were talking, I was thinking of, I'm an investor in Stability AI, and I was the Chairman of the Board there, and we got a new investor group that includes Sean Parker. And as I'm listening to you, and I got to know Sean pretty well, and as you were talking about Mark with the Mosaic browser, I immediately thought of Sean and Napster, right?
Mike Maples, Jr.:
Yep.
Jim O’Shaughnessy:
He did that because he wanted to do that, and he thought it was going to be just a much better way to be able to download music, et cetera. But I noticed that that kind of thing carries through because the... And maybe it also helps that I had kind of agreed with the different go-to-market strategy for Stability that Sean and Prem, the CEO, are going to pursue.
But that type of person is great because they... And a prior CTO that we had at Stability, David Ha, who came to us from Google Brain, David is defined by the fact that he just loves to tinker and solve problems. And every time I just love talking to David, because I'll say, "What are you working on?"
And then we'll split it between his new startup and what he's personally vexed by. I'm very interested in what he's personally vexed by, because he's a guy who lives in the future. Is that something you do as well?
Mike Maples, Jr.:
Very much so. And this is the part that's tricky to get one's mind around, and it goes back to, you'd asked about advice to young person, breakthroughs happen because you're exploring the unexplored. And so, the best breakthroughs happen because the founder is obsessed with some type of a new field that usually embodies some technology inflections that could create massive empowerment. And they are pursuing this technology because they're interested in it for its own sake. It's the last thing they think about when they go to bed at night, it's the first thing they think about when they wake up in the morning.
I like to say it reminds me of those British trainspotters, those old British guys with the anorak coats who, they have these journals and they track the comings and goings of trains, and everybody looks at them and they say, "How could you be so fanatically interested in something so mundane?" But they can't talk about it. It's almost like they're too socially inept to be at a party because they can't talk about normal stuff. They want to talk about trainspotting. And a lot of the great founders that I've worked with, whatever domain that they're obsessed with, they're that way about it. They're like a trainspotter of their domain.
And they're interested in it for its own sake. And they're not necessarily interested in it to do a startup, they just keep exploring. And they find breakthroughs because they explore the unexplored. They open a new fractal of knowledge.
And they're exploring a frontier that most people think is a waste of time because most people explore things because they think there's a return on the time that they spend. But the problem is that, to find a breakthrough, you have to explore something where the return is potentially unknown, because if you knew that there was a breakthrough there, the breakthrough would've been discovered.
And so you have to have this willingness to do what's interesting for its own sake. And what I find so intriguing about that, and this didn't make the cutting room floor of the book, but I studied creativity a lot, like, why do these people come up with these breakthrough ideas?
And in almost all cases, if you study great scientists or you study great artists or you study great startup founders, it was an obsession with a new frontier of something that was interesting to that person. And they did it not because it was going to be popular or not because it was going to make a money necessarily, but because they couldn't not do it, and they just kept going. When someone's a teenager, I always encourage them, always have a project that you're working on that doesn't make you progress in any way in the normal social dominance hierarchy. Work on a project that's not going to look good on your college application, that's not going to help you get better grades. But that is interesting only because it's interesting to you, a project of your own by yourself defined on your terms. And because that's where the breakthrough ideas come from is people willing to engage that way. It's a different way of showing up in the world, but it's a really valuable way of showing up in the world, and I think it's going to be increasingly valuable.
Jim O’Shaughnessy:
Wow. I love that advice and I'm going to steal that from you, and start giving that advice, if you don't mind.
Mike Maples, Jr.:
Fair enough.
Jim O’Shaughnessy:
I will give you the credit, of course. But that is absolutely so true, and one of the things that you said really made my eyes light up and that is this idea of obsession. At the beginning of my career, I was absolutely obsessed with why certain stocks went up and why certain stocks went down. Like, why? And you would talk to old timers and you would hear the same sort of thing, "It's the CEO, it's all about the CEO," or "No, you never get fired for buying IBM." I'd be like, "Why aren't people trying to invent something that's vastly better than IBM that gets the new people to buy that?" But I was absolutely obsessed by it to the point where literally, going to Nantucket with our kids when they were small, we had a Ford Explorer, and you remember how big computers were back in the '90s, right?
Mike Maples, Jr.:
Yeah.
Jim O’Shaughnessy:
I was running the test for what become What Works on Wall Street, and so my wife came up and she said, "Have you loaded your part of the car?" I'm like, "Yeah." She came back into the house and she looked at me and she goes, "Jim, the only thing in there are three computers and these three huge monitors. You've got to certainly want to bring something more than that." I was just like, and I just paused for a minute and I was like, "Oh, yeah, I guess I probably should." But I was just so obsessed that even on vacation, I wanted to be able to continue to run these tests.
My wife is very practical in most ways, and she's just like, "Is this leading anywhere? What good practical thing will come out of this?" I had an idea, but I'm absolutely uncertain whether it would work or not. But I love that idea of obsession. We try to fund those people through our fellowship program at OSV because when you mentioned taking the carbon out and her following Sam around at OpenAI, one of our fellows this year is ,she's trying to figure out a way to store digital data in trees.
Mike Maples, Jr.:
Okay, interesting.
Jim O’Shaughnessy:
And she goes, ""Instead of the cloud, we're going to have the forest." But I'm naturally drawn to those types of people. Who do you think is not a good candidate to pursue what we're talking about here? In other words, if somebody came to you and you asked them a bunch of questions, I'd be interested in the question you'd ask them and you were like, "Yeah, probably you should pursue a much more conventional path or career."
Mike Maples, Jr.:
Yeah, and it's tricky because the right founder usually is also in the right place at the right time for the future they want to pursue. So when Justin Kan did Justin.tv, it was a terrible idea, but it led to Twitch. And it was a good investment because Justin was just ideally suited to do a 24/7 live stream of his life. He's 23 years old. He wanted to be an influencer before there was a word for influencer, so he was perfectly cast for that job. Ironically, the second company he started, Atrium was not a success. And everybody, when they heard the idea for Atrium, it was like streamlining legal services using technology and AI. Everybody thought that's a good idea and Justin Kan's a great founder, what a great investment. But Justin doesn't have any interest in the legal field at all.
Justin started Atrium because he wanted to be a higher status founder. He wanted to be in the echelon of Patrick Collison and Brian Chesky, and those kind of guys. And so where has that come back to in terms of which founders to fund? A lot of people right now are wanting to do a startup because they want to be a founder. They think of founder as a role to play that they're excited about that's glamorized in society, that is a high status role. That's not a good reason to do a startup. It's not good to say, "Hey, I'm coming off this success here and there's a whole bunch of VCs who are interested in me because I'm talented. Now is my time to do a startup." That's not a good reason to do it. When I talk to founders, I spend a lot of time trying to understand the authenticity of their insight.
Do they come by it honestly? Is it really from the future? Are they the right person to pursue this future? Are they intrinsically motivated by it? Justin was extrinsically motivated to succeed at Atrium. He was intrinsically motivated with Justin.tv which came Twitch. And then, there's a lot of stuff that you look for, I think that really great founders tend to be very original thinkers, high IQ, tend to be unconventional in the things that they're willing to do to make things happen. And so you try to tease a lot of that out. It's hard though. It's one of the reasons that greatness is so rare. It's like you got to be spectacularly right when you're right, but it's hard to spot even when you're very focused on it.
Jim O’Shaughnessy:
What do you read, watch, listen to, that you would recommend to others for getting a sense for finding those kinds of people that are living in the future with those really cool new paradigm-breaking ideas?
Mike Maples, Jr.:
I have to confess. In this regard, I'm a little bit of a train spotter. One of the things that I really admire about what Buffett and Munger did is, I call it the T of knowledge. They're very broad, so they have a lot of worldly wisdom and mental models, but they're also very deep. They read Fortune 500 reports of every company, every year for its own sake. In the breadth arena, I study religiously all of these worldly wisdom topics, but I try to run it through the lens of startup capitalism. I'll give you an example. Munger and Buffett would talk about margin of safety when you buy a stock.
The margin of safety is the stock trading below its intrinsic value. The idea is never lose money and rule number two is don't forget rule number one, and you accomplish that in many ways. One is margin of safety, one circle of competence. There's a bunch of things. It turns out in startup capitalism, you don't want a margin of safety. You want a margin of asymmetric upside. The rule in startup capitalism is not to never lose money. The rule is never pass on Airbnb because you could make 6,000 times your money if you said yes in the seed round. And so what you have to study then is in the 15% case that it's right, how big could it be in that case? So it's a conditional probability. In theory, Munger's worldly wisdom is right. If you're investing in a compounding corporate capitalist entity, you do want a margin of safety because it has to persistently compound, and you have to be protected on the downside if its ability to compound is compromised in some way. But as a startup capitalist, you want to understand the magnitude of how much you're going to change the future if you're right. It's the margin of asymmetric upside that you care about. It's the convexity, what Nassim Taleb would call the convexity of the curve. And so across all of Munger's hundred or so maxims like if you read Poor Charlie's Almanac or whatever, I'll say, "Hmm. Is that true for startups or is there a symmetric truth that applies to startups?" Circle of competency applies pretty much directly to startups. You got to know where you have an edge and you got to be accurate about the fact that you have an edge there.
And so whenever I look at an investment and before I write that check, is it in my circle of competence, I ask that. So that's the worldly wisdom piece. But then, the depth piece is I have a database of every startup where you would've made more than a hundred X on your first check, and I get a time capsule for each one. So for Shopify, you get like, "Okay, this is what the deck looked like at the time you had to decide on the seed round." "Air bed and breakfast. This is what ..." It's not enough to say, "Here's why they succeeded," because that won't tell you whether you should have invested at that time. You got to know exactly what the facts were at that time you would've had to make the decision.
And then we got to ask, "Okay. Did this company embody inflections? Did it have an insight? Do our frameworks apply to this company or do our frameworks not apply? Is there ever a world where we would've figured this out and invested or not?" We do that for all these companies, Zoom, Chime, Shopify, Airbnb, and we do it for the ones we passed on. We do it for the ones we said yes to. We do it for the ones we never saw. In the short term, you don't get an advantage doing that. But if you think about, let's say you're doing one or two of those a month. If you do that for 10 years, you're going to have a giant advantage, because you're going to know startups in a way that train spotters know coming and going of trains, and you're going to have done the work to understand things at a level that no human's ever been willing to do.
At the level of depth, what I try to do is I try to understand startup capitalism better than it's ever been understood by anyone alive. We're at the beginning infinity of our knowledge of that. We know a lot more about normal business. Business schools have been around for 100 years, but entrepreneurial education really only started with Steve Blank and customer development 15 years ago. So there's a lot more to know, and there's so much to discover going down that rabbit hole of what do these wild capitalist mutations look like when they're just born? So I'd say that that's the depth that I look for, and that requires you to read a certain amount every day in the same way that Buffett and Munger described. But you're optimizing for something different than what they optimize for. But we kind of come from the same philosophy, I think. "I wish I was as successful as they are." I think philosophically, we're pretty aligned in you want the worldly wisdom, which is wide, and you want the crazy rabbit hole depth in something you're interested in, which is the depth.
Jim O’Shaughnessy:
I love that idea. It brings to mind the South Sea Bubble where Newton lost all of his money and where one of the funnier things was an undertaking of great advantage, but nobody to know what it is. That was their first slide in their deck back then. But people often go the conventional route and use the South Sea as, "Here's why you got to be careful about bubbles. Newton lost his fortune, most brilliant man in history." But one of the things that I always try to do is invert that and think, "Yeah, that's true," and I myself have used that example many, many times.
But were there are a bunch of companies that were given birth to at that time that ended up being massive companies? And the answer is yes, mining companies, canal companies, insurance, new ways of insurance were born then because of that bubble. And so, you want to try to think of the invert, I mean, back to Charlie, always invert. But it's very useful to like, yeah. Of course everyone in traditional gives the, "Oh, this is the bubble and you better avoid that," et cetera. But I do like, and I love what you're doing with the, "What did that deck look like? What did the first bed Airbnb deck look like?" And my guess is, not anything like the company it ultimately began.
Mike Maples, Jr.:
That's right. And the reason you have to do that is you've got to say, "What is the signal that could have been possibly divined at the time?" And you've got to be just incredibly truth-seeking because the problem is, even the founders misremember how it happened. When you're successful, you come up with all kinds of reasons you succeeded. For example, you can't say to Mark Pincus at Zynga, "When you pitched me, this was your game. Why did you succeed?" I mean, he might tell me the truth, he might not. He might intend to tell me the truth and not be able to tell me because people remember the truth in certain ways. They match patterns to the past.
But what you can ask is something like, "In your seed pitch deck, you called your product X, but I noticed that the product succeeded was called product Y. What happened? How did X become Y? Just tell me that. What caused you to change?" And so now, you're not asking, "Why were you successful," or "What did you get right?" You're just saying, "It went from this to that. What caused the change? What surprised you that led you to decide to do something different? What was the breakthrough moment, pivotal moment that you figured this out?" Like you said earlier, it's dangerous to try to be too smart. You're trying to be more like a Joe Colombo detective, that guy with a trench coat, you just kind of walk up to the person and say, "Hey, I'm looking at this pitch deck here. It's not what your product is now."
"What's up with that? How did you figure this out? How did this start to go your way and when did you know it was working," and things like that, because we have to care about the answer to those questions because if the next one walks into the door, our mind has to be ready to receive the idea. Our mind has to be prepared to recognize the thing that's really hard to recognize. I can tell you what. Jim, these things are wild at the time you have to decide. They look crazy, and they look very poorly formed and screwed up. A lot of things are wrong with it in addition to a lot of things right with it. But you have to be willing to say, "Okay, how do I get good at figuring out the signal that matters when I see one of these?" I don't know any other way to do that other than just to study a whole lot of examples, and study them to a degree of fanaticism that most people just won't do.
Jim O’Shaughnessy:
Yeah, I absolutely love that. The idea that you talk about when you ask somebody after they've had a success like I did a deep dive on our human operating system because you got to understand that if you want to understand other people. One of the things that I found which really amazed me was we all overwrite our memories to make them consistent with what our current beliefs and thoughts are now.
Mike Maples, Jr.:
Yes.
Jim O’Shaughnessy:
I discovered that in a really fun way in that I thought that I had felt something back a long time ago. I'm a journal keeper and have been since 1978 when I was 18, and so I can go all the way back to 18-year-old Jim and see what he was thinking and writing about. I didn't even start the journal keeping with that idea in mind. It ended up emerging as incredibly important because it let me see in my own handwriting, "Oh my God, I overwrite memories all the time."
Because I would've sworn in court on this particular thing, and it happened to be I was at a cocktail party with a bunch of people my age, and we were talking about the first Gulf War, the one they joked George Bush Sr, the good Gulf War where Saddam had gone into Kuwait. And everyone was saying, "Yeah. I certainly supported that one, but I didn't support any other ones." I was just like everyone else. I was like, "Yeah, I supported that one, too." And then, I had to look something up from that period in one of my journals and I came across an entry that I had made right prior to that war. Mike, I did not support that war.
Mike Maples, Jr.:
That's a really good reason to document this stuff, especially if you're investing in things where it's really uncertain. I'm with you. I think it's really useful to journal the state of your thinking at the time, because then you can go back to it. The other thing I think is useful that I started to do more recently in journaling is I have an entry on what surprised me today. The reason I do that is I'm like, okay, if I believe that you should savor surprises, that's an interesting way of showing up in the world of always asking yourself every day, what surprised me because to some degree, to be surprised is to get closer to the truth. And so every day that you're surprised, you compound your advantage in reaching the truth sooner or getting closer to having better explanations for what's happening than other people have.
But I find that if you can make it a habit, it sticks more. It becomes more embedded in just how you think about stuff. In any given meeting you're in, you're always in the back of your mind looking to be surprised, and you're like, "Even if this isn't a good startup idea, I can still show up at that meeting with an eye towards being surprised, and that person might teach me something." The other thing I like about journaling is you can model the types of ways that you want to show up in the world as prompts. And every day you can say, "What did I do to get more disciplined? What surprised me?" Whatever the things are, you can remind yourself every day so you can go back and know what the state of your thinking was, but you can also prompt yourself to think better in the moment.
Jim O’Shaughnessy:
Totally agree. I loved the idea about surprise. Of course, that is central to the initial thesis of information theory that Claude Shannon posited. Basically, he had the idea that information, which was the unexpected. What Shannon said was like, "If you do an analysis of a political speech, there's zero information in them because everything that you're going to hear or read is expected." And he said, "What real information is, is the unexpected." It might not have been him, it might have been one of his collaborators, but they said, for example, "A poem is filled with information because it oftentimes has a lot of unexpected in it." Well, I'm getting the hook from our producer here. I keep the phone in front of me and they start flashing me because they know that I would go on forever and ever with someone like you.
Our final question on the podcast is I think it's fun, and I think I might be able to guess one of the ones you're going to come up with. But so Mike, we're going to wave a wand and make you the emperor of the world. You can't kill anyone. You can't put anyone in a re-education camp. Well, what you can do is we're going to hand you a magical microphone and you can say two things into this magical microphone. What it's going to do is it's going to accept all eight billion people on the planet, plus or minus, however many we're at right now in reality, they're going to wake up the next day and the two things that you accepted in them, they're going to think was their own idea, and they're going to say, "You know what? Unlike all the other times that I've woken up with these great ideas, I'm actually going to start acting on both of these." What do you got for me?
Mike Maples, Jr.:
I would say take tribalism out of your reflexive instincts on viewing the world.
Jim O’Shaughnessy:
I love that one.
Mike Maples, Jr.:
Yeah, truth over tribalism.
Jim O’Shaughnessy:
I love that. Okay, that's number one. Number two, what's the second thing you're going to accept?
Mike Maples, Jr.:
Number two would be, don't assume you need to imitate anything. Don't assume that because somebody desires a certain lifestyle, you should desire it. Don't assume that because somebody's achieved status, you should care about status in that same way. In Pattern Breakers, we talked about how the mind is wired to match patterns and it helps with survival, but it also holds people back. I think the human mind is also wired to imitate. In early years, that helps because when you're a baby, you imitate your parents, you learn how to work through the world. But I think unfortunately, imitation creates rivalry for the things that we all believe confer status. And that, combined with tribalism is a very toxic mix and that is something, I think those two things I think is humanity needs to transcend if we're going to get to the place that we want to go someday in future, if we want to achieve a positive sum, totally abundant world rather than one where we hurt each other in wars and threaten the destruction of things.
Jim O’Shaughnessy:
Hallelujah. You are preaching to the choir here, Mike. I highly recommend everyone listening or watching, get a copy of Mike's book, Pattern Breakers. If you have any interest in either being a founder, being an investor in new companies, you really have to read this book. I found it really refreshing and a great look at the right way to do this. Mike, where can everyone find you online?
Mike Maples, Jr.:
Yeah, probably the best places would be my Substack is patternbreakers.substack.com. On Twitter, I'm at @m2jr, well, now X. Those are probably the best places, and then our website is www.floodgate.com.
Jim O’Shaughnessy:
Perfect.
Mike Maples, Jr.:
Yeah. I appreciate the time, Jim. It's a pleasure to spend time with you.
Jim O’Shaughnessy:
Oh, the pleasure was entirely mine, Mike. Thank you so much for coming on, and hopefully we'll be able to get you to come on again, and maybe we'll look at some companies that kind of looked like they were going to be pattern breakers, but didn't be worked.
Mike Maples, Jr.:
Oh, yeah, I got plenty of those.
Jim O’Shaughnessy:
And then, maybe do some case studies because I think that a lot of people could learn a lot from that exercise as well. So thanks so much for joining me.
Mike Maples, Jr.:
Happy to.