Instead of raising $5 million and selling 50% of your company, you could actually now go ahead and build and use public infrastructure. Lyft didn't just sort of replace taxis. When first launched, it was illegal, but this opportunity to reinvent venture was totally new. I'm turning 50 this year, and this is my year of saying yes. There's someone out there who hasn't been discovered, or we haven't discovered yet at least, who's building something that matters. I want to know who they are. There was not actually a stage called C at that point. We used to call it micro VC.
Hi everyone. Today I'm talking to one and only Ann Miura-ko, the co-founding partner of Floodgate and a professor at Stanford. I love Ann's story of ruthless pursuit of curiosity to find her life's work and something that she could be world class at. Ann is so full of wisdom of how to live life, how to pick founders, how to spot potential. And we talk a lot about how Floodgate has evolved, how she has evolved as a person, as an investor. Her passion for debates and passion for competing AI built companies and so much more. So excited for you to listen to this conversation and let's get to it. And thank you so much for taking the time. I'm really excited to talk to you. You have such a fascinating career and so much wisdom and so many interesting thoughts. So I'm excited to dive in.
Yeah, absolutely. I am curious to start with your famous debate background. So he's
Famous but [laughter].
I feel like in a lot of conversations, debate is always brought up, and there is one funny story where you are making students cry for a slice of pizza. I'm really curious: what exactly did you do to make people cry? Like what was the technique? What was asked of you?
Um, so I think my strength as a debater was just pure logic. And so I felt like the one thing that I could do was figure out how to corner an opponent on how they were explaining their position and make pretty evident any kind of contradiction that might exist in their logic. And so, I felt like I was really good at doing that. And the more aggressive you could be, especially in the situation of like a cross-examination, then that would often times really fluster an opponent and gave me the opportunity to either make them cry or make them at least feel like they had already lost a round in that moment. And I think that was sort of a really empowering thing for me.
So you were like, 'Hell yes, I got it. I'm going to get a slice of pizza.' It was that competitive spirit that was elated.
Well, I think that the point of that story and sometimes why I bring it up is that I think a lot of times for women, we are told to be agreeable all the time that we're told that part of our nature is actually to create peace. And because I had really young coaches, we had basically freshman through seniors, like undergraduates at Stanford who were coaching us. They didn't suffer from that same belief and they felt that it was okay for us to be aggressive. And so I think one of the things that was interesting to me was that it was the first time I got this permission to be a little bit disagreeable, and I don't think I'd ever received that permission before. And to me that was really empowering in a way that it was unexpected to me and very powerful to me as well.
What are some stories after you've gotten that permission to be disagreeable that really that skill helping you in your career?
Well, I think it plays out actually even within how we discuss at Floodgate what we see what we think is true about a company. I feel that our organization is really truth seeking and we seek it from not only the partnership but we seek it from the associates who work within our team. And we seek it from other people who have been exposed to that idea. And it could be anyone from a high school student to an operator to one of the partners within our organization. But we don't think of it as titles. We don't think of it as expertise. We're looking at it through the lens of who's been curious enough to ask the right question. And for us, I think that's the way it gets exposed is we have a very debate oriented culture around how we think through ideas and I really appreciate that about Floodgate.
How can you tell the difference between truth seeking and defending someone's thesis?
Oh, I think so. This is a really good question actually because I think some people get into the mode of wanting to defend their position and so I would describe that as more ego-driven, right? So, I have been right in the past or I said this thing was true and so my reputation is staked on the fact that I am right. Versus someone who is truth seeking doesn't think of it that way. They think that by seeking truth, their position is ultimately elevated, if that makes sense.
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But wouldn't you say that if it's about if the foundation of it is elevating someone's position because they're truth seeking in a way that's still connected to ego?
Uh I think ego is more about I am right versus the truth exists outside of you and so it actually has to be disconnected from ego.
There is a lot of conversation about ego these days which I love. I feel like you always should try to be low ego and seek the truth and try to learn and get feedback and understand someone's point of view and not try to do things for your own merit and good. But um how can someone actually recognize that they have a large ego and they need to work on their ego? What is a practice of dropping your ego?
I think it's being in environments and supporting environments where anyone can disagree with you. And so if you are in an environment where you believe that everyone agrees with you all the time, that you have a lot of yes people around you, then it's probably an indication that you haven't cared enough about truth seeking. Versus if you live in an environment where that disagreement or the fact that someone will call you out on something is actually encouraged, then you know that that environment fosters truth seeking.
How often do you think someone should be aware to check what environments they're in?
I think you should always be checking. And I think the more I don't know, celebrated you become or the more people say you're smart or interesting or you figured it out, the more you should be paranoid that you no longer live in a environment that fosters truth seeking.
So you're obviously someone who is celebrated. You have a really fantastic career as an investor, as an educator. How when what was the last time when you had to check yourself and recognize that your beliefs are potentially not right and you need to examine them?
So I try to do this on a very regular basis. So as an example, I have a chief of staff consistently who is someone who recently graduated from college or graduated let's say within a year to the last five years. And the thing that I'm always trying to coach that person on is the balance of agreeing with me and disagreeing with me. And so if someone is always saying yes, you're right, or is always saying that is a really great idea, I will very explicitly give them feedback that they need to confront me with what they think is wrong about my position. And it's a constant coaching to get them to feel comfortable doing that.
That's awesome that this is something that you give direct feedback.
Oh yeah. On constantly. [laughter]
Has there been um some fundamental disagreement that really made you re-evaluate your beliefs that led to some sort of breakthrough for you personally?
I think a lot. I one of the things I really value about my partners around me, I'll specifically name Mike Maples was probably one of the first people that I worked with where from day one he treated me as an equal and he was unafraid to agree and disagree with me. And just to give some context at the point when you guys started working together when he was like come co-found Floodgate with me how much more experience has he had in investing? Well, he had been already an entrepreneur whose company had IPOed and he had been angel investing for about three or four years and I was I'd worked for five years and then come back for a PhD but I had been in that program for five years and so it was for Mike and me like there was actually eight year age gap but also professional seniority which he definitely exhibited and so the fact that he would treat me as an intellectual equal was actually I think to me very unprecedented.
I want to come back to debate and uh something that I've listened to slash read in my research is that your husband tells you that life is not debate. Yeah. And then you shouldn't be trying to win and debate everyone. I'm curious when have you internalized that and when do you treat life as debates? So obviously in your investing career I'm sure there's as you said a lot of debate but when does it make sense to not debate?
Yeah I think this is a struggle that I do have because I love to argue with people. I also think whether it's a good thing or not it's how I also explore ideas. The thing that I think I have to constantly work on and I don't think I've done the best job at it is that that recognition that other people don't explore ideas in the same way. And so sometimes there are people who for whom debating an idea feels personal all of these sort of negative emotions associated with it. And so to me, I feel like that's not something that's natural. And so I have to think about that constantly.
And how do you determine in which way does someone want to explore an idea?
I mean, that's the hardest part. Um, sometimes I'll ask, but I think as an example, if you work at Floodgate and you can't work in that sort of verbal environment, it's probably not a good fit. So it is something that we ask people about and um so as an example if your primary way of communicating is through a written mechanism then oftentimes that person is not they don't love debating a topic or winging the conversation. They want to come in super prepared and culturally that may not work. And so I think you have to know for yourself what type of environment you will flourish in. And for some people that is more of a prepared written communication style and then for others they do better in sort of this verbal sparring mode. And so I think it's a combination of we have to be aware of how someone else works, but that person also needs to know how they work.
So take me inside of your brain. when you are presented with an argument or with an idea, you prefer exploring it through speaking versus, you know, there's this overall belief that writing makes you a clearer thinker. And a lot of people are like, okay, you should actually write things down before saying anything to really understand how you think and what you think and why. Is that through writing or sorry, is that purely through speaking for you or do you still write also?
I definitely do write as well. I think there's definitely a role for written communication and written processing. I think though the speaking mode of wrestling with an idea allows you to do it in a more casual frame. And so you could get through more ideas and you could get to the processing of information faster I think when you use sort of a debate format.
Yeah. If someone who's listening is not very good at debate and wants to get better at it as an adult, let's say they don't have access to a debate class to go to. What would you recommend them to do?
I think there's some really excellent books. So, when I was a kid, I read there's a negotiations book, Getting to Yes, that was quite good. Um, my son is currently reading a book. I think the title of the book is how to win an argument. But there are these incredible books that talk about how people in history have structured arguments and how they have built their own way of speaking and arguing for their position. And so I think there's lots of resources now. I think there's also great YouTube channels that so I think that actually the back when I was learning you had to find an expert and for us it was Stanford students because we had no coaches but I think today the beauty of it is if you decide you want to learn something you really can go buy a book, watch a bunch of YouTube channels. And then for your son he read the book and then he is practicing it with someone because I feel like consuming information is one thing but especially for debate you better practice.
I don't know because he's in the process of reading it right now. I saw him reading it yesterday.
Got it. Got it. So TBD what the process is going to be.
Exactly.
Um so throughout your life you've often heard that you were average at the beginning of your life, right? Before you found what you wanted to actually do. Yeah. Um I'm curious, does that voice still talk to you at all?
Um, no. You know, it's it's funny. I've talked to my mom a lot about this in terms of like the there were always some things that I was really good at. I was a little bit unusually good at piano when I was a kid.
Um, I still do. Not enough, but I still do. And then and I knew from that experience, oh like I already have this baseline that's well above what other people can do and then the discipline of practice then extends that. Um I also realized pretty quickly that there were other places where tests would hide my real capability.
Can you give me an example?
Yeah. So, in elementary school, in order to be part of this like gifted and talented program in California, you would take an IQ test. And every time they gave this IQ test, I would be distracted by something that the test administrator was doing. And so every time the actual score would be not great and so the there's first of all my mom would advocate for me in a way that I just think is was really difficult to do but she just sort of believed and she would advocate for me every year.
What do you think gave her that belief? Was it that was it just like regular Asian parenting where she's like my kids are the best?
I don't really think she thought I was necessarily the best at that point. She did definitely thought I was kind of a strange kid. I would really get into something and then just devote a ton of time to it. And so, uh, I got into roller skating for a little while, like really good at roller skating. And then I really got into, uh, debate later on. And like I would be sort of a self motivated kid. And so my mom believed in that. And so she wouldn't give me the story that everyone else would say, which was like, 'Oh, she's fine, but she's not a great student.' And so her the story she told me was, 'You're exceptional at math. Doesn't matter what everyone says, you're exceptional. You're exceptional student. You're exceptional pianist.' And so that sort of compounded on itself until it actually became true. And so, you know, I think a lot of it is you do need someone who believes in you because sometimes it's hard to believe in yourself.
Yeah. Do you think you should tell people that they're exceptional when they're also clearly putting the work in? Because I worry that if someone's just like, 'Oh, you're so amazing. You're so smart. You're exceptional.' But then there isn't really a lot of track record. It could also backfire, I think. So, I don't know. I do struggle with this idea of like everyone is told they're special.
Exactly. Um because to a certain degree, my mom would tell me I'm special, but she would add a huge dose of reality to whatever I was always doing, right? And so, she would be my biggest fan, but she would also be my biggest sort of source of realism. Um, and today I do encounter a lot of people who've just been told, they're so special their entire lives. And so resilience comes from knowing that you have the capacity to break through trials and things that don't go well, right? And so I think that is something that you need to learn. You need to be told is possible too. And I think that that is an important part of that.
Would you say that when you were looking for that thing that you would be uniquely good at, you were um looking for like your life's work or did you cuz you had a lot of track record for dedicating enough time to something and then becoming really great, but then you still kept kind of winding your way to find what you're doing now, which is investing.
So I I think um finding your life's work is a combination of what are you good at, what do you like to do and what is valuable in the world like a ikigai, right? And so it has to be that combination. If no one cares about the thing that you are really good at and you love to do then you'll have purpose but you won't have like the true sense of purpose which is having impact in the world. Mhm. So to some extent people have to care about the thing you're doing and and so it is that combination of what are the things that you're good at and a lot of students that I work with they'll say you know what am I really good at and some of it is very subtle right it's I think a lot of students are looking for you're really good writer or you're really good at singing Um, and sometimes it's not as obvious as that. Uh, even if I look at my own personal strengths, they were more subtle. So, I discovered that I really both loved teaching and could be innovative at teaching. And I could take things that I saw in the real world and then translate that into product or information that students could ingest. And that is a skill that also translates actually into early stage investing. Right? Because I as an early stage investor, I can't build the thing. I can't do the thing, but I'm talking to the founder as if you sort of a teacher. I observe the world. These are some of the things that I'm seeing and you might take that into consideration when you are building the thing you want to build, right? And so all of those gifts sort of are built upon the strength that I have and how that's valuable in the world.
Have there been any strengths that you've discovered recently that you weren't aware of or do you think there is a moment when you're like okay these are all my strengths and now I'm riding the wave of applying them.
I think that's a good question. I think AI probably changes the way in which your strengths manifest and how you could take advantage of them. Uh I think one of the things that I actually am good at is taking kind of disparate ideas and and pulling them together. And right now AI makes that even easier and allows me to take two very different ideas and have a partner in exploring how those are connected.
Is there a recent example of when you did that and you were like, 'Oh, wow.'
Well, some of this work that I'm doing on how AI companies are just different in the way they operate is a place where I've been using some of these ideas. So as an example, when we first started Floodgate, the general idea was actually that the world of startups was really changing because the way in which startups built their product had shifted because of cloud computing. AWS had launched in 2006 and there was a lot of open-source software that was now available at the time. And so it meant that instead of raising $5 million and selling 50% of your company because you had to buy servers and proprietary software, you could actually now really just go ahead and build and use public infrastructure, right? And so that actually really changed the way in which companies were not only built but the cost at which it was built, the people who were involved in these companies, how many employees were needed. And so, uh, we're seeing the same thing happen because back then there was this whole idea of what a lean startup actually would look like. And there were new ideas about how you would test the hypothesis of a company. You would go out to the customers much earlier. You would talk to them about what you were building. You would get that feedback and incorporate it into the company and the product on a real time basis. Well, AI actually really changes that because the amount of information that you're getting in real time from your customers, from the industry, from sales prospects, you can incorporate that directly into your product, your business model, how you operate in real time. And so we really think that these disparate ideas of how we saw lean startup forming in the early days is now going to be replicated but in a totally new way with AI native companies. That's an example of how we're sort of taking these different ideas and tying them together.
That's really cool. I want to come back to this idea of finding your um yeah finding the work that you're built for. Do you remember the specific moments when you were like, 'Oh, wow. I'm built for this. I love this.' You know, the ikigai intersection is happening.
I'll tell you a few times where it didn't fit. And then so like it gave me a clear sense of what it might feel like when it does fit. So um a few times. So one was I was I was studying for the MCAT and I thought I was going to be a doctor and I thought that for many years right I thought that being a doctor is such a noble profession and so that's the career I wanted to have but I was at a hospital at some point and realized I wasn't suited to be a doctor. I didn't love memorizing things and so the whole medical school process felt very artificial to me. Uh the hospital environment was not something that I really loved. I also don't like structure, right? And and being a doctor basically implies a lot of structure. It has to. And so it felt like that was not the right calling for me. Just the description of what the job is. I then thought I was going to be a lawyer. I even got into law school was getting ready to go and uh my boyfriend at the time, now my husband had his first internship in law school.
He's not. He never practiced law.
When in that first year, in that first summer, he's in this like amazing summer internship where basically they're they're whining and dining you. This is as good as it gets when it comes to this job. And when we looked at the actual nature of the job, it's very detail oriented and very literal in many ways. that initial part of the job, what you do as an associate was so ill suited to me and the way I like to think that I knew immediately that that was just not going to and and then when I fast forward to then being in grad school, so I'm in a PhD program and the natural thing to do in the PhD program is then to become an academic, right? And as I'm sitting in my office as a graduate student, two or three years in, a person walks in and introduces themselves and they're actually going to be across the hall from us. And he is a professor. He's a new professor, newly minted professor. And in our conversation, I realized that because I was out of school for five years and then came into my PhD program, this guy had gone straight through, but he was my age. And when I took the seminar with him and I just sort of saw how his mind worked, I realized that if you're an academic and you're world class, that's what it looks like. And I felt like I had a lot of gifts and I could be a pretty good academic, but I would never be a world class academic the way he was. And so I remember at this point my dad said to me like, you have actually a lot of gifts. There has to be something out there in the world you do that's world class where you can actually be one of the best. And so it's a matter of finding it versus just giving up and deciding that you're going to try your hardest at something that you're not that great at, right? And so for me, falling into venture was a really opportunistic thing. I had actually been in venture right before I came back to my PhD.
Yeah. And so I kind of knew what it was, but this opportunity to reinvent venture was totally new. And so that became a big opportunity.
What role do you think luck plays in you finding not you personally but anyone finding their calling and finding their life's work because you could have kept you know going and trying things and it wouldn't be exactly it and maybe you would have conformed and be like okay well maybe I can't find it.
There's a great book by Tina Seelig. It's a new book on luck and so you should check it out. But some of the ideas that she has in there I think are really important. One is there's a difference between fortune and luck. Fortune is something that you don't have any control in through the circumstances into which you're born. You're very fortunate, right? But luck is something that you can actually play a role in. Doesn't mean that there's no randomness, but you can increase the surface area on which luck falls by doing some things proactively. Some of it is just the basics of good manners. You write thank you letters. You know, you write emails that are easy to forward. uh you just do sort of basic hygiene in how you interact with someone. You create value for other people and don't expect anything back. You are increasing your surface area of luck. And so I believe that I was very lucky. I was also quite fortunate. Uh but I also did a lot of things to maximize the possibility that things might happen.
How are you maximizing your surface area for luck right now?
Oh, um, so one thing is I continue to do things that aren't necessarily uh strategic with just sort of ROI in mind. So, I love to teach and that's something that I'll continue to do. I think that actually by mentoring people and teaching them how to operate in the world and like giving your rolodex to people, introducing them to other folks that I maximize my chances of luck. Uh I also work really hard. Um and so as someone who's almost 50, I don't just sort of ease up on the gas pedal. I am constantly trying to be responsive to people who connect with me or who need something from me, especially our portfolio company CEOs. If they're asking for something, I try to get back to them in a way that like shows that they matter. Uh and I think that's just sort of important for most relationships. And then the last piece is I'm constantly learning. And so I feel like part of maximizing your luck is also being someone who's always curious about the world. And so that's something that I really believe in.
I want to um obviously talk about Floodgate because you've been at Floodgate, building Floodgate for almost 18 or almost 19 years now.
Insane. Um so at the beginning you guys have done a lot of non-consensus things like you know the thunder lizard or micro VC which now are very orthodox. What are some non-consensus things that you're doing right now or working on right now?
Yeah. So a few things one is a lot of the firms that have grown up in our era or even beyond as they get successful they have grown their fund size. One of the non-consensus pieces is that we have continued to remain relatively speaking small. And so we have not grown our fund size, I think, in three or four funds. And most people would say that's very non-consensus because as soon as you hit a little bit of success, you would grow your fund size quite significantly. Our non-consensus belief is that it allows us to actually provide incredible cash on cash returns to our investors. And so we've proven that with our ability to provide real DPI back to the investors that we work with. Um, and on top of that, I think what it does is it allows a billion dollar outcome to really matter to Floodgate and our investors versus being a way to return a very small percentage of our fund. And so those are things that we've studied. Those are things that we've actually demonstrated and we we're continue to be excited about that.
I love your point about playing offense and defense because um somewhere I've read or listened to that you think that not losing is not winning.
How are you playing offense as an investor right now?
Yeah. So a few things. One is that um we have our own sort of differentiated perspective around how we believe companies will operate in the future and we think we see it because we are so early stage and we have a number of companies that are operating in a totally different way.
Can you give me an example? What are some ways that they operate in?
So, we have one company as an example that has an agent that goes through all of their data and can actually pinpoint something factual that someone says, right? So, uh they'll say something about the product that they think might be true. Well, the agent will pick up on that, validate whether or not that's actually correct and using access to data, and then if they believe it's going to be impactful on the business, that agent will actually do something about that analysis. So if it believes that the product could be improved by creating an offshoot of that product and it believes that it could sell through more of that product as a result, it will actually make and implement that product change. And then deliver it to the team that is supposed to analyze whether or not that product should exist.
And is it usually smaller changes or is it large changes as well?
Uh it could do any number of things. Um and so uh we've seen it identify like millions of dollars of credit. Wow. That needed to be applied. That was one example. Um it can do smaller things like split a shift in half. Um, and so there it it it changes, but I think the thing that's been really interesting is that, you know, this is a company that's not an AI product company. It's just using AI for but the company uses AI in some of the most innovative ways.
That's really cool. So one thing that comes to mind with respect to that is um what do you think is the balance between blindly following data and also following your intuition? Like in your experience as an investor, has it always been the case that at a company data is always right?
No, I think so. So so that that's the art form of being a founder, right? Or CEO? And that's why I'm like if an agent just blindly makes changes without consulting someone, is that always a good thing?
Make changes will send it to a pod.
Oh, so someone has to approve it still. Okay.
It's always a human that does the approval.
Got it. But if you could have a tireless agent that is constantly analyzing information and providing you with proactive feedback about your strategy or your current state of affairs, uh or will notice things that you hadn't noticed before.
100%. And I think the thing that's most difficult about how you set this up is not just the engineering that's associated with it. The engineering is actually very simple and I feel like it's solved now. The hardest part is actually how do you get groups to interact with one another? How do you get designers to work with engineers and product people? How do you get marketing lined up with engineering? How do you get sales to deliver information that the customer just said to you to the product person and then they have the product person take that as real feedback from direct interactions with the customer and figure out how to incorporate that into the work that they're doing. I think that kind of interdisciplinary way of working with an agent or having an agent work across disciplines. It's actually really really hard.
Yeah, that sounds. We've only seen a few companies doing that and we're the thing that I think we've become experts at is really understanding and teasing out how it's being done at the forefront today. Uh and I think we know more about that than almost any other firm. And for someone listening, if they want to have this AI first or agentic first way of building their company, making real-time decisions on real-time data, how would they get started with that?
I think uh so there's some things that I've already written. So you can find some of my writing at ann.bc. Okay. Um the other the sort of the first step that I've noticed with all of the companies is that they are exposing their data to the agents. Um and then they are also exposing it to all of the other people in their organization. So whether it's Vercel or fairly non-technical companies, one of the first steps that we've observed is that they will create some mechanism by which anyone within the organization can actually query the database in natural language and it turns it into a SQL query. That's incredible. Um, and almost everyone goes through this process and then what happens is that the whole organization sees that as a superpower.
And all of a sudden they're sending requests to understand data in a new way.
And by doing that they are now at the forefront of understanding their business and being able to create new experiments directly. And then the next thing that they'll demand is, well, then now that I know what's happening, how do I do something about it?
And then that creates this need for other agentic products.
And from what everything that you've seen, what separates the founders who decide to take this AI-first mentality versus the ones that don't?
I think, uh, paranoia. I think that, um, it's not, it's not, you know, some people said, oh, maybe it's age, but I have, you know, forty-some-year-olds who are extraordinarily AI-pilled and have pushed their organization in that direction and I have twenty-some-year-olds who are operating companies that look exactly like it did in 2023, right? And so I think there is sort of this knowledge that there is going to be a new way of building a company and they want to participate in it and so they are modeling it themselves. So they are curious about what are the tools that they should be using. They are figuring out how to make their organization more legible to AI. They are then using agents in new ways internally for themselves. And so I have yet to see an organization where the CEO didn't care and the organization is AI-pilled.
It's always the CEO coming from the CEO cares really deeply about it and the organization itself starts to operate in that way and individuals start to own that mentality.
Uh, since you said paranoid, it made me think of, uh, competition and the fact that I think you describe yourself as incredibly competitive. How do you compete right now? What is firing you up?
Oh, I think, I mean, it's always that opportunity to work with amazing people. You just want, you want that experience again. And so I think I have the paranoia that there's someone out there who hasn't been discovered or who we haven't discovered yet, at least, who's building something that matters and I want to know who they are.
And on the investing front, have there been any investments recently that really reshaped how you think as an investor and picker?
Yeah. So, um, my very first investment out of the last fund, our most recent fund that we're still currently investing out of, is a company called Smarter DX.
That's the one that exited, right?
Yeah. So, it exited in three years for over a billion dollars. And it's sort of a combination of AI, healthcare, uh, revenue cycle management. And so a few things. The first is when I first met with them and even at the Series A, I couldn't get investors interested in this company.
Uh, most people told me revenue cycle management wasn't that interesting. They said that, uh, they thought that the market was too small. Um, and so, you know, the Series A really went to an investor who had already studied the market and knew it deeply enough to understand why this company was different. So that was interesting to me in the sense that you don't have to constantly be chasing hot companies or even if your company is not hot at the Series A, that doesn't mean that fundamentally it's an amazing company.
The second was that with a billion-dollar-plus exit, we actually returned more capital than I had even invested out of the fund.
And so this goes back to this notion of if you have the right-sized fund, then a billion-dollar outcome, which is actually really meaningful to the founders, can be equally meaningful to us. And so if we want to continue to have a fund that is really aligned with founders for whom that kind of outcome is life-changing for them and it's actually a meaningful exit for us, we are proud of the fact that our fund construction continues to do that. We're not just founder-friendly in the sense that as long as you're building a trillion-dollar company, then we're founder-friendly.
Yeah. How, um, can founders dissect what type of founder-friendly the investor is? Is it just literally looking at their incentive structure and what size of funds they have and what amounts they invest?
Yeah, I think a lot of it actually is about, um, their strategy. And I think for an investor, your core strategy is revealed by the size of your fund, right? And so I think what most founders don't realize is that if you have, you know, a hundred-million-dollar fund, then, uh, if you want to be one of the top funds, you're really trying to 3x your fund. If you're competing against the S&P 500 that's ripped, you're probably trying to go for a 5-to-7x fund, right? So that means you're trying to return somewhere between 300 and $700 million back to your investors. If you assume that at exit I own 5 to 10% of the company, let's say 10% to keep it clean, in order to return my $100 million fund three times over, I'm looking for a $300 million outcome. That means that I'm looking for a $3 billion valuation, right? That's the point at which it's like I'm returning three times my fund.
Um, so if you are a founder and you had a $100 million exit and you took money from a billion-dollar fund, you can only imagine how that is not scratching the surface of what that fund needs, even though that might actually be a game-changing exit for you. And so I think founders need to be aware of what the incentive structures are for the investors that they're bringing onto their cap table and what value those investors bring. And sometimes there's a little bit of a tradeoff.
Sometimes you can learn a lot by just talking to other founders who've taken money from those VCs. And I think there's like a whole way of understanding what it means to be in a relationship with that investor.
What kind of investor are you when you are on someone's cap table? What do founders come to you for? What are your superpowers?
Yeah. So I think a lot of people are hiring Floodgate in general, even though I am sort of the main person on the investment. And what people oftentimes come to me for is just sort of brutal honesty about where they are with their company. So they're seeking out sort of the Asian tiger mom, [laughter], on some level. Um, I study a lot around what it takes to get to product-market fit, what we should measure, what that looks like, why you're there, why you might not be there, what is it going to require for you to get there. So those are things that I really care about. Um, a lot of people are also interested in working with Mike Maples because he's incredible at category design. And so, um, even if you take money from me, you're taking money from Floodgate. And so you get that. Mike Heler, uh, has worked a lot in go-to-market. And so you get sort of this go-to-market engine, um, when you work with him. And so those are the superpowers that come along.
Tell me a bit more about Mike Maples' category design. What does that actually mean and how has that shown up in some of the portfolio?
I think for us what we believe is that, uh, category design means that you're not just making a product, but the organization, but like the best companies actually create a completely new category. And so if you think about a non-tech example of that, we oftentimes talk about, um, the 5-hour energy drink. And so the 5-hour energy drink is a shot glass.
Yeah. So you guys had Magic Mind in your portfolio too, which is kind of like an extension of 5-Hour Energy.
The 5-hour energy drink is really interesting because a guy said, if you're tired, you're not necessarily thirsty, right? And so he took the form factor of what is typically a drink and shrunk it. And so I think what's really interesting about him as a character and sort of category creation is that he decided he wanted to be in a totally different area. And so he creates a totally new beverage, right? And so because it's a new form factor, it's not going to sit in the beverage aisle. It's going to sit in, uh, the cashier. So I think when you're successful at category design, you're actually in a new area of the storefront. You own a very different shelf life, right? So that's something that we think about for startups as well, is startups actually will look different and operate differently and can actually create a totally new, different category. So Lyft is a great example that Lyft didn't just sort of, uh, replace taxis. They actually created this new category of peer-to-peer ride-share. Um, and it was so novel that when they first launched it was illegal, they couldn't charge money for it, so they had to ask for donations.
Wow. And so the idea that you aren't just starting a company but actually designing what that category looks like is absolutely—
And I feel like that's very true for how you've structured your career because you, you know, with your talents almost like picked a new lane and carved the path for yourself. So it's like you've defined the category.
Yeah. I think when we first got started with Floodgate, I think there were like four to six other firms doing what we were doing, and there was not actually a stage called seed at that point. Uh, we used to call it, uh, micro-VC.
