[Video Edition] Ep 129: Pattern Breakers with Mike Maples Jr., Founding Partner at Floodgate

Thanks for having me, Jason. It's a pleasure. I'm really excited about this and really excited to talk with you about your new book, Pattern Breakers, and just venture and startup in general.

So about 10 years ago, I had an unsettling realization. I was involved with a company called Twitch that was acquired for $970 million, and we made 84 times our money. The unsettling part was that I had forgotten I was a shareholder in Twitch. I had invested in a company called Justin.tv, and it morphed into two companies: Socialcam and Twitch. Socialcam was acquired by Autodesk for $65 million, and I thought that was just the company. So imagine how embarrassing this is: you go to your limited partners, your investors, and you say, 'I'm really sorry, there's a company I don't even have in our financials. I need to restate my financials, but it's this big windfall—we made 84 times our money.' And all of them were like, 'No, we're good, just send us the money, don't need to restate anything.' In fact, one of my LPs sent me a pretty fancy bottle of champagne and stuff like that. But then a couple of other things I noticed: the prior fall, Twitter and Odeo had gone public within a week of each other, and I had seed-funded those two companies. But they had also been massive pivots. Twitter started as a podcasting company, and they tried to decide whether to call it 'twttr' or 'voicemail 2.0.' I like to say that I bought two vowels, and then Elon took them all away by renaming it X. And Odeo started as a classified site for colleges. So I zoomed out and realized that 80% plus of my exit profits had come from pivots. Around that time, Lyft had just pivoted from Zimride to Lyft, and it was starting to blow up, and ride-sharing was blowing up. At the same time, a lot of startups I was working with—and this might resonate with some of your listeners—seemed to do the best practices you're supposed to do: they did the business model canvas, they would have been a Harvard Business School case study of what to do, except for the fact that they failed. So I noticed it time and again: here you had Twitter that didn't do any best practices that I could discern. They couldn't decide who the CEO was, the fail whale was there all the time. In the early days, it was pretty messy. And the Justin.tv guys famously brag about how dysfunctional they were as a management team. So I was like, 'Okay, what if this is all just random? Am I just a lucky fool?' In Fooled by Randomness by Nassim Taleb, he describes a character called the lucky fool who attributes his success to something he knew about or some vision that he had, but really was just lucky and isn't willing to come to grips with the fact that he's been lucky. So I thought, 'I either need to figure out if this is total luck, and I should retire before I get exposed, or there's something else here to understand that's worth understanding.' That was the genesis of the book: I went down this three- or four-year rabbit hole of trying to figure out this question.

Jason, that's what I was really grappling with. How do you come to this realization that when you're successful, 80% of the time the product changes? That's in the success case. So it's like, what are you investing in then? Are you investing in the product? Because it seems like maybe not. So that's exactly right. The person matters tremendously for sure. But what I came to realize, and what I ended up calling inflection theory, was that there are forces behind some ideas that give them more potential upside than other ideas. Some ideas embody a set of powers that just give them more of an advantage to changing the future. And even if you don't know if you've converged on the exact right implementation, it's still oftentimes worth pursuing. So what I discovered, I put it this way: some ideas that seem dumb are worth pursuing. Like Justin.tv was a dumb idea—Justin Kan live-casting his life online 24/7 is a terrible idea—but it embodied some things that made it a good opportunity to pursue. There are other ideas that sound plausibly good that aren't that good. An example from the past is FanBase, a social network for sports fans. Those ideas are the most dangerous because you talk to five friends and they all say, 'Social network for sports fans? That sounds reasonable.' But the problem is there are zero desperate people for that, and you end up having a failed startup. So you want to protect the ideas that sound bad but are actually good—Airbnb, Justin.tv, Zimride—but you want to avoid pursuing ideas that sound plausibly good that aren't that good, and you lose your time, you're three years in wishing you hadn't started it, but now you're stuck because you have employees and investors and you can't just leave. So that's really what the book was about: to help founders assess and stress-test their ideas to decide which ones were most worthy of their time and talent.

That's where the inflection theory ideas started to take shape. Here's what I concluded: business is never a fair fight. The only question is who gets to fight unfair. In the default position, the incumbents fight unfair; the present fights unfair. So what most people don't realize, and what I came to understand, is that a startup capitalist is a different kind of capitalist. A corporate capitalist makes money and creates value in a different way. They create value in the way that Warren Buffett would describe value creation: they create defensible moats, economies of scale, network effects, brand, process power—forces that contribute to benefits for their profits and barriers for competitors. Well, what I came to realize is that a startup has none of those things. So how does a startup capitalist create value? They create value by changing the subject. They create value by denying the premise of the rules. The mistake that a lot of startups were making—and I'm sympathetic to it—is they would hear the advice that if you don't have a big market, you're going to fail. It doesn't matter if you invent a good widget; if you don't have a good market, you're going to fail. So you should go after big markets. So they'll assess markets, try to find a big market that has white space, unserved needs, unserved customers in underserved markets, and then go try to build a product that addresses that unmet need. But there's a problem, and it's subtle but important: when you do that, you're buying into a context where the rules of the market are governed as they've already been defined. You're buying into the premise of the rules and trying to find a gap that exists on the playing field within the rules as they've been defined. What a great startup does is avoid the comparison trap entirely. When you took a Lyft ride for the first time, nobody in San Francisco ever said, 'Well, how does that compare to taxis?' I like to say that a great startup idea forces a choice and not a comparison. If everybody's selling apples, you're not a 10 times better apple; you say, 'I'm the world's first banana.' You may not want my banana, which is fine, but I need to find all the people in the world who value the advantage of bananas because I'm the only guy that has them. So I should be able to command a premium and do really well. So the inflection theory starts with inflections. Inflections are the empowering force that allows founders to change the rules. It's kind of like the rock and David's slingshot against Goliath. We need to start with inflections to provide the type of empowerment that would allow us to rewrite the rules.

They can vary in size and number. It probably helps to start by defining what I mean by that. To me, an inflection is a turning point. For example, Moore's law is not an inflection; it's an improvement curve. One of the things that's so important about startups is to get the timing right. You see all kinds of good ideas that don't work just because they were too early or too late—usually too early. An inflection is something new, a specific new thing that's introduced by somebody else, not a startup, that creates the conditions for the first time for radical empowering change. A minute ago, I was talking about Lyft. The inflection was that the iPhone 4S had a GPS locator chip in it. Because of that, a new form of empowerment was unleashed. Now all of a sudden, I could use an algorithm and build an app and locate someone within one meter accuracy without asking them for their location; I could just send an API call. Then you start to say, 'Who does that inflection empower?' Potentially a lot of people, because almost everybody owns smartphones and almost everybody upgrades their smartphones. That's an example of an inflection. With Instagram, the inflection was more about the iPhone camera having enough megapixels. The one released in 2009-2010 had enough megapixels where you could say, 'You know what? I can kind of use this as my camera when I go on vacations. I can take good enough pictures that I would want to share it as if it was a photograph.' That empowered Instagram. Phone cameras were always improving; they started out really bad and got progressively less bad, but eventually they got to a tipping point where they were good enough to create a new set of empowering conditions for people who wanted to use cameras. So the first thing we always look for is the inflection. When I see an idea, I want to see what the product is, but I want to stress-test the inflection. I want to understand: does this idea embody inflections? How powerful is the inflection? How much empowerment does it provide for people? Because the more empowerment it provides, the more the entrepreneur can bend the arc of the present to a radically different future. That's what I want. Most people, when they think of the future, they forecast; they think the future will be a forward projection of the present, but it'll mostly resemble the present. The great entrepreneurs backcast. They say, 'I only win if the future's radically different. I only win if I can work backwards from a radically different future defined by radically different rules.' It's the inflection that catapults or transports the entrepreneur to that radically different future. We need some set of empowering capabilities for that different future to be realized.

I love your question. Here's how I would net out the theory at large. What is a theory really? It's an explanation. It's an explanation for a mechanism for how something happens. Inflection theory basically says there is a mechanism for creating breakthroughs. It starts out with the insight. The insight answers a specific question: what do we know about the future that's powerful and not obvious? The power comes from the inflections and the empowerment that they provide. The more empowerment, the better, because the more empowerment an inflection provides, the more radically superior a solution we can offer can be. So we do want the biggest inflections possible, but we also want to know something about that inflection. For the Lyft guys, the GPS locator was the inflection. The non-obvious insight was, 'Oh, that means you could do a sharing economy for car rides.' That was a non-consensus insight in the sense that it seemed crazy that a stranger would want to get in another stranger's car. That seems kind of crazy to most people. But that's the first breakthrough: the insight breakthrough. The more powerful the inflections are, the more powerful the insight can be. The more non-consensus the insight is, the more powerful it has the potential to be. Then you answer the question: what do we know about the future that's not obvious? The next part of the breakthrough sequence is product-market fit. This is the one everybody talks about. Product-market fit, in my mind, answers another simple question: what can we uniquely offer that people are desperate for? If you have a valid insight, you've already solved the uniqueness part. So your implementation of the product, the goal, is to navigate the insight to the desperate. The reason we've made so much money on pivots, and the reason pivots happen quite often, is if the insight is valid, you have a first-mover advantage into the future. You're still right about the future; you're just not necessarily right yet about the right implementation of your insight or the right person to offer that implementation to. Product-market fit is when you form that connection. Then, for completeness, you have the growth breakthrough. You start to say, 'How can I scale according to a predictable pattern, exponentially?' If you have created something unique that people are desperate for at scale, now all of a sudden growth will happen because you don't have to throw money at the problem of growing. All you have to do is syndicate the truth, because the obviousness of your superiority is true. Every component has an impact on the next component. If you have a very powerful insight, it's almost like a Newton's cradle: that energy gets transferred to your efforts to create product-market fit. If you do that really well, then energetically that energy gets transferred to your growth breakthrough. That's the mechanism for how startups and startup capitalists change the future. They don't build moats; they create this breakthrough sequence. By harnessing the energy of the inflections and the insights and their navigation of an implementation to the desperate, they radically alter people's perception of what's possible. They break the pattern of how people do things. That's the reason I called the book Pattern Breakers: pattern breakers have pattern-breaking ideas that defy the assumptions of how products should be and what we expect of them. But they also engage in pattern-breaking actions, because a startup of the kind I'm describing is a disagreeable act. The status quo has the word 'status' in it, and the present is going to fight back, and it's not going to fight back fair. The present isn't interested in negotiating with you in your future; the present wants to stop you from disrupting what it already likes and knows well.

That's what I really came to realize. It reminds me of evolution. If you look at fossils, they'll look similar for multiple generations, and the evolutionary traits don't vary that much. But then all of a sudden, you go from dinosaurs to mammals. How does that happen? A meteor hits the Earth, or a flood wipes out something. It's called punctuated equilibrium. Value does come from compounding; companies create value by compounding their advantages and bringing more abundance and better products to people. But every now and then, you want that punctuated equilibrium. It's the corporate capitalist's job to keep the fossil record always evolving. It's the startup capitalist's job to say, 'No, I'm going to come in with something radically different. I'm going to start a flood and change the subject, change the rules and the laws of physics and spacetime altogether.' The problem with most entrepreneurship frameworks is they study startups that fail. They'll say, 'This startup failed because there wasn't a market, so you should start by looking for big markets,' or 'This startup failed because it didn't have a business model, so you should do a business model canvas.' Those things are good to do, but they're like how you avoid unforced errors. Clearly, you can fail if you have unforced errors that become existential. But startups don't create breakthroughs by avoiding mistakes. Startups create breakthroughs by breaking free from the boundaries, conditions, and limitations of the present. So what we want to understand is: what are those forces that provide that empowerment? How can we harness those forces? Because that's the thing that, time and again, I noticed was the better explanation for why these startups had the breakthroughs.

That's why I think it's good to have good definitions about these things. People might say, 'Well, the iPhone had inflections in it, but wasn't it itself an inflection?' And I'm like, 'Yeah, that's true.' But you can kind of get your mind wrapped up in these recursive questions. So I was like, 'Okay, what are we really getting at here? What's the point?' The point is that every now and then, something new gets introduced, and that new thing creates new forms of empowerment. What the startup capitalist does is translate that new form of empowerment into an insight for how to deliver that power. The empowerment: iPhone 4S has a GPS locator chip. The insight: 'Oh, you could do a transportation network of independent drivers and riders.' The movement is a different thing. When you think different and when you embody inflection theory in your idea, you're an entrepreneur out in the future. You're right about what the future could be; you're right about what your implementation and insight could be. But being out in the future by yourself doesn't do any good. You have to get other people to move with you to that different future that you envision. That's where movements come in. You want to create a movement that moves the right people with you, so that you and your fellow movers who join the movement can co-create the future. The future isn't created just by the founder, just by the idea. It's co-created by the initial set of believers in that idea, by the people who are desperate to avail themselves of the empowerment of the insight. That's really different. Most people, when they think of their go-to-market motion as a startup, think about it in a classical way: 'What's my marketing mix? Who are my targets?' But what I would assert to you is that most of the great startups I've seen are movements. Tesla's a great example. You mentioned Elon Musk earlier. You go into Tesla's headquarters, and it doesn't say as their mission 'make the best cars.' The word 'cars' isn't even in their mission. It says 'accelerate the world's transformation to sustainable energy.' A great movement appeals to a higher purpose and activates the grievances of a minority against the tyranny of a majority. Most of the time, we think about movements in terms of civil rights, Martin Luther King. But Martin Luther King forced a choice and not a comparison. He's like, 'You either believe that people should be judged by the content of their character and not by the color of their skin, or not.' There's no middle ground. You can't be kind of racist. You occupy this future or don't. There's no way to reconcile the world you're in versus the world that could be. You have to decide. Movements are very powerful. The other thing that movements do is they take the greatest perceived strength of the status quo and reposition it around the weakness. Airbnb: Brian Chesky didn't say hotels are no good. Brian Chesky said, 'Look, you have a choice. If you want to stay in the Four Seasons in Paris, you can. It'll be central downtown, it'll look like the Four Seasons in New York City or in Austin, Texas, or in San Francisco, and you'll have a wonderful, guaranteed Four Seasons experience. Or you might want to live like a local in the neighboring neighborhoods of Paris, live like a Parisian in a house built in the 1700s that embodies the beauty of the Left Bank Parisian architecture.' I don't have to say that Four Seasons is bad for you to think that this other thing is good. It's just that you can't reconcile the two. Now, Four Seasons, how do you respond to that competitive strategy? It's very hard. Your entire business has been predicated on the compounding advantages of being really good at the pattern of how you built hotels. Now Brian Chesky is off breaking the pattern, and he's telling the world that the thing that made you strong—he's doing a judo throw. He's using your size against you to make your greatest strength your greatest weakness. That's the other thing that movements do: they make what seemed to be appealing about the status quo something it needs to apologize for. By doing that, the founder doesn't fight fair, which is what we want to do. We want to engage in an unfair fight that is biased against the incumbency rather than overcome the power of the incumbency.

It's an optimistic conspiracy. It relates to a really important point: it's actually a good thing if most people don't like your idea at first. When you think about it, it makes sense. Human beings are conditioned to like things. If everybody likes your startup idea, it's too similar to what they already know, which means it's not non-consensus enough, which means it doesn't break free enough from norms. The best startup ideas tend to have a small number of people who are hyper-loyal. They've maybe tried to solve this before, it failed, but they've almost been waiting for someone like you to show up. They do see themselves as co-conspirators. That's why I like to say that you and your co-conspirators co-create the future. Most people are going to see your idea, even some of the most well-meaning people, and they're still bound by convention. They're going to be either lukewarm, negative, or just not caring. What some founders don't always realize is: don't waste your time trying to convince those people at first. What happens too often is a founder will be pitching a lot of VCs, and the VCs won't like the idea. Then because they don't like the idea, they're like, 'Okay, I need another slide that addresses that objection.' What ends up happening is what I call a Franken deck: there are like 30 slides to imagine any possible objection. Now, I was the VC who was prepared to believe your crazy insight, but we never got to it because I got confused, lost in a maze of slides talking about a whole bunch of different things I don't care about. What I like to say to founders—and I've learned this the hard way—is that the best startups are movements initiated by founders with a fundamental insight about the future, and then they enlist co-conspirators to join that movement. That includes early employees, customers, investors. The best startups are a set of co-conspirators believing in the right kind of crazy together. Early startup movements are animated by belief more than utility. People buy from your startup not just because of your value proposition; they buy because they believe what you believe.

Some movements happen faster than others. Airbnb actually didn't happen that fast; it had to accumulate and gather over time, there had to be proof points. Lyft and Odeo are the two that I was involved with that just got instant ignition. When they get product-market fit, it's just obvious to everybody very quickly that this is the answer. Reid Hoffman has a term called blitzscaling, and I think some people misuse that term. I don't think Reid was trying to say always blitzscale. But there are times where markets go through more of an adoption life cycle where you have the early innovative customers, then the visionaries, then the pragmatists, then the laggards—crossing the chasm. That's probably the more typical way it plays out. What you're trying to do when you start a movement is an instantiation of that thought process. You're saying, 'Okay, I want to find my early movers, and I want to spend my units of energy in limited time and resources finding those people, getting them to move with me.' The important thing is to realize they're joining a movement, not just buying your product, and they're co-creating the future with you. But every now and then, you get something like ride-sharing. I remember they launched Lyft, and we had this associate named Tommy Leep. A week after they'd launched, Tommy comes into our team meeting—we call it the huddle—and he says, 'We are going to make a fortune on this Lyft deal.' We're like, 'Yeah, we're excited about it too, we hope it works. It's kind of illegal, we'll see what happens.' He says, 'You don't understand. Every single one of my friends is using this thing. It is spreading in San Francisco like wildfire. This thing is going to be a phenomenon.' I remember curiously going into San Francisco to try it. Got in the car, fist-bumped the driver, got a ride somewhere, and you see these cars with pink mustaches riding all over the place. I could tell he was right. It was one of those things where you just immediately knew it was a hit product. Then Travis Kalanick sees it from UberCab, and he decides to do UberX, and he raises like half a billion dollars from Google Ventures. Now you're in this weird situation where the market will be satisfied; it's just the question of who's going to satisfy the market. The option of being capital-efficient is no longer available to you, because if you decide to grow in a capital-efficient way, Travis Kalanick's going to raise tens of billions of dollars and just go invade every city and capture all the demand. That does sometimes happen. You have this inflection where the entire world is energized to want this thing, and the question is just who's going to satisfy the world's demand the quickest. That's happening right now in LLMs, for example.

You put your finger on something that has been my greatest challenge with AI. I haven't made a whole lot of AI investments lately. I have one that just came out this week actually, Created by Humans with Trip Adler. But why haven't I made that many AI investments? The inflections behind AI are incredibly powerful. They're just awesome. They're more than an inflection; it's like a sea change. It feels like a sea change in the way that mass computation did with the personal computer, mass connectivity did with the internet, and the smartphone. I like to say now we're in the mass cognition sea change. Certain cognitive tasks are becoming asymptotically free, the way communications bandwidth once did, the way microprocessing power once did. So the inflections are there; you see new ones every week. The problem I'm seeing in AI is I'm not seeing very many insights. I'm seeing great ideas where I'm like, 'Yes, I can see exactly why someone will want this.' And I can also see why there's probably 10 of them just like it right now, and there'll be another hundred soon. When the next LLM comes out from OpenAI, this may be obsoleted by what comes out. The challenging thing I'm finding in AI is finding legitimate insights. So I've been very careful about how often I write checks and when I do so. I think that's a perfect example. I'm sure that a lot of...