Pattern Breakers by Mike Maples Jr. and Peter Ziebelman

Andrew, thanks for having me.

Yeah. Well, it was actually born out of embarrassment, if I'm being honest. So, in 2014, Twitch was acquired by Amazon, and we made a bunch of money on this acquisition. And the scary thing was I had forgotten I was a shareholder in Twitch. So I had invested in a company called Justin TV, which was a terrible idea. And then it had morphed into two companies, Social Cam and Twitch. And I thought, well, who's going to want to watch people stream video games? That's not a real business. And so when Social Cam was acquired, I just thought that was the company. And so next thing I know, I have to go to my investors and explain to them that we had this company where we made almost 100 times our money. And I had to apologize that I didn't have it in my financial statements. There was no evidence we owned it, but I was like, 'Here you go. Here's some money.' And so I was like, 'What am I doing here?' Like, 'What business am I in?' And I looked at my profits from my investing. And 80% of my profits had come from what's called pivots, you know, where they started out doing one thing, they did something totally different. And so I thought, 'Okay, am I just a lucky fool? Am I just playing darts here? Or is there something else to understand?' And so because the other thing that was happening too was companies that seem to do all the right things would go out of business. And so I was like, okay, what's happening here? So the ideas of pattern breakers really came about in this exploration of like why do some of these startups have breakthrough success even though they seem to be messed up sometimes? You know, Twitter always had the fail whale. They couldn't decide who the CEO was, but it didn't matter. It was still a massive success. And so that was what I got interested in is like why do some companies have outlier outcomes and why do some other companies not have those outcomes even though they seem to do all the right things.

Yeah. So like one of the things that I learned is that business is never a fair fight. The only question is who gets to fight unfair. And so if you're a startup, you don't have a lot of weapons. You know, the big companies, the incumbents, they have all the advantages of the incumbency. They have established brands, they have customers, they have revenue, they have employees. And so why is somebody going to buy from a company that's 80% likely to go out of business? They're only going to buy from the startup at scale if the startup is radically different. So what I like to say is when it comes to startups, better doesn't matter. You have to be radically different because if you're better than the incumbents, they're not going to be desperate enough to buy from you. You have to force what I like to say, you got to force a choice and not a comparison. And so like a pattern-breaking product of recent times that probably everybody's seen is the Tesla Cybertruck. So like I don't know Andrew, do you have a Cybertruck?

Do you want one?

Yeah. So most people I know they think it's ridiculous, right? Like when I first saw Elon launch the Cybertruck and I thought maybe he was joking, right? I thought is he really going to ship that thing? And now you know it's done pretty well. But like here's the thing about the Cybertruck is I bet you never asked how does that compare to a Ford F-150, right? It's like Elon frames a stark decision. He's like, 'Join my future or don't, but like I'm not going to allow myself to be compared to a Ford F-150.' And so that's what startups do. Like startups show up seemingly out of nowhere with something radically different because I like to say only by being radically different can you make a radical difference. And so like the first time somebody got in a Lyft or an Uber they never said how does that compare to taxis and the first time somebody used Twitter they didn't say how does that compare to blogs. They stood alone, they defied comparison and that's what you need when you're a startup, right? You need to be something that can't be reconciled with anything that's ever happened.

In general, I would say that's true. And I love the way you framed it because you must have had a tape recorder in so many rooms where people are brainstorming their startup ideas. And it kind of makes sense on the surface, right? Like why wouldn't I want to go after a big market and why wouldn't I want to solve an unsolved customer need with a product that meets that need? But the problem is as you kind of allude to is that by doing that the founder buys into a certain context which is the rules of the market as they exist are the rules. And you know what a great product does, a pattern-breaking product, they refuse the premise of the rules. A pattern breaking product says, 'Look, you know, if the future is a new and improved version of the present, I don't win because I have to play by the other guys rules. I have to play in their sandbox. No matter how good I am, my upside is always going to be bounded by what the incumbents leave as scraps for me to compete for. What I want to do instead is I want to refuse the premise of the rules. I want a product that defines a new market entirely. You know, I want to create a new category rather than play in somebody else's sandbox. And the only way I'm going to do that is to break the pattern. I need to assume I can only win if the future can't be reconciled with the present. It can't be a better version of the present. It has to be a radically different future. And so, I have to find a radically different future, work backwards from that radically different future, and move people to that different future of my design.'

Yeah. So an inflection, you know, as you point out, it kind of happens independent of the startup. So, a good example of one that I like, let's start with one that I like to illustrate the good case, right? So, like with Lyft, the iPhone 4S had a GPS chip in it. You could have had the idea for ride sharing before the iPhone 4S and it wouldn't have mattered because you couldn't have located riders and drivers algorithmically, but now all of a sudden you could. And so, the inflection creates a new form of empowerment. And as you point out, an inflection is not the same as a trend. You know, the megapixels per dollar in cameras may be improving all the time or the cost of solar or the cost to sequence the DNA, right, may be improving. But what you want is a turning point. You want a window in time where a new form of empowerment is possible for the very first time that never existed before. The reason that that's so important is the inflection gives the founder the ability to wage asymmetric warfare on the present. If I'm using an inflection, now I can bend the arc of the present to a radically different future. I can show up with something that people didn't even think was possible to deliver. And now all of a sudden I disorient the incumbents. I change the pattern of what people think is possible. And so I refuse to operate according to existing patterns. Instead, I say, 'No, there's now a better explanation for how the world could be. I'm going to change your reality with this new thing that's radically empowering, and you can't reconcile it with what's happened before.' So that's what we really look for is a change event that gives the entrepreneur a mechanism to change the subject.

Yeah. So like I'd say that in all the risks that can happen in a startup I think that timing is the toughest one to get right. And so like if we go back to the ride sharing example, you would have been too early if you'd tried to do ride sharing before the iPhone 4S because you wouldn't have been able to make a system that worked. So, you could have been exactly right about what the future holds, but you weren't in a position to capitalize on your knowledge of the future. Now, if you waited too long, you know, Uber and Lyft start to dominate the market and you're just a me-too competitor. And so the inflection is this moment in time where it's not too early because the empowerment's there, but it's not too late because founders haven't yet had the insight about how to harness the empowerment. And so what great founders do is they convert the inflection into an insight, right? Like the Lyft guys said, 'Oh, that means you can do Airbnb for cars.' But like you had to act on that insight within a window of time or else others would act on it and build the networks and now you'd be a me-too also-ran. And so like you said it's this Goldilocks moment, this window in time where you can answer the why now. The tech is now ready to be exploited and there's a window of time to exploit it where you can be the first to get product market fit and to get early customers.

Yeah. Well, with Uber, it was people are going to get in a stranger's car. That's kind of crazy. Like that feels scary to me, right? Or is somebody going to stay in a stranger's house? That's crazy. You know, somebody might get murdered in one of these things, you know, because in the early days, the host and the guest would stay in the apartment or the house at the same time. And so, usually there is something about an insight that is non-conensus. And so, Ann and I, my partner at Floodgate, had foolishly passed on, at the time, it's called Airbed and Breakfast. We passed on that company because we thought, well, who's going to want to stay in a stranger's house? That's crazy. Well, then by the time we saw Lyft, we're like, 'Oh, you know, maybe I'm willing to take a walk on that wild side. Maybe somebody will get in a stranger's car.' So, the importance though about it being non-consensus is twofold. The first is that you don't want to have competitors. And so, ideally, when you're a startup, you want to be not just right about the future, but you want to be non-consensus and right. Because if you're right and you're in the consensus, your opportunity gets competed away. Because you can't escape the comparison trap. You get compared with other startups and other companies. What you want to do is stand alone. But there's another reason that gets back to forcing a choice and not a comparison. And that is that human beings are conditioned to like things. So if everybody likes your startup idea, it's too similar to what they already know, which means that it's too incremental compared to what already is. And so the best startup ideas have this quality of polarizing people. They cause some people to say, 'This is stupid. I don't want that.' You know, whatever. But some people are like, 'Oh my gosh, I can't unsee that. Where have you been all my life? This is amazing. I got to have this.' But like that's the place you want to be when you're a startup in the early days.

Yeah, it is interesting though because my business, right, it will be counterintuitive to a lot of people. So, you know, Warren Buffett used to say, 'Rule number one, don't lose money. Rule number two, don't forget rule number one.' My rule number one is don't pass on Airbnb. And so, you know, it's interesting and it matters because like I'm 80% likely to be wrong. And by the way, the very best in the world at my job are 80% likely to be wrong whenever they make an investment. And so what I have to ask is not so much what could go wrong. Usually it's going to go wrong. What I have to ask is how big could it be if it goes right? And so in the 20% case that I'm right, is it going to be big enough that I got paid for the risk I took? And so that's my business is how big could it be in the 20% case that I'm right given that I'm 80% likely to be wrong. And so the reason I go after these pattern-breaking ideas is in the case that they are right they have to have enough escape velocity and upside potential to profoundly impact the future.

I pay attention to it for sure. The way I look at it, Andrew, is if I'm going to be good, 5% of my investments, I need to make 100 times my money on the first check. And roughly 10 to 15% I need to make 20 times my money on the first check. And so if I'm investing in a company that is valued at say $40 million, that company for me to make a hundred times my money is going to probably end up needing to be worth more than six billion. It may happen and there are companies that are worth that much, but there's a whole lot more companies worth a billion dollars or 500 million. And so I have to factor that in. One of the things I like to say that I don't think enough people realize is that valuation and risk have a direct relationship because I have to get paid for the risk that I take. So if I pay $40 million valuation instead of 20 at the same outcome, I only get paid half as much. And so I got paid half as much for the risk I took. So another way of looking at that is I've doubled my risk by paying double the price. And so that's really important. I think most people look at risk as probability of success or failure, but what you're really looking for is the risk adjusted upside of what I get paid in the event that I'm right. That's what I really care about and that's why valuation matters. It matters not so much for pricing reasons or for some dogma about what the price should be. It matters because the higher the price is, the lower the upside that you can realize by definition.

I'm looking at it. I'm saying okay in a portfolio I have let's say I have 40 companies that I can invest in and I'm hoping that 5% of them I'll make 100x and another 10 to 15% I'll make 20x and then I say okay well then in theory every single one I have to believe at the time there's a theoretical possibility of making 100x. And that's different from how some people look at it, right? Some people would say well hey Maples well why don't you want to make 10x if you could have a 30% chance at 10x. Isn't that pretty good? And I'm like, 'No, it's not.' Because the problem is if I've got 40 investments, if I invest in one of those now, I have 39 left to get these hundred baggers. And so I'm like, every single investment I make has an opportunity cost. And so I need to believe that in the case that I'm right that I can get paid for the risk I took. And so therefore, every bet that I make, I have to believe that there's that outsized upside if everything goes our way. But I like to make fun of my ability to predict how it will happen, right? So it's hard to predict what the market of the future will be. So what I say is like, does it have these forces? Does it have an inflection that's really powerful? Does it have a powerful insight or the founders living in the future? Do they have the stuff to create a movement to that different future? If all those things are, you know, my Spidey sense is tingling, I'm like, okay, that's a bet worth taking, but I don't know how the dots will forward connect, right? A lot of things could happen between now and it succeeding.

Yeah. So I think that for me non-consensus means you're thinking independently for yourself and contrarian to me is another form of conformity because contrarian is contrary to something else. You're still living with the results of somebody else's thinking. And so it's kind of like if you have a teenager and they dye their hair blue as an act of rebellion against the parents, they're not really being non-consensus. They're being a different type of conformist, right? They're reacting to the ideas of the other. And so what's interesting is the non-consensus ideas quite often when I talk to founders, I'll say, 'How did you come up with that idea? Hey, Evan Williams, how did you guys figure this Twitter thing out?' And they almost look at you like they feel guilty that it wasn't obvious to everybody else. They were just doing their own thing their way and they were exploring the unexplored and they were obsessed with something that other people weren't paying attention to and they were just like well if you saw what I saw you would have thought it was obvious too at the time. So non-consensus is more about not thinking that much about what the consensus is even doing or caring about. It's like forming your own opinions, your own point of view based on your own independent exploration of things.

Yeah. So, it's interesting. I like to say to founders, if the valuation of your startup is high and a lot of investors want to invest, that should worry you because chances are you've come up with an idea that appeals to the conventionally minded. And you know, eventually you're going to discover that those ideas struggle. Because conventional ideas, they sound good on the surface, but they're the most dangerous ideas of them all because they sound plausibly good, but they're not that good. And so, you know, you get a lot of positive feedback about it and you get a bunch of people wanting to invest in it. You know, there's a guy, you may know, Eric Paley over at Founder Collective, really smart, good guy, great investor, very successful. And Eric told me one time they did this analysis of the biggest startup outcomes of each given year and they said that in the year that they were founded far more often than not they were in a sector that was not popular that year. So like in 2015 everybody loved direct to consumer startups. Now you just almost can't get one funded. And so, you know, what usually happens, you know, Coinbase had a gigantic exit, but they struggle to raise in their seed round. And so, what you find is that a lot of these companies because they're so non-consensus, they're not attractive to most investors. They seem kind of weird in some way, but that's kind of what you want, right? You want the right kind of crazy. Those are the ones that usually end up being really big.

Yeah. So, like the conventional wisdom would be something to the effect of, okay, I need to go talk to customers and if they don't like what I'm doing, I need to figure out the gaps in my product. I need to figure out why they're objecting to my value proposition and then go fix the objection. But the issue with startups is that people only buy from startups when they're desperate for what the startup offers, right? So, what we really want to do is not figure out why people are saying no. We want to find a circumstance where somebody will say, 'Hell yes.' And the way that that usually happens is we get surprised. So, I'll give you an example. Like, when Chegg was launching textbook rentals, we weren't sure if students would rent textbooks in the first place. And so, we created a fake site called Textbook Flicks. And we knew that we had to get $35 for textbook rental if the new book was $100. Sonny and Aush did something clever. They didn't just test the price at 35. They tested all the way up to 75. And they found that some students were willing to pay $75 to rent a textbook, which was counterintuitive to me. But okay, now once you're armed with that knowledge, that is a very positive surprise because now it changes your point of view about what your price ought to be and it changes your point of view about whether people want to rent textbooks. And so like what I find is when you think about it, it makes sense because breakthroughs by definition are undiscovered. And so you're discovering undiscovered things in new territories under new frontiers. And so by definition, something should surprise you because if you're not surprised, it's already been discovered. And so, you know, you're trying to create the conditions where whenever you run an experiment and whenever you interact with a customer, you're trying to talk to the right people who are desperate potentially, but you're also trying to have your surprise filter tuned to volume 11. I learned this lesson from Scott Cook at Intuit. So, Scott would have these pitches where people would come in and they'd say, 'Hey, we want to do this new product. We want to do this new initiative.' And he'd say, 'Okay, great. This all sounds great. In the last six months when you've been working on this, what surprised you most?' And he used to say to me that if they weren't able to answer that question, well, they weren't authentically truth-seeking. They just had an agenda and they just wanted you to buy off on their agenda. Because if you're an authentic truth seeker, how could you ever not be surprised by something? And so, you know, this idea of savoring surprises and that surprises are something that luck gives to you if you have a prepared mind, I think is a really key part of this.

Oh yeah. Total desperation. You know, we had to do a fake website because we couldn't afford to do a real product. We couldn't afford to buy textbooks to rent to people, right? So, we had to pretend we had textbooks and then once we knew that people wanted to rent textbooks, we're like, 'Hey, let's raise some money and go get some real ones.'

Yeah. So there's primarily one reason that startups fail and that is that there was nobody desperate for the empowerment that they offered. And so what is product market fit? It answers a simple question which is what can we uniquely offer that people are desperate for? We don't necessarily need a product to prove that people are desperate. Like the textbook flicks example is a great example of that because we created a website that people experienced. We could simulate the reality of a product without actually having the real product yet. I learned this metaphor from car shows. One time I was hanging out at a car show. I like cars too much. And I noticed there was this concept car and people were kind of crowded around it. But if you open the hood, there wasn't an engine. And if you turned on the radio, it wouldn't make any sound. If you turn the key in the ignition, it wouldn't do anything. Why did they do that? Well, that was the minimum viable implementation prototype that a car company needs to determine whether they should build the car. And if everybody just kind of walks by the car and is like ho-hum about it, then they probably shouldn't build that car. But if people are crowding around it and saying, 'Oh my gosh, I want one of these.' Now all of a sudden you have the data you need to know if you should build that car or not. And so what I started to realize was that most products are that way. Most new products. What you want to do is you want to build whatever is required. Like you know you can't build a website with a landing page to test whether people want to buy that car. They have to see enough of the reality of it to convey their preferences and their desperation for it. So, some products, you know, Tim Ferriss when he did the 4-Hour Workweek, he wasn't sure whether he wanted to call it the 4-Hour Workweek or Drug Dealing for Fun and Profit and he wasn't sure what color the cover of the book should be. So, he created fake covers and he put it on these books in Barnes & Noble and he'd just sit back in the shadows and watch how many people would pick up the book and they'd pick up the book and they'd open it and they'd be like, 'This isn't the 4-Hour Workweek. This isn't Drug Dealing for Fun and Profit.' But it told Tim, okay, just if all they see is that cover and nothing else, which one are they more likely to pick up? And that even influenced his perception of what should be in the book. If the book was called Drug Dealing for Fun and Profit, he might have oriented the chapters differently, might have titled them differently, might emphasize different things, but the 4-Hour Workweek kind of became about, you know, arbitraging location and, you know, sort of life hacks, if you will. And it all flowed from that. And so you want to come up with the minimum viable way to simulate customers revealing their true preferences.

Yeah. So if you're deciding to do business with a startup, you don't do it for practical reasons. You do it for aesthetic reasons. So what happens is you're the startup and let's use a story to illustrate it. So you're the startup. You're not Luke Skywalker. You're not the hero. You as the founder are Obi-Wan. And so what did Obi-Wan do? He finds Luke Skywalker. Luke is on a dusty, dirty planet. He's bored out of his mind tattooing. And he says, 'Hey, Luke, we got to go rescue this princess. And you know, it's going to be hard. I know it's crazy to take on the Empire, but I've got this thing you haven't heard of before. It's called the Force and lightsaber. And you know, if you learn the Force from me and use these tools, we actually have a credible chance to defeat the Empire and rescue the princess.' So Luke first says, 'Well, no, I can't do that. I've got chores with Aunt Beru and Uncle Owen this summer. I can't leave. That's crazy.' Resists the call to adventure. He goes back to the farm. It's burned up by the stormtroopers. He's like, 'Okay, now let's go. It's go time.' So, they take off. They find co-conspirators like Han Solo and Chewy. Rescues the princess. Destroys the Death Star. Emerges transformed. You know, he even gets a medal at the end. Well, startups do the same, but the startup is like Obi-Wan and the early customers and employees and investors are like Luke. And so like if we take the example of Lyft, you know, we talked about ride sharing a little bit ago. The customer is like, 'Okay, I'm in San Francisco. Taxis are impossible to get. It's hard to find parking. My car's get broken into all the time. Even when I get a taxi, it's late. If they take credit cards in one of those gross triplicate things, you know, screwed up. I can't rely on them to get me where I want to go on time.' And so what the Lyft guys did is they said, 'Okay, well we have this new thing. It's called ride sharing and it's an app where you can locate your car and get a ride in 3 minutes and go where you want to go.' But like when you think about it, the insight that we talked about earlier that you could do Airbnb for cars, that's like the magic. That's like the force and the product is like the tool. And the hero needs to know about both because the hero needs to know why it's credible that this adventure you're going to take them on isn't going to end up in them dying. They need to know that they're going to achieve transformation. And so this is why, by the way, the pink mustache was genius. The Lyft guys understood that getting in a car, a stranger's car felt crazy. So how do you make it feel less crazy? You put these pink mustaches on the cars and people in San Francisco are like, 'Hey, what's up with that car that just drove by with the pink mustache?' And people say, 'Oh, haven't you heard? There's this new thing. It's called ride sharing.' And so what we need to do if we're founders is we need to recognize A, we're not the hero. B, we're engaging customers, employees, investors on a call to adventure. And they want to transform their lives. And our startup is a vehicle for them to do that. And we need to honor the fact that they're likely to resist the call to adventure. And we need to make it more acceptable to take this crazy risk to go on this wild journey together. And that's our job, right? Our job as the founder is to convince a set of people to undertake this call to adventure in their own hero's journey that we help them actualize.

Yeah, I'd say the number one thing is it just got really crowded. So, like in the early days, Josh Kopelman and I would, he'd come out from Philly and we'd have dinner at Il Fornaio when he was in town and we'd look at each other and we'd just say, 'How is this not obvious to everybody that this seed is going to be gigantic?' You know, we saw the LAMP stack. We saw how many founders wanted to raise only a million. We used to say 500,000 is the new 5 million. And whenever we saw an interesting opportunity, which was often because they came to us, you know, if you wanted to raise a million dollars in Silicon Valley, there's only like three guys you could call back then. And so you'd see every one of them. And then if I saw it before Josh, I would tell Josh or vice versa because neither one of us had enough money to do it all on our own. And so we saw everything. Well, now you've got a world where there's over 2,000 seed funds. And so now they don't naturally find you. You've got to find them. And so the way you think about the challenge is different. You know, the challenge in the early days is to raise money and convince anybody that seed investing even mattered. Now nobody doubts that it matters. Now the question is, how do you find the best founders in a noisy world where they're not going to naturally know who you are? Where you're one of 2,000 of the usual suspects. So that's, you know, in the early days you could compete based on them knowing about you finding you. Now I think you got to compete based on having a better radar or, you know, you can try to be Sequoia Capital and raise giant funds and have a huge brand and spend tons of money on marketing programs and that kind of stuff. But I don't think that should be our game.

I think so. So like I look at it like every week let's say that your goal is to get 100 baggers and 20 bagger startups. You know 100 times on your first check or 20 times. I think there's roughly a dozen hundred baggers started a year and roughly a hundred or so 20 baggers. So I like to say every week there's two companies that are going to hatch that I'm going to wish I'd invested in. So, I need to find them and I need to think like it's like World War II and I'm looking for the U-boat, you know? It's like I'm trying to find them now because they're going to get funded this week and then once they get funded that seed round is over. I may never get a chance to see them again. And so, that's the energy I need to bring to the job. I need to say, 'Okay, I got to find those two companies this week because they're not going to naturally know to come to me every time. In fact, they're not going to come to me most of the time. Naturally, I got to find a way to get to them.' So, that requires me to have a better radar. That requires me to know where is the signal. How do I avoid the noise? Because, you know, there'll probably be 500 companies started and so I can't meet all 500. I've got to avoid the other 498 and make sure that I spend time with the two that week that really matter.

I think it does definitely help. I mean, there are different ways to kind of think about how you want to show up in the world. And one way to think about showing up in the world is I'm going to be the smartest person in the room and I'm attached to people believing that. Another way to show up is to say what I really need is tools to deal with my own ignorance that there's such a vast set of things that are yet to be known, you know. So there's a guy named David Deutsch who wrote a book that I love called The Beginning of Infinity. And he basically says, you know, no matter how much we know, we're at the beginning of infinity of all things that can be known. But the good thing is that humans are smart enough that all knowable things can be known someday. It's just that we're at the beginning of infinity. But like once you start to say reality is incredibly complex and multifaceted and that you can never truly know that you have a settled view of reality, you start to say, 'Well, what I really need is tools to cope with the fact that I can't completely understand reality. What I need is methods of making better decisions given how high the uncertainty is and given how unknowable a bunch of things are.' So I guess you know you could call that humble. You know I call that realistic, right? But I think that coming up with tools to deal with your ignorance, I think, is often a better strategy for getting to the truth than assuming that you can ever corner the market on what the truth is.

Thanks, Andrew. It's a pleasure. And thanks for engaging with the topics and spending time with the ideas.

Cool. Thanks, Andrew.