Mike Maples, welcome to the Tailwind podcast.
Andrew, thanks for having me.
So, after years as a successful venture capitalist and co-founder of Floodgate, why did you decide to sit down and write Pattern Breakers?
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.
So in terms of doing all the right things, I guess let's start with what is a pattern breaking idea and how does it differ from a lot of the ideas that often emerge from the sort of classic teachings about entrepreneurship.
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?
I don't, but I see a good amount around.
Maybe one day. Not today.
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.
The notion of a pattern breaking, and what resonated so much with me about your book was the sort of traditional formula for thinking of a business idea is like do the market mapping, find the white space, interview customers, figure out what their pain points are, and then build a product to address those pain points. And I think is it fair to say what you're saying is pattern breaking ideas don't emerge from that sort of exercise?
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.'
Let's talk about inflections. So inflections are a key part of the recipe that you lay out in the book. Why is an inflection not just something that is coming down the cost curve? Like for example, the cost of solar is coming down as you point out in the book. A potential entrepreneur might say because the cost of solar is coming down, let's build a business around solar. Why is that line of thinking not sufficient to lead to the type of idea you're looking for?
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.
And how does timing interact with inflections? Like you talk about that there's this sort of Goldilocks moment. There's a window after an inflection happens where an entrepreneur basically has to act and if they wait too long then there's probably going to be too much competition.
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.
In terms of insights, you point out that a key part of them is that there's a non-obvious component, maybe something that's sort of non-consensus. And to give an example there, what was the non-obvious truth that Uber and Airbnb had?
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.
I can totally see at an investment committee table at a venture firm if an idea of Airbnb and Lyft came in someone saying, 'Well, wait, like I'm not going to let a stranger sleep on my couch like in the living room.' And then the investment firm passes and you move on. And it's those non-consensus things that to me not only enable maybe less competition for the startup, but also I think from a valuation standpoint as an investor in the early days, it prevents the valuation from sort of getting too high.
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.
How much do you scrutinize and sweat over valuation in the early days of a company?
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.
And so when you're making an investment, do you try to underwrite it to okay based on the market size even if it's difficult to size the market for what they're doing just based off of the data around venture outcomes and how many have exited over 10 billion? Are you sort of underwriting it to just kind of like an average?
