How I Invest with David Weisburd - E79: Mike Maples on How to Return 100X+ on Seed Investments

Episode Date: July 23, 2024

Mike Maples, Founding Partner at Floodgate, sits down with David Weisburd to discuss Mike’s new book “Pattern Breakers: Why Some Start-Ups Change the Future”. This is a masterclass on early-stage venture investing. Mike shares his views on identifying ideas and founders that led to his early investments in Lyft, Twitter, and Okta. They also cover how Mike thinks about fundraising from LPs, his learnings from legendary LP David Swensen, and the power and importance of pursuing non-consensus ideas.

Nobody ever looks at a Tesla Cybertruck and says, so how does that compare to F-150? Nobody ever says that. A startup fails, or at least sub-optimizes, when it plays the comparison game. I call it the comparison trap. And so a startup needs to force a choice and not a comparison. When we invest in a startup,

we're investing in something different than a normal company. We're investing in the power of an idea to change the future and the power of the founders to make that different future real. I'm a 49ers fan. Unfortunately, I was at the Super Bowl when we got beat by Kansas City. I didn't know what play Patrick Mahomes was going to run next. But like every time he was on the field, I'm like, oh, shit, there's Mahomes again. Founders are a lot like that.

Founders, you don't know what play they're going to run necessarily. You don't know what technique of improvisation they're going to do necessarily. But you're betting on the fact that this guy's in the entrepreneurial field is kind of like Patrick Mahomes. Just give him the ball and wait to be amazed. You only ought to be spending time with people who value your advantage or are prepared to value it and not waste any energy on the other people. What did you see in Twitter and explain your thought process and how you went about evaluating a company like Twitter. Mike, I've been really excited for this conversation. I've prepared quite a bit.

Welcome to the 10X Capital Podcast. Thanks for having me. I've been looking forward to it too. It's a different subject line that I'm used to, so those are always fun. So let's get started. So I see in the back, you have your new book, Pattern Breakers. I want to jump right into it. Where do breakthrough companies come from? One of the things that I've learned over time, and it's been a series of humbling lessons, to be honest, is that a startup capitalist is a different type of capitalist. And so if we think about capitalism the way it's normally practiced, we would look at it through the lens of business school or Warren Buffett or Howard Marks or folks, really smart people. Quite often when we think about those companies, we think about their ability to persistently compound. So like Benjamin Graham was talking about Geico like in the 30s or in the 40s. And basically it's persisted today as still a pretty good business doing business much the same way it always has.

And so most capitalists are trying to create value by creating persistent compounding. And they create competitive advantages, you know, like economies of scale, network effects, things like that. And they create barriers for their competitors. Startup capitalists doesn't do any of those things. So startup capitalist creates value not by persistently compounding, startup capitalist creates value by changing the subject. So business is never a fair fight. The only question is who gets to fight unfair. And the default assumption is that the present will fight unfair. The status quo will fight unfair. The incumbents will fight unfair. If the startup doesn't do something to change the rules and force a new playing field, the incumbents will persist.

And so why does that matter for venture capital? A venture capitalist's job is to invest in startup capitalists who are going to propose radically different futures. The reason that I called it pattern breakers is most of the time we just go about our normal patterns of how we think, feel, and act. And as long as that happens, the future is an extension of the present. But in a startup lens, you need to break the pattern. You need to impose new rules. And what the startup capitalist does is rather than forecast from the present going forward, they backcast from a radically different future and they move people to that different future of their design. And so when we invest in a startup, we're investing in something different than a normal company. We're investing in the power of an idea to change the future and the power of the founders to make that different future real.

Presumably, this is non-incrementalism. So it's non-iterative. It's revolutionary. So give me some examples of that. Pattern breaking doesn't have to just be in startups. Like, for example, the Tesla Cybertruck, I would say, is a pattern breaking product. Now, some people in your audience may think that the Cybertruck is ridiculous or that it's stupid or that it's ugly or whatever.

Some people love it and think it's just like totally righteous truck. But nobody ever looks at a Tesla Cybertruck and says, so how does that compare to F-150? Right? Like nobody ever says that. And so like a startup fails or at least sub-optimizes when it plays the comparison game. I call it the comparison trap. And so a startup needs to force a choice and not a comparison. You could be on team F-150 or you could be on team Cybertruck, but you can't really reconcile those two things. And so like, I like to say, if you're a startup founder, if everybody in the world is selling apples, you don't come to the

market with a 10 times better apple. You want to be the world's first banana. And you want to say, look, if you value the advantages of bananas, I'm the only person who has them. If I can't convince you to want bananas, that's okay. You're not ready to join my movement. I need to go spend my time with the people who are prepared to join my movement. And so like startups win when it's like you have to choose when you defy comparison completely. Lyft, nobody ever took a Lyft for the first time and said, so how's that compared to taxis? And so, you know, you want to have something that can't be reconciled with anything that's come before it. You were in Lyft early, but you were also in Twitter. To me, it's a very counterintuitive idea. What did you see in Twitter and explain your thought process and how you went

about evaluating a company like Twitter? Yeah, I think I was pretty lucky with Twitter. I'd invested in the prior company, Odeo, and Odeo didn't work out. And one day, Ev tells me, this isn't going to work. I'm going to give everybody their money back. And so I was like, look, you don't owe me anything. I took a risk. You win some, you lose some. And I've said, well, you know, not everybody feels as you do. Some of my investors are kind of disenchanted. And I figured it would be better if I just gave everybody their money back. So would you just please take it? I said, well, under one condition, you know, if you'll let me invest in whatever your next thing is. So he says, I'm working on this idea. We're deciding whether to call it TWTTR or voicemail

2.0. And I'm like, okay, well, what does it do? And he says, you say what you're doing. And oh, and in 140 characters or less, because we want to be able to do it with text messaging. And I'm like, okay, cool. What else does it do? And he said, it doesn't do anything else. That's all it does. And I said, what's the roadmap? He goes, there is no roadmap. And what's the revenue model? There is no revenue model. And I'm like, Ev, you know, like, why do you think this is even a product, much less a business? And he says, oh, I have no idea if it's a product. You know, we're still tinkering with it. But, you know, I figured that when I did the blogger software before Odeo, a million people wrote blogs. Podcasting was kind of hard. It was hard for people to upload their audio. It was hard

for people to syndicate in feeds. And so I thought I'd go in the totally opposite direction and do these microblogs. And I figure if 10 million people do microblogs, then the burden of proof will be on the people who are negative. And so I thought, okay, that sounds good. And so I said, I'd love to invest. But he's like, well, there is no investment right now. There's no company right now. So I took the money back. And then Twitter blows up at South by Southwest. And I'm like, oh, my gosh, you know, I'm going to lose out on this thing. It's going to drift away and I'm not going to get to invest in it. And then one day, Ev, to his credit, calls me up and says, did you mean it when you said you wanted to invest in Twitter? Because if you want to, we've decided we're going

to raise some money. Now's the time. And so he, you know, let me invest in Twitter. It was very hotly contested around. Everybody was excited about it at the time. But, you know, he kept his word twice, right? He gave me my money back and then remembered me to have another shot at it. And, you know, he didn't have to do that. He certainly didn't need me by that point, right? He had a lot of excitement and enthusiasm around it. Can you explain kind of from a first principles basis, how you could invest into something that may not even be not only a business, but a product? Yeah. So here's the thing that I think I've come to understand. And I would like to emphasize that a lot of what I'm about to describe is from error more than success, right? So, or just luck. So about 10 years ago, Twitch was acquired for 970

million by Amazon. And you'd think that's a good thing, but I'd forgotten I was a shareholder of Twitch. And so I'd invested in Justin TV and it had morphed into two companies, into SocialCam and Twitch. SocialCam got bought by Autodesk and I figured that was the company. I figured that's the reason they split these things up. They wanted to sell SocialCam. So I end up having to go to my LPs and fund one. And I say, look, I'm really sorry, but we've got this exit Twitch and it's not in my financials. I haven't, you know, in my audits, I didn't mention it, but it does turn out we made 84 times our money. Should I restate my financials? And everybody's like, nope, we're good. Just send me the money. We're fine. You know, some people sent me champagne and stuff like that,

but it was a little unsettling because that same week I helped a founder shut his company down and he would have been most likely to succeed. He'd done the business model canvas. He'd done all the best practices you're supposed to do. And he would have been a Harvard business school case study, except for the fact that he failed. And then I thought about it some more. And I noticed that more than 80% of our exit profits had come from pivots. And so I'm like, what am I even investing in? You know, why is it that, and this might resonate with some folks in the audience too, right? Why is it that some companies that seem to do all the right things still fail? And why is it that some companies that don't seem to implement any best practices

achieve breakthroughs? And so I started to think maybe I'm just a lucky fool, you know, Nassim Taleb in Fool by Random has this character who's a lucky fool who attributes his success to something he knew when he didn't really know anything. And I thought maybe that's the case here. And so I spent some time in this rabbit hole trying to figure out why do some of these startups break through? And that's kind of what led to kind of the conversation we're having in the Pattern Breakers book is kind of the realization that there were forces that an entrepreneur uses kind of the realization that there were forces that an entrepreneur uses to change the future that are more subtle than most realize.

If 80% of your capital return came from pivots, then you are exclusively investing in the founder, or are you investing into something that could pivot into something more meaningful? Here's what I came to realize, that breakthrough founders, because they need to change the future and because they need to break patterns, they need to think different and act different. And thinking different involves three fundamental things. The first is harnessing inflections. And an inflection is basically a change event that can provide radical empowerment, right? So like in the case of Lyft, for example, the inflection was a GPS locator chip in the iPhone 4S. So the inflections happen external to startup. Inflections are important

though, because inflections are the thing that allows the founder to bend the arc of the present to a different future. So what we want is to harness a specific type of empowerment that radically overturns established norms of how things are done. And so then the next thing that we look for is what we call an insight. An insight in the case of Lyft would have been, oh, that means you could do Airbnb for cars. You could have been right about ride-sharing networks. But if you tried to implement one before the iPhone 4S, it wouldn't have mattered. You wouldn't have been able to provide the capabilities to people because you couldn't locate people algorithmically. So the inflection is this turning point in time

where all of a sudden a new thing is possible. And the insight is what the entrepreneur through their creativity comes up with, invents to harness that inflection. And usually something about the insight is non-consensus and right. And so the non-consensus thing about Lyft was, are people gonna wanna get in a stranger's car?

That seems kind of crazy. But we had seen that they would with airbed and breakfast, which we foolishly passed on because we thought you wouldn't want to stay in a stranger's house. You and the rest of Silicon Valley, to be fair. Oh, yeah. I mean, it just drives me crazy to think of how much money I'd have made if I'd said yes to Airbnb. What's interesting there is in no case did I mention the product. Lyft started out as Zimride and Airbnb started as a WordPress site where the host and the guests stayed together at the same time. And so Zoom started out as a thing called Saspi, which was going to be a consumer product. And so the product itself

in the seed stage, I like to say is a reference implementation of the insight. The implementation can change, but the insight should not change. So the insight is what gives the startup the power to change the future. And now when I'm trying to get product market fit, I'm trying to convert that insight by answering a question. What can I uniquely offer that people are desperate for? And so the offering comes from a combination of the implementation and talking to the right audience for that implementation. And product market fit happens when those things line up. And now all of a sudden I found a bunch of desperate people for the specific implementation of the specific empowerment that I can offer. The assumption being that the first product is just a prototype and a good founder will find a way to talk to customers and iterate if they're in the right space with the right inflection point.

I believe that's true because time and again, I was humbled by the fact that the product would change. You know, like Justin TV was a terrible idea, right? He was trying to live cast his life 24-7 and he's calling it a reality show. And I'm like, look, even reality TV doesn't work that way. You know, reality TV, you film the entire week and you condense it to 20 minutes. Like nobody wants to follow you around your whole life. That's just stupid. But like he was doing some really impressive things to make it work.

It was hard to stream live video on the internet at the time, especially if you were out of a coverage Wi-Fi zone. And so Kyle Vogt, who was a co-founder, had created this backpack full of EVDO cellular that would combine with live streaming on the internet. And so fortunately, I had the instinct to think that Justin and his team would turn it into something. But if I'd invested in it, you would have never said yes to it for what it is, right? You would have never thought that it was a good product idea out of the get-go. So in that case, was it the inflection pre-pivot that was part of the investment thesis, or was it just the founders? These are just founders that would find a way. Why was it a good investment?

In some ways, the insight and the inflections converge in something that is easier to interpret at the time. For example, sometimes the inflection happens after. Twitter benefited enormously from the iPhone because the iPhone made it possible for people to compose tweets a lot easier. You couldn't have known that at the time that you decided. So there's another term that I really have affection for. I call it founder future fit. Justin Kahn, it turns out, I didn't realize it at the time. I was probably lucky. Justin Kahn was incredibly authentically matched to the future he wanted to create. Justin Kahn wanted to be an influencer before there was such a thing. Justin Kahn started Justin TV right after you was the Times person of the year. You know, YouTube was on the cover of Time.

And so user generated content was exploding and more and more people wanted to express themselves. And if you could ever pick a person from central casting to want to do that, it was Justin Kahn at the time. Eric Yuan, when he started Zoom, had been at Cisco WebEx working on video conferencing software for 10 years. And so if you'd evaluated his initial product and made your decision based only on that, you would have missed the fact that he thought about video conferencing all the time for 10 years. Mark Andreessen, when he came up with the Mosaic browser, he was living in a time machine. He was at the University of Illinois in a supercomputer lab trying to make the Internet useful. And the Internet had just been made legal for business. So everybody thought the digital

superhighway would be built by big companies or the government. And here's a guy making minimum wage in a supercomputer lab. He doesn't even know enough about business to know that that's supposed to happen. He's just tinkering with the new technologies of the internet. And he wasn't trying to solve a market problem. He was just making the internet useful for him. And so he's solving his own problem. So he had good intuition about what to build. And so time and again, I found that the most powerful signal that you can tune into during a seed round is founder future fit and how authentic of a match is that founder? Can I imagine that there would be anybody in this world better suited to pursue this future than this

person? And if the answer is no, I've been surprised over and over again on the upside in terms of what these people create and how the dots forward connect in ways that none of us could anticipate. Is there any useful information there in terms of investing pre-pivot? I understand why you would look at Eric and say he's the perfect person to start Zoom or Justin, perfect person to start Twitch when you saw that inflection in the video game space. But could that somehow inform your decision on how to invest pre-pivot? I pretty much assume they will pivot because in the success case, it's 80% likely that they will.

So I say to myself, okay, does this person, that goes to the acting different. Does this person have what it takes to notice things that other people aren't going to notice? And is he going to navigate his insight via an implementation to the desperate customers and eventually lock onto product market fit? And so I'm betting on that founder's ability to make that happen. I don't know specifically how they will, though, when I make that bet. It's kind of like, you know, I'm a 49ers fan. And unfortunately, I was at the Super Bowl when we got beat by Kansas City. I didn't know what play Patrick Mahomes was going to run next. But like every time he was on the field, I'm like, oh, shit, there's Mahomes again. And it's like that founders

are a lot like that, right? Like the founders, you don't know what play they're going to run necessarily. You don't know what technique of improvisation they're going to do necessarily. But you're betting on the fact that this guy's in the entrepreneurial field is kind of like Patrick Mahomes, just give them the ball and wait to be amazed. And it's my job is to make sure that it's the right person on the right playing field so that if they succeed, that we get paid for the risk that we took. But ultimately I need to not be too attached to whether the product for what it is, is the end product. Not yet, at least. How do you counsel founders on when they should pivot versus stay the route? Is it obvious when

you have massive product market fit? Yeah. People talk about loose interpreting of the constitution or strict. I'm pretty strict when it comes to product market fit. So to me, it's like, if you're not positive, you have it, you don't have it. Companies that have product market fit just have a fundamentally different kind of drama. It's like, oh man, we can't build servers fast enough. Oh no, we can't hire quick enough. Oh shoot, the product's not performing well enough because we're getting slammed by all this traffic. And so when product market fit happens, those are the kind of problems that you're dealing with, right? The problems of hyper growth. I like to always go back to first principles with product market fit and pivot. So I say, okay, we have an insight and we have to answer a question. What can we uniquely offer that

people are desperate for? And so what we need to do is we need to find people desperate for the empowerment that's embodied in our insight. If we don't find those people, one of three things is true. We either don't have an insight, in which case we don't have a startup, right? We'd be better off just stopping. Or our implementation is wrong, or we're talking to the wrong people. In the case of Okta, they started out talking to early adopters of Salesforce and they thought that they wanted to do

cloud systems management. And they thought initially that the implementation would be problem resolution. And they went to all these early customers and they all said, this isn't even in my top five priorities. And they said, well, what is your top priority? And they all came back with this problem of identity management.

They said, we've got all these cloud apps, and it's a hassle to manage identity across them. So Todd goes back two weeks later with an implementation of identity management. The rest is history. But like in that case, Todd and Freddie had the right insight. They were talking to the right customers, but they had the wrong implementation of the insight. So they had to pivot on the implementation. But when you pivot, you either need to pivot on while you hold your insight firm. You know, the metaphor of pivot is very apt. It's like in basketball, when you pivot, you plant your pivot foot and you move your body. And in startups, the metaphor of moving your body is modifying your audience and modifying the implementation of your insight while holding your pivot foot. In this

case, your insight fixed. But if you leave your pivot foot, if you leave your insight, you have nothing left, right? There's no valid reason for you to exist anymore as a startup. Even large companies like Procter & Gamble will only go new product to an existing market or new market to existing product. They never introduce a new product into a new customer base. Yeah, when you do that, you're exponentially multiplying your risk. So what do you say to founders that might have semi-product market fit or might be at $200,000 in revenue, but no real product market fit, no real traction? Do you just advise them to rip themselves out of the market and redesign the product?

Not usually. Well, the first thing, it's tricky, right? Because sometimes the founder may not have an insight. So the first thing I always try to do, and this is part of why I wrote this book, is I kind of said, okay, these things can be stress tested. If you have a startup idea, I can come to you and say, I don't know if it's a good idea or not. I'm not a customer, but I can ask, what was the inflection? What was the specific new thing that was introduced that didn't exist before that you're harnessing

to create empowerment? Why is it powerful? Who does it empower? And under what conditions? So like, for example, in the Lyft example, if the government had outlawed GPS locator chips in smartphones, it wouldn't have mattered how empowering it was. Just like, you know, we can't build nuclear power plants, it seems, even though we know that it would create lots of sustainable energy. So there are conditions that empowerment will be realized and there are conditions it might not be. But I can ask a founder, the more specific you are about your inflection, the more likely it is that you have a specific form of empowerment that can change the

future. And the less specific you can be or the absence of such a thing, it becomes less likely that you can change the future. It's more likely that your idea is incremental. And then similarly with the insight, I could stress test it. I could say, what inflections are you harnessing? What is it about the future that you know that's not obvious? What's non-consensus about it? Why are you right? Why is the consensus wrong? Who are going to be the initial people to believe your non-consensus view? you living in the future? Are you looking at the future through a pair of binoculars? Are you more like Marc Andreessen and you're tinkering with new things and you identified what's missing in the future because you're directly exposed to it? And so by asking those questions, I can get to the root of whether I think they have an insight. And if I believe they have an insight, then I would say to the founder, fundamentally, you have a choice. You can navigate your insight to the desperate by either revising the implementation or revising the audience for your product. But if you have a valid insight, it's axiomatic that

somebody should exist who's desperate for the empowerment that that insight provides. I don't want to take any credit from John and Logan or even Travis and Garrett. Would there be other teams that would have taken advantage of this inflection in your mind if it wasn't for Lyft and Uber? Was this something that had to happen given your theory? I think usually it does. Like DoorDash and Instacart also leverage the GPS locator chip in the iPhone 4S, but in different ways. And so there are multiple ways that an inflection can be harnessed to create empowerment.

One of my favorite examples is the wheel. For over 500 years, the wheel was mounted horizontally to make pottery. And somebody figured that, hey, maybe I can mount it vertically to propel wagons and other types of things. But the ability for the wheel to propel things existed for hundreds of years before some entrepreneur had the insight to harness that empowerment in a different way. And so just because an inflection exists doesn't mean you know you have that empowerment, right? The thing that's in our pockets right now might have an empowerment that we don't see, but that occasionally an entrepreneur is an outlier. Occasionally an entrepreneur sees what we don't see, and in doing so, they break the pattern, right? They see an opportunity to break the patterns of how we think, feel, and act by implementing an insight that takes us to a different future. I think it's the television

that was invented like seven times within two months, once a couple of technologies were produced. So Cynic might say that, you know, it's also this new invention is also with some missing piece that wasn't there previously. I like to say all of it will happen someday. The question is just when and why now? And, you know, the inflections are a good way to diagnose the why now,

because they help you understand the new thing that just happened that creates the conditions for a new thing that will happen. That's why the inflections are so important in all this. You believe that things like business models or distribution are not a good enough why now. It has to be a technological why now for it to be potential big business. Very often the insight does embody something about the business model. Airbnb is a good example of this. Airbnb not just offered an empowering new product, but it was positioned differently. Hotels in the past, you know, Four Seasons in Paris, very similar to Four Seasons in

Austin, Texas or San Francisco. Brian Chesky forces a choice and not a comparison, right? He says, hey, you can go to the Four Seasons if you want, but if you're in Paris, wouldn't you rather live like a Parisian? Rather than be in the center hub of the city in Four Seasons if you want, but if you're in Paris, wouldn't you rather live like a Parisian rather than be in the center hub of the city in a Four Seasons that looks like every other Four Seasons? Wouldn't you rather be like in a French apartment on the left bank that is from the 17th century

for the same amount of money? Now, if you're Four Seasons, it's very hard to react to that business because like all of the work that you've done, the entire pattern of your business is predicated on providing a high quality, consistent experience across all of your properties. And so now all of a sudden, what Airbnb does with their business model is they turn your biggest strength, they find the weakness in your strength, and then they turn it into a weakness. And so often the business model flows from the insight.

And when you think about it, it kind of makes sense. If you have an insight about the future that's radically different, you're going to empower people in radically new ways. There ought to be a way for you to monetize that, right? If you provide a radical empowerment that people are desperate for, there should always be a way that they're willing to pay you. And you should always have at least the option to charge them in a way that's counter-positioned to the incumbents in the market. We discussed Steve Blank's quote that a startup is a temporary organization seeking a business model to one day be a company. Tell me more about that. Steve and I are very simpatico on this, right? What Steve helped me understand is that a startup literally does start at zero and that a company has assets and advantages and modes and powers.

And what a startup needs to do in order to create a breakthrough, there's what I call a breakthrough sequence. The first breakthrough is the insight. The insight answers a question, what do I know about the future that's powerful and not obvious? Most founders, unfortunately, skip that all together. They don't have a good answer to that question. And the problem is without an insight that's powerful enough, you're not going to offer a radically different form of empowerment. You're not going to be different enough. You're not going to force a choice. You're going to fall into the comparison trap. The next part of the breakthrough sequence is the product breakthrough. This is what everybody always talks about with product market fit. And the question we want to answer there is,

what can we uniquely offer that people are desperate for? And there's a force multiplier. If the insight's powerful, we're going to be more able to offer something unique because only us will have that insight. And if it harnesses inflections and it's a powerful insight, we'll be able to find desperate people more likely because the difference between what we can offer and what the status quo offers is so ginormous, right? And so that's the product market fit phase. So once we have the product breakthrough, then we want to have the growth breakthrough. And in the growth breakthrough, we ask another question, which is how can we grow at an extraordinarily rapid and predictable pace to dominate the new category that we're defining? And so then and only then do we become a company.

But in the early phases, the insight, product market fit and growth, our value creation strategy is different at those moments in time. We're not creating value the way a company creates value. We're creating value by multiplying the effect of our ability to create this breakthrough. And it reminds me of like a Newton's cradle, you know, the insight transfers energy into the product. And then the product breakthrough transfers energy into growth. Because if you have a great product that people are desperate for, you can grow by syndicating the truth. You can grow by teaching people rather than spending lots of money to persuade them to buy. The success in the prior phase begets success in the next phase and energy

transfers. So by the time you get to the growth breakthrough, you're just tearing into the market at incredible speed and rapid progress. And that's what you want to observe when a startup does the job right. When it comes to these disruptive businesses, are they all driven by word of mouth? Does that tend to be a pattern you see? For the most part. So part of a founder acting differently is we like to see them create a movement. Lots of people, when they think about marketing, they think about go to market, but a movement is a little bit different. A movement basically harnesses the passion of the minority against the tyranny of the status quo majority. And it creates an irresistible desire on the part of those early people to move to a different future. And movements are usually mentioned in the social arena, right? It's like Martin Luther

King with civil rights. But we can learn a lot from these people who created these social movements. So Martin Luther King forced a choice, right? You can't be semi-racist, right? You either believe that people should be judged on their content of their character, not the color of their skin, or you don't. There's no middle ground. But what Martin Luther King did is he found people who shared that belief with him, and he got them to move with him to a different future. And over time, that movement started to accumulate more and more believers. It went from being a heresy or a controversial point of view to the mainstream point of view. Similarly, that's

what startup founders do. So startup founders have an insight about the future that's contrarian. They find the people that are most likely to believe their insight, and they co-create the future with them by persuading them to join their movements. And they form a dichotomy between the world that is and the world that could be. And they position the status quo as the problem. They make the status quo apologize for its greatest strengths. You know, in the way that Airbnb made Four Seasons apologize

or hotel chains apologize for the consistency of their experience. What you want to do when you start a movement is you start by appealing to a higher purpose. You find the minority who's ready to move with you. You move with them to a different future. You co-create that future with them, and you position the greatest perceived strengths of the status quo. You reposition it into weaknesses and you create a sense of grievance around those weaknesses and show a path to a better world based on your strengths and your radically different approach to doing things. Is that

why you don't believe in this canonical great founder that the founder has to be aligned with his or her mission? Absolutely. Right. The affection term that I use for it is founder future fit. It's like, why does founder future fit matter so much? Part of the reason it matters is so that you know what to build. And so if you're more authentically living in the future than other people, and you're tinkering with the technologies before other people, and you're doing it in a way that is more creative than other people, you're more likely to know what to build. But equally important is that the future isn't created just by the founders. It's co-created by the founders and their early believers. And so an authentic founder,

authentically matched to the future that people believe in, is more likely to attract believers. And so their authenticity creates signal that punches through the noise and causes the early believers to raise their hand and say, I want to join your movement. And so then that authentic match to the future, thinking different, combined with their ability to create movements by acting different, is the two major forces, thinking different and acting different, is what animates the path of progress to creating these radically different futures. In the financial world, you have many successful people, including billionaires, that seemingly do it just for the money. In startups, why is that not possible, especially given that some startups gain traction very quickly? Why is that such a

narrative in the startup ecosystem? I think it varies. Some founders that I know kind of are in it for the money. I found that different people have different motivations, right? So some people, almost all of them are motivated by some obsession they have about the future. I'd say that that's pretty common. Like Justin Kahn, for example, is kind of a thrill-seeking personality, right? He just likes to stir the pot and see what happens and try things and shake things up a little bit. Whereas somebody like Casser Yunus is like really passionate about cars and the future of cars and grew up with cars, loves cars, couldn't imagine himself doing any business other than a business that's car related. And so like, it does vary, I find, you know, sometimes people talk about mercenaries versus missionaries, But what I find is that what really matters is

obsession with the future they're pursuing. Are they intrinsically motivated to pursue it? And, you know, intrinsic motivation is right. It could come from making money. It can come from being famous. It can come from being interested, you know, all kinds of places. Yeah. You look for that motivation, especially early on pre-product market fit. It makes a lot of sense, you know, what keeps you going and what keeps you going for many years before there's financial outcomes. At the other end of it, you see, you know, people that own sewage companies. Are they passionate about sewage? Maybe they are. But my sense is that it's a little bit overly dogmatically applied. When it comes to LPs, you mentioned that you can't make anybody love you. You could only let yourself be loved. Tell

me more about that. Yeah, that's a saying that I read somewhere. I think like when I was a kid, I read it at Sunday school or something. Here's my thing is that like one of the things I think I learned, and I'm grateful for this, that I learned it early in my relationship with LPs, I learned that I should not think of it as a sales cycle. And so at the time I was trying to convince the world and even myself that you could have an institutional seed fund. That's hard to believe now, right? There's so many. But in 2006, there wasn't really a thing. There was myself and Josh Koppelman and a very small handful of people pursuing this. And so when I talked to original LPs, I would say, okay, look, here's what I believe is true. There's angels who invest small amounts. There's VC firms that invest $5 million or more.

And there's this thing happening. It's called lean startups. And 500,000 is the new 5 million. And somebody is going to create an institutional seed fund. And it's going to be a permanent fixture of the landscape because if I'm Peter Fenton at Benchmark, why would I leave Benchmark to start a seed fund? So the only people are going to want to start a seed fund

who know VC are mediocre VCs. And then angels don't really know how to even spell LP, right? And so they don't understand how to think about LP as a customer. So I believe that there will be this new thing, seed funds. And what I would say to people is, if we disagree, that's okay, but I just gave you your time back because nothing else I'm going to say for the whole rest of this time is going to make any sense to you. What I learned was that if they had an objection and they said, I don't believe seed funds will happen,

I didn't take it upon myself to convince them they were wrong or to anticipate it as an objection or add a new slide to my pitch to counter that objection. I said, I need to find people who believe what I believe. And we're going to co-create that future together. When I started to get to know Judith Elsie at WeatherGage or Phil Horsley at Orza Bridge or a little bit later, Dave Swenson, the way I tried to approach him is I believe that there's going to be a new category of funds in this world. I believe we can be one of the first and the best at it, but we need to co-create this future together. We need to all collectively

believe that set of beliefs. Don't do this just because you want to buy low, sell high, because I'm going to come back to you and I'm going to, because we have this shared belief about the future, I'm going to always be trying to learn what you're seeing, how your belief is being animated potentially in different ways than mine is. And so startups are a lot like that too, right? It's like people are animated in early innings by shared belief in a different future. It's a very different way of approaching LPs, right? So like I never meet a new LP when I'm fundraising ever. I only wanna raise money for people who've already decided they wanna invest.

And when I meet new LPs, it's never under the pressure of fundraising because then I can just talk to them about how I see the world. And we can see if we have a values match or not. And if we don't believe the same things, that's okay. You can't make everybody love you. You can only let yourself be loved, right?

You wanna find the people who have similar values to you. And so you're not selling them on investing. You're engaging them in a shared call to adventure, you know, to change the future. That's kind of what I look for in the LPs. And I think most managers would be better off if they looked at it that way. If they looked at it, not as a sales funnel. How do you reconcile that? There's a saying, there are no dumb students, only bad teachers. I might be butchering it. So how do you reconcile? You're advocating for this entire new asset class. Certainly not everybody's going to get it right away. What's the nuance there in terms of how much are you willing to be a missionary for a new idea versus how much do people have to have those views already before you sit down and talk to them? I think quite often I find that early believers kind of had an intuitive sense of it before they met you.

Usually, you know, usually they've kind of got a feeling in their bones that something needs to change. They've seen things that are unsettling to them. So I think when I met Phil Horsley, in hindsight, I realized he was looking for new ideas. He felt that venture had stagnated. He felt that, you know, it needed to be reinvented in some ways and that we kind of needed to get back to what venture was good at, what it had succeeded at in the nineties. So I do believe that most people have a sense of what they believe. And so a lot of times it's the founder's job to put a voice to that belief and sort of animate that belief in a new way to unlock it. I don't think this is

unique just to myself, but like what I've learned is that there can only be one you. If you are your most authentic self, it's a little bit like founder future fit, right? If you are your most authentic self that you can possibly be, you can't be any better than that. Like you can't do better than your best. And so like what I've sort of come to realize is that the way to be hard to compete with is to be the best version of you and to do the best you can at what you do and to just be real about that with people. And it's like they either gravitate to what you can do and what your comparative advantage is or they don't. But I don't think you're going to convince people by trying to be something you're not. You're almost always better off saying, return to being your best self as the true North and being self-aware enough and humble enough in many cases to know what that looks like. How do you operationalize that? You were creating a new asset class. There's only so many people with those unique insights you mentioned. Phil Horsley,

he was on the ground seeing so many deals. Dave Swenson, arguably one of the greatest LPs in history. It might've been very intuitive to them, but maybe there wasn't that thousand, certainly not thousands, but maybe not even a hundred people like that. How would you advise new VCs to operationalize your strategy? Yeah. And it's the same advice I give to founders. I'd say when you're early, you have an advantage or you don't. Let's assume that you do. If you don't have an advantage, you have no business raising money because you're going to waste your LPs money, right? So in theory, you should have an advantage and you should know what it is and it should be real. If you have an advantage, there's two kinds of people

in the world. There's people who value your advantage and there's people who don't value your advantage. You only ought to be spending time with people who value your advantage or are prepared to value it and not waste any energy on the other people. Wasting time on the other people is bad for two reasons. One is they're not going to do anything. They're not going to give you money. It's not going to be a good use of your time. But even worse, they're going to give objections to your strategy that aren't valid. And you're going to modify your strategy according to their feedback.

And their feedback doesn't matter in the early days. The only feedback that matters is the feedback from the believers. Because if you're right, you want to find the people who believe that you're right, because their feedback has a better bearing on a correct future. So like what I say to people is only spend time with people who either value your advantage or prepare to value it. And don't sweat it if not everybody does, right? And it's like, it's nothing personal, right? It's just they just don't value your advantage yet. Maybe they will someday, maybe they won't, but it's not your problem. And you know, there only needs to be enough people who value your advantage and you're in business. And if, if nobody values your advantage, then you

got to ask some broader questions about whether you have one, but if you have a true advantage, it's compelling. There will always be people who value it. And that's who's worthy of your time. It's kind of inspiring when you think about it, because then you realize that there's always an opportunity for those who have the advantage. It's interesting. One of my masters in psychology, if I was to put on that hat, I would say a lot of people subconsciously focus on the people that don't believe in them. They have this need to be liked by people. And then they give a pitch to someone. Someone's like, yeah, that makes total sense. And they lose interest. It's kind of like, you know, in a romantic realm where people are just chasing, you know, women or men that aren't interested in them. There's some deep subconscious issues there. This is where I think Peter Thiel is really onto something. Peter Thiel would talk

about Rene Girard and mimetic theory, right? And Rene Girard's theory was that people tend to form their opinions based on the desires and interests of other people rather than their intrinsic, personally formed desires and opinions. And so part of being your best self is to avoid mimesis, right? Is to avoid the patterns of mimetic wiring that we all possess. And instead to say, hey, look, your time in this world is limited. You don't have much of it. You don't know how much time you'll have. Honor the gift of your time every day by doing your best and being your best self and always returning to that as true north. And what you find is that if you're your best self, there's nobody like you, so you'll always have an advantage, right? No matter what you're doing. And there will always

be people who value that advantage. And so that's what's inspiring about it to me is that like why avoiding mimesis can always be a path to the light, no matter who you are. And that's why he has this theory on why there's so many great autistic founders that it takes almost a irregularity to be able to not succumb to the mimesis. Yes. Yeah. There's reasons that we engage in mimetic behavior. We want to fit in. We want to be part of the community. Harmony matters sometimes. But I also think that it's always good to ask, how are you going to show up in the world in your best possible way? You talk a lot in Pattern Breakers in general about being non-consensus, right? And it itself has become a meme in the venture ecosystem. Could you explain as a fund manager, would you have been

as successful if you had consensus view on institutionalized seed? Was that a big part of your success? I think it probably contributed to it. I'm always prepared to admit that it was lucky all along, right? So that may be a part of it. But like, why is non-consensus so important? Well, it's like the only way you can make a difference is to be different. If you're doing what everybody else is doing, you might perform well, but you won't perform extraordinarily better than the rest. If you and I buy stocks, we have a choice.

We can buy the index or we can be stock pickers. If I buy the index, the stock market may go up. I may do well. I may make money, but I'm not going to do better than everybody else who bought the index. It's just going to be a function of the average. If I buy a stock, let's say I go buy NVIDIA, I'm either going to outperform the index by making that decision or I'm going to underperform the index. There's no in between. And people say, well, NVIDIA is a great company. You should buy the stock. But the problem with that is that NVIDIA is priced based on supply and demand. There's a set of people who think it's optimally priced, even though it's great.

And so anytime you buy a stock, you're departing from the consensus. And there's an equal number of people who think you're wrong, an equal number of people think you're right. And it's your willingness to be wrong. It's your willingness to underperform the index that gives you the opportunity to outperform it. So that's always true in any given field of endeavor. It's your willingness to fail that lets you succeed. When you're non-consensus and right, you don't know that you're right at first. You have instinct that you're right. All you really know at first is that you're non-consensus, but you have to risk being wrong to be right. And so that's why I think non-consensus and right is so important in all of this, right? Like you can't, as an entrepreneur, you're never going to create a

breakthrough by pursuing the consensus because your profits and your opportunity to get arbitraged away by the incumbents and by other startups in mindless competition, because it's a mimetic way of showing up in the world. Only by departing from the consensus can you create the extraordinary breakthrough. Just to play devil's advocate, is the converse also true? Something that sounds good to a lot of people is automatically bad to you as a startup idea? For the most part, yes. And the reason is that human beings are conditioned to like things. So if everybody likes a startup idea, it's too similar to what they already know, which means it's probably too similar to the consensus. It's probably

too much of a projection of the present rather than a radically different future. And so it's kind of a weird, yeah, it's kind of Zen, right? But like when you think about it, it makes sense. The distinction there for somebody, something like Twitter, that to me still doesn't quite make sense. I would have definitely passed on Twitter. But at the time, it was consensus among the super intelligent VCs because they understand this natural bias towards non-consensus.

How do you explain something like a Twitter at the time it was hot? At the time of Twitter, it had already blown up. Got it. So the metrics were already- Yeah, everybody already knew Twitter was a thing by the time Ev decided to raise money. It was just kind of like, did you believe he was going to turn it into a business

was really the only question. We'll get right back to interview. But first, to stay updated on all things emerging managers and limited partners, including the very latest data on venture returns and insights on how to raise capital from limited partners, subscribe to our free newsletter at 10xcapitalpodcast.com. That's www.10xcapitalpodcast.com. You alluded to it. You knew David Swenson. Presumably, he was an LP. Yeah.

And the show, we've met a lot of his former friends and colleagues. What are some things that you learned from David Swenson? Oh, man. There's so many things. I mean, he was just a great man, a great strength of character, just a great human. If I had to reduce it to one thing, and it relates to his impact as well, is that patience is a form of arbitrage. So like most people used to think that liquid assets, all things being equal, are more valuable than non-liquid assets, because with a liquid asset, you can trade in and out of

it. But what Dave understood is that your willingness to hold an asset for a very long time eliminates competition for that asset. And so as a result, if you're prepared to be patient, if you believe liquidity doesn't matter, only success matters, you need to be right about the investment. If you're right about the investment and it happens to be a liquid, you might even be more spectacularly right because there are going to be fewer people with a trading mindset that are going to engage in that trade because they can't trade in and out of it really fast. So that's what I always think about that with what I learned from him. Because like, for example, I've worked with Ann now since 2008, so 16 years.

And part of our advantage is we just have a temperament advantage. We just know each other. We know each other's tendencies and things like that. We don't feel pressure to invest in every hot AI deal because we'll look at each other and say, this is getting a little bit crazy right now. Maybe we shouldn't, we're not in any rush to do anything. We don't have anything to prove this year. You know, let's just spend the money wisely, invest it wisely. And it kind of comes back to this idea of Dave's, which is the more patient you're willing to be in the pursuit of valid excellence, the fewer competitors you'll have in that pursuit. Because most people won't do that.

Most people are impatient. Most people do want to trade. I would say there's so many things you can learn from him. His books were really good. But I'd say that that's the high order bit. You mentioned Ann, your partner. Is that part of a good partnership? Somebody that is able to be strong where you are weak

so that together you guys kind of bolster each other? And talk to me about that. Ann is probably more disciplined than I am, probably more focused, probably more horsepower smarts wise, better at analysis than I am. I tend to be a little bit too optimistic, but sometimes I'll have really good creative ideas. But the thing I think that we have in common that's more important is I think we just have very similar values. I think that we have in common that's more important is I think we just have very similar values. You know, I think that we care about similar things, both in our professional and personal lives at our respective homes and stuff, and our kids are friends. And I've appreciated the fact that, you know, one time we closed a fund and it occurred to us, one of the lawyers said, hey, you know,

you haven't written down your carry split yet in the documents. And so we'd closed the fund before we'd agreed on how we were going to split the carry. And so we were just texting each other, what do you think it should be in this fund? We've never argued about that stuff. We've never had some type of a issue under the surface that caused problems between us. If we argued, it was just because we disagreed about something. It wasn't because we had a difference of values or different ways to go about something. I invented a new word. a difference of values or different ways to go about something. I invented a new word. I call it reversion of negotiation

where the best partners I've had, actually we start negotiating against ourselves because we feel like the other party kind of deserves more. It's happened to me multiple times in my career. It's a great feeling all around. This is one of those businesses where if things go your way, you get overpaid. And so all of us can get what we need.

It's just crazy. You see some of these firms blow up, you get overpaid. And so all of us can get what we need. It's just crazy. You see some of these firms blow up because partners argue over compensation. It's just the dumbest way to fail I can imagine. It's just crazy that people could let that happen. Do you see that as a lifestyle kind of benefit of working with a partner that you like given? I think a lot of people underestimate

how much time they spend with their colleagues. Do you consider that a lifestyle enhancement of sorts? I think so. I think that there are some very smart people that wouldn't really fit at Floodgate, right? Because we don't want to succeed by just being conventionally smart, right? We always want to have some new idea

to kind of some angle of attack, some type of advantage to go after seed. And so you have to have a little bit of quirkiness to do that. That's another thing I learned from Swenson, actually. Howard Marks wrote about it, too. You want a portfolio that is, I think he called it uncomfortably idiosyncratic. And you actually want a partnership that's uncomfortably idiosyncratic. Because if the partnership is too buttoned up, you start making consensus decisions. You need to have a partnership that is able to pursue the non-consensus idea,

but not just non-consensus, wacky, stupid for its own sake, right? You have to find non-consensus things that work, but you have to have an organizational culture that encourage finding those things. And if you're not careful, you'll create a voting system in an institution and you'll get bigger

and you'll start implementing processes that drift you towards being the consensus. A lot of your colleagues have grown and raised these mega funds. What was your thinking around keeping it small, relatively? I think that's just what we can be the best at and that's what we enjoy doing. And yeah, maybe we could have raised more money, but just because we could doesn't mean we should. We can be perfectly successful and happy doing it our way. And so I don't expect that to change. It is funny, though. Sometimes when I talk to LPs, I'm like, yep, we're still a seed fund.

Don't worry. We haven't done some major hard pivot to become some gigantic multi-stage kind of thing. We're still sticking to our knitting. Penultimate question. We discussed the advantage that occurs to people who know what they're looking for in the market. Tell me about that. And this is something that I think I learned from Buffett. Buffett has this idea that he calls

your circle of competence. The circle of competence, if I had to reduce it to a statement, it's where do you know you have an advantage and actually have one? And so most people think they have an advantage where they don't, or they don't even know that they should have one.

They just go chase, they chase hot deals and hope they get into their share of them. But like when you think about it in investing, if you're really going to have differential returns, you need to know something the world doesn't know. You don't need to know more than the entire world about everything, but there needs to be a specific thing where more times than not, you know more. Because otherwise, how are you going to depart from the consensus in a way that you get rewarded for Because otherwise, how are you going to depart from the consensus in a way that you get rewarded for doing so, right? You need to depart from the consensus

because you know something the market doesn't know. So that goes back to your circle of competence. It's funny, the other day I saw this company and I love the founder, it's called Endless Health. And I'm like, I really like this company. And it's got a little bit of a hardware component to it. And I'm like, Ann, can you check this out? I think you're gonna like it too. And Ann's like, dude, I love this founder. This is amazing. And so we start talking about it a little more and

thinking about a little bit more. And Ann's like, you know, I don't think I can lead this because it's not in my circle of competency. I've never made money on a project that looks like this before. And here are the attributes of it that I don't fully understand. And I don't know why I have an advantage. And as I heard her describe it, I'm like, she's right. We shouldn't do this investment. And now will that investment make money? It may, it may not, but there is no differential reason for us to make money at it other than maybe we had access that other people didn't have. But like, if you can't articulate on the tip of your tongue, the thing, you know, or have access to that the rest of the world doesn't know or have access to, why would you have any basis to believe that

you're going to have differential returns by making that investment? I think that knowing, knowing where you have an advantage and actually having one there is a big part of success in this. It's a very contrarian point. If you look at even Twitter's cap table or Slack early on, you had all these prolific founders from other enterprises that just had access to it. Why is access not a good enough reason to invest? It can be sometimes, but then you could say, okay, my circle of competence is I can get access to deals that everybody wants, but not everybody can get into. And then you just got to be clear about why that is, what makes you so special, right? And if that's true, that's fine. But I think it's

always important to know where you have the advantage. If you don't know where you have the advantage, you have no business investing money because you have no basis to outperform the average. That's the key in all this. You need a systemic competitive advantage. That's right. You need a structural competitive advantage to succeed, you know, on any long-term basis. I know you didn't want to promote your book too overtly. I'm going to promote it. It's Pattern Breakers. I've now spoken to you several hours on topics in the book. Where could people get it and how could people purchase your book? Well, yeah, I mean, it's just wherever you get books, right? Amazon or, you know, we have a website called patternbreakers.com that probably the best way to do it is the way people always do it. I hope people like it.

You know, we spent four years on it and rewrote it three times. I the way people always do it. I hope people like it. We spent four years on it and rewrote it three times. I definitely did my best on it. We'll see if readers agree, but I gave it my best shot. Hopefully that'll be more than enough. It will be more than enough. Thanks again for jumping on the podcast and I look forward to sitting down live soon. All right. Thanks, David. I appreciate the time. For more ideas on how to raise venture capital in this market, make sure to subscribe below.