Motley Fool Hidden Gems Investing - A Sea Change of Mass Cognition

Episode Date: July 13, 2024

Mike Maples is a co-founding partner at the venture capital firm, Floodgate. He’s also the author of the new book, “Pattern Breakers: Why Some Start-Ups Change the Future.” Alex Friedman caught up with Maples for a conversation about: How to spot true visionaries. Missing out on an early investment opportunity in Airbnb. Whether the AI future will be defined by incumbents or upstarts. Companies mentioned: AMZN, LYFT, OKTA, CHGG, AAPL, MSFT Host: Alex Friedman Guest: Mike Maples, Jr. Producer: Mary Long Engineers: Dez Jones, Tim Sparks Learn more about your ad choices. Visit megaphone.fm/adchoices

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Whatever lies ahead, don't change your morning. Let your morning change you. Discover Coffee Plus on Nespresso.com. The biggest challenge I see right now with AI is who has a real insight. So I see lots of ideas where I say, man, that would be really powerful. I could see why people are going to want this product, but why aren't there going to be 10 just like it? Or why isn't OpenAI going to leapfrog it with their next large language model?

And so the challenge with AI in many ways is finding that founder who has a non-consensus insight that harnesses AI. I'm Mary Long, and that's Mike Maples, a co-founding partner at the venture capital firm Floodgate. Maples was an early investor in Twitter, Twitch, Okta, Chegg, and more. He's also the author of the new book, Pattern Breakers, Why Some Startups Change the Future. My colleague, Alex Friedman, caught up with Maples for a conversation about the difference between being a co-conspirator and being an investor, why he passed on an early opportunity to invest in Airbnb, and how large companies like Apple and Microsoft can embrace pattern-breaking technologies. so mike a big theme of your book and pattern breakers is about identifying founders who live

think and dream about the future as an investor how do you personally live in the future yourself yeah well it's funny i i think i'm better at identifying those who do and so um if you what's interesting when I listen to your show, right, a lot of the companies that you talk to are companies, right? Starbucks, you know, and it turns out that that's a different type of capitalism than the type of capitalism I focus on. So a startup capitalist doesn't create value by persistently compounding. They don't create value by creating competitive moats or by economies of scale or any of those things. A startup capitalist creates value by changing the subject, by breaking the pattern. And so ironically, startup capitalism is a completely different value creation paradigm

than normal corporate value creation. And the way that a lot of these startup capitalists come up with their ideas is they live in the future. And so they're living in the future before most of the rest of us. And they notice something in the future that they think is going to have very big implications for all of us someday. And they build that missing thing in the future and then move us to that different future of their design. So what does that really mean to live in the future? Yeah. So a lot of people, I think, have the wrong idea of what vision is. They think of vision as I have a better pair of binoculars I can see farther than the next guy can. But if you look at, say, Marc Andreessen, when he created the Mosaic browser, he was a

student at the University of Illinois in a supercomputer lab with a really fast network. And so in some ways, he was living in a time machine. And everybody thought that the digital highway was going to be created by Time Warner or the government or Microsoft or AOL. But Mark Andreessen was tinkering with a set of technologies that had just happened around the internet. And he wasn't trying to address any market. He was just trying to make the internet immediately more useful for him. So he was encountering barriers in his interaction with new technology, and it was what he built to overcome those barriers that became from the future, that became a fundamental insight that created a revolution. And so time and again, I see that that's the case, that

the best way to come up with great startup ideas is to live in the future and to notice what's missing in that future as you interact with the technology, as you experiment with it, and then to build what's missing. And then if you're living in a future that a whole bunch of us are about to be living in, you have a head start, right? You have a first mover advantage into the future. So in addition to finding founders who live in the future, what are some of the other key aspects of your investment process at your firm, Floodgate? Yeah. So it's, you know, process is kind of a generous word, I suppose. But so I invest too early, way too early, or even legally ambiguously too early in these startups, right?

And Twitch started out as Justin TV, Twitter was Odeo, Okta was Sasher, Lyft was Zimride. And so I'm investing before they've really figured the product out. And what I'm really investing in then is the power of their ideas and insights. And are they thinking truly differently? Are they thinking in a way that breaks the pattern of how things happen today? And then are they, do they have the abilities to act radically differently? Do they have the ability to convince people to move to an unsettling different future? Do they have the ability to overcome the skepticism and the apathy of the world? Do they have the ability to fight back effectively when the present fights back and when it doesn't fight back fairer? And so, for example, Lyft deciding to launch an illegal service, knowing that they would have to negotiate later with the government of San Francisco. So those are the main things that we look for is thinking different with the pattern breaking ideas and then the willingness and ability to act different and pursuing non-conventional paths to making the mission come true.

You just mentioned a number of different startups that have had lots of pivots having gone through those experiences with those startups that have faced their changes and twists and turns. How does this kind of inform your expectations about the startups you're investing in now? Yeah, and I would say it informed it in many ways because of my own feelings of ignorance and inadequacy. So about 10 years ago, Twitch was acquired by Amazon for $970 million and we made 84 times our money. And normally that's a good thing and it was a good thing, but I had forgotten I was a shareholder Twitch. So I had invested in Justin TV and it morphed into two companies, SocialCam and Twitch. SocialCam was acquired for 65 million. So I just thought that was the company. So imagine what that's like. You go to your limited partner investors and you say,

guess what? We have this windfall. We made 84 times our money, but I apologize. It's not my financial statements. Do you need me to restate them? And my LPs all said, no, we're good. Just send us the money. But what really hit me was I looked at my profits. 80% of our profits had come from pivots. Twitter had started out as a podcasting company. Twitch, we know what happened there. Chegg had started out as a college classified site. And so I was like, what's going on here? Because the companies that seem to do all the right things, that seem to follow all the best practices, didn't seem to do so well all the time. And then there were companies that did great that didn't seem to do anything you're supposed to do, right? Like Twitter had the fail

whale. They couldn't decide who the CEO was. Lyft had launched an illegal service that was starting to blow up. And so I was like, what's going on? Nassim Taleb has an expression, the lucky fool. Am I just a lucky fool and should I retire before I get exposed? Or is there something else going on here that's worth understanding? And that was kind of the genesis of the ideas behind the book. So why do you subject yourself to this constant uncertainty? Why not just invest in later stage startups? You know, I just like, I'm a little bit of an emotional investor. And I like to say I'm more of a co-conspirator than an investor. And so in some ways, a great startup is a disagreement with

the present. And it's an optimistic conspiracy among like-minded people to change the future. And so I like to be more of a co-conspirator than an investor. I like to believe in the same crazy secret about the future that the founder believes. And I like to be their partner in helping overcome the skepticism and inertia of the world in making those ideas real. can't do that in later stage. Got it. So for startup founders looking for co-conspirators, what should they look for in those types of people? Yeah. So I think that the thing that I've found about ideas that break the mold is that most people should not like them at first because human beings are conditioned to like things. And

so if your idea is liked by everybody, it's too much like what's already out there. And so what you want is an idea that most people dislike or just don't care about, but some subset of people are undeniably passionate about, where they're like, where have you been all my life? And so what I would say to a founder is, if you have a radical breakthrough idea, get used to the idea that most people won't like it, but that that's okay. All you need to do is spend your energy and time finding the people who value your advantage and believe what you believe. Don't waste any ergs of energy on anybody else because they don't matter at first. All that matters is the early true believers. And that's true of investors. That's true of early customers.

That's true of early employees. And having it be disliked by most, that comes with the territory. It doesn't mean you're right, but you can't be spectacularly right without most people disliking it at first. One big theme you talk about in the book is the importance of inflection points for the startups you're choosing to invest in. How do these inflection points manifest themselves in the real world? Yeah. So inflections are really important and here's why. Business is never a fair fight. The only question is who gets to fight unfair. And the default is that the incumbent fights unfair because the incumbent has the advantages of incumbency. So how do startups win. Startups win when they deny the premise of the rules and create entirely new rules.

And how do they do that? They harness inflections. And so an inflection is a change event that creates radical new empowerment. A good example, we talked about Lyft a little bit ago. Lyft's inflection was the iPhone 4S had a GPS locator chip embedded in it. And because of that, you could locate riders and drivers with an algorithm by just with an API, right? Because you could know where everybody was within one meter. You could have had the idea for ride sharing before the iPhone 4S, and it wouldn't have mattered because you wouldn't have been able to implement a system that embodied that idea. It wouldn't have worked. So the inflection was a turning point in time, a moment in history, when all of a sudden a new type of empowering set of capabilities

were available. And so what a founder does then is they convert the inflection into an insight, which is where their creativity really comes into play. So the idea that, oh, you can share rides like you share housing that Airbnb had done, that was the insight behind Lyft and later Uber when they decided to enter the market with UberX. So that's why the inflections are so important. inflections let the founder wage asymmetric warfare on the present. So it's kind of like the rock and David slingshot. It's the thing that gives the opportunity, the power to the entrepreneur to escape the pull of the current rules and to throw the playbook out and rewrite the rules. One thing I loved reading about in the book was your decision not to invest in Airbnb

in 2008. And I'd love to know, looking backwards, why didn't you invest in Airbnb at the time? Why didn't it make sense for your fund? Yeah, that's my biggest regret. And so, well, first of all, the circumstances are interesting. So I'd been pitched by a cereal company the week before. And my partner, Ann, is like, what are we doing talking to a cereal company? We're tech investors. And this cereal was called Mojo Mix. What are you thinking? And so I said, OK, fair enough. So then the next week, Brian comes in to present what was called airbed and breakfast and it's a room full of cereal boxes obama owes and captain mccain crunch and ann looks at me like what the hell you know if you're going off the rails again i thought we

were i thought we'd agreed we're not talking to cereal companies and i said to brian i said hey brian you know what's up with this cereal you know i thought you're you're a tech company and he says well um we've been funding the company by selling these cereal boxes do you want to buy one and that was my first mistake was declining buying one of those cereal boxes to be worth a lot now so um he said you know michael seibel who introduced us says that you don't really like slides you like demos so we thought we would demo the product for you so i said great so they fire up the software and it crashes it doesn't work and so they can't show me the software so i said can i see the slides they said well we didn't bring slides we were going to show you the demo so we're sitting

here in a room full of cereal boxes, 20 minutes into the meeting, I still don't know what airbed and breakfast does. And so I just, it was such a screwed up set of circumstances that I just wasn't awake enough to the possibility of how big it could be. And it was my foolish decision to pass on airbed and breakfast that taught me a lot in terms of not having a failure of imagination in the future. So for example, the insight with Lyft was people will ride in strangers' cars and ride-sharing networks. And the non-consensus aspect of that was, would somebody want to get in a stranger's car? That seems kind of crazy. But Anne and I had foolishly passed on Airbnb because we didn't think somebody would stay in a stranger's house. And so now all of a sudden,

I'm like, yeah, maybe I'm willing to take a walk on that wild side. Maybe somebody will get in a stranger's car. And so, you know, these things look kind of crazy at the time that you have to decide. Like we now all know that Airbnb was successful, but imagine yourself in a room full of cereal boxes. He can't get the site to work. And he tells you that I've got this site that where you host a guest in your house and feed him Pop-Tarts the next morning, and they sleep on an airbed, airbed and breakfast. You know, at the time it was not very obvious at all that that could be a good opportunity. But I was tragically wrong. I mean, if I'd said yes to that, that would have been the best investment of my career. It's clear in the book, you have a great deal

of admiration for Brian Chesky and his team at Airbnb. And I'm sure you kind of kick yourself a lot wishing you had invested in Airbnb. But now that it's a public company, have you ever had the inclination, okay, maybe I'll buy a couple of shares? I think about it sometimes because I do think that they have some structural competitive advantages. You know, I think it's a hard company to compete with. But, you know, I am pretty sincere when I say that I try not to invest in something

where I don't have a very clear edge. You know, Buffett often talks about this idea of your circle of competence. And, you know, I think you need to know where you have an advantage and actually have an advantage there and stick to where you can have a differential return. And so I don't necessarily trust my instincts about Airbnb as a public stock,

probably more than the next guy's instincts. So in this moment in time, what are the inflection points you see right now? Yeah, right now, the biggest inflection is probably what we're all seeing around AI. And so you see these large language models and they just keep getting better and better. they're coming out all the time. The biggest challenge I see right now with AI is who has a real insight. So I see lots of ideas where I say, man, that would be really powerful. I could see why people are going to want this product, but why aren't there going to be 10 just like it? Or why isn't open AI going to leapfrog it with their next large language model? And so the

challenge with AI in many ways is finding that founder who has a non-consensus insight that harnesses AI. And that's a little bit harder to do. So we've had some success investing in those, but they're harder to find than it seems on the surface. When it comes to non-consensus insights with AI, what does that look like? How do we even think about what non-consensus with AI even means? Yeah, it's a tricky one to answer. You kind of know it when you see it. But one thing I'm looking for is something that people would call counter-positioning. So I think AI ushers in a sea change, actually, more than just an inflection. It ushers in a sea change of mass cognition. And in my career, we've had two sea changes. There

was mass computation, which was Moore's law. And essentially what mattered, the center of gravity was the desktop. You wanted a computer on every desk and in every home. Then came the era of mass connectivity. And the center of gravity of mass connectivity was networks. And you went from Moore's law to what they call Metcalfe's law, you know, how many nodes are on your network. Now, what happened that was interesting with mass connectivity was the startups were counter-positioned. So Microsoft didn't really know how to compete against Google in the early innings because they were used to selling desktop software and Google was selling ads. They were monetizing it in a completely different way, in a way that confused and disoriented

Microsoft. And so just like Microsoft disoriented IBM in the era of the personal computer. And so to me, the interesting question is, what are going to be ways to sell product that disorient the incumbents? So selling the next co-pilot, I don't think is that interesting or compelling because the incumbents can do that. But you might decide not to sell software. You might decide to sell jobs to be done. There are other ways that you can monetize a product other than selling a monthly subscription or software by the seat or by selling ads. And so I think part of the unlock is going to be not just product innovation, but business model innovation that is orthogonal some way or different some way from how the incumbents do it. When you think about AI and

the future of AI, do you think that technology is going to be centered around very well, large established companies like Apple and Google? Or do you think they're going to be upstarts that don't even exist yet that are going to be defining that conversation? All my instincts tell me that people are underestimating the role that upstarts will play. And so, yes, the big companies will play an important role too. But in many ways, the important role those companies are playing right now is like a massive build out. It reminds me a little bit of what happened in the late 90s when broadband got built out and fiber and just, you know, massive connectivity. Now, you know, we see people just hoovering up NVIDIA

chips as fast as they can make them. And so there's this massive investment in infrastructure that will probably amount in the trillions of dollars. And that's going to be a set of enabling technologies for both incumbents and startups. But everything I know and everything I've seen about the past tells me that there will be a new set of startups with a new set of ideas that change the subject in addition to the incumbents. If you were Tim Cook or Satya Nadella, what would you do to position Apple or Microsoft to be a company that creates and innovates around AI and more broadly, just new technologies? Yeah. So I think that big companies can embrace these pattern breaking ideas. So like, for example, at Apple, the iPhone one was clearly

a pattern breaking product, right? It defined an entire new market. It changed the rules of competition. It wasn't just an extension of their prior products. The iPhone 15 is kind of a, you know, compounding product, right? It's a sustaining innovation. And so I think that when you're a large company, you can decide to do sustaining products. And you can do that either organically by building it yourself, you can do it by partnering with other people, you can do it by acquiring other companies, you know, like when Microsoft bought Blizzard, or when they bought GitHub, for example. But if you're going to do pattern breaking innovation, you need to do something radically different. And that actually you can do organically, you know, the iPhone's an

example. Amazon Web Services would be an example. But you can also acquire it, you know, like when Facebook, now Meta, acquired Oculus. That would be an example of a pattern-breaking acquisition. Or you can partner around pattern-breaking opportunities, which I would say is what Apple's trying to do with OpenAI. And so when you're a big company, you have a portfolio of products. And some of the products are meant to change the subject and radically redefine the opportunities for the company. And some are intended to compound your existing advantages and increase your profits and increase competitive modes. And so the good CEO is able to do both at the same time. And I think that quite a few companies have. Apple recently shut down their

electronic car development project. And I'm wondering, do you feel like that money should have gone, if you were Tim Cook, do you feel like that money should have gone to developing something internally with AI? I'm not sure. I think Apple is playing its hand pretty well when it comes to AI right now. They're taking advantage of the fact that there's hyper-competition among the LLM providers and that they have a unique identity with a lot customers. And so I think that they have played it well so far. Time will tell if they have to develop more competencies in AI. I actually admire them for trying to build a car. So I think that it's your willingness to fail that enables you to have breakthrough success. And so like, you know,

a lot of your listeners probably do pick stocks and think about stock picking. Well, when you think about it, if you buy the index, you may do well, but you're not going to do better than the average. You're just going to do however well the index does. The only way you could ever be a super performing stock picker is to pick stocks, right? You have to pick stocks. And if I decide to buy Lyft stock or NVIDIA stock or whichever stock, Airbnb, it's not just, is that a good company? It's, do I know something more than the consensus knows? Because the price, the value of the company and its prospects are already priced into the stock by supply and demand. Right. And so whenever I pick a stock, there's an equal number of people who think I'm wrong

about the future prospects of the company, given the price that it's at. So I'm either going to outperform the index if I buy that stock or I'm going to underperform the index if I buy that stock. But it's my willingness to underperform that creates the opportunity to outperform. And the same is true with Apple, right? And any company, it's your willingness to embrace the possibility of failure that allows you to pursue the non-consensus breakthrough upside idea. I like to say any coin that says can't lose big on it, the other side should say can't win big. And so, right, like there are two sides of the same coin. I think of that line, it's a little overplayed, scared money don't make money. There might be a little bit of truth to that. Yeah. And it's like, it's like anything in this world, only the different can really make a difference. And so in order to make a radical difference, you always have to depart from the consensus. If you stay in the consensus, you'll only be slightly better than most people. And you may still prosper, but you're not going to disproportionately prosper. You know, in order to have a radical upside, you have to depart from the consensus. And the challenge of being an entrepreneur is at the beginning, you don't know for sure that you're right.

All breakthroughs are undiscovered and unproven. You only know that you're non-consensus. And so you have to risk being wrong in the pursuit of a non-consensus great future breakthrough. But, you know, it's your willingness to do that that affords you the opportunity to create that big outcome. As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Mary Long. Thanks for listening. We'll see you tomorrow.

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