#1381 Mike Maples | Investor Reveals Secret To Finding Billion Dollar Companies

Mike Maples is a Founding Partner at Floodgate, and the author of a brand new book called, “Pattern Breakers: Why Some Start-Ups Change The Future.” In this conversation, we talk about startup capitalism vs corporate capitalism, how startups win, evaluating founders, stress testing ideas, pattern breaking actions, embracing chaos, finding opportunities, startup investments, and his new book. ======================= Buy and sell cryptocurrency in a tax-advantaged crypto IRA with iTrustCapital. Enjoy 24/7 access, lowest fees in the industry, and tax benefits for your retirement. Open and fund an account today at ⁠https://www.itrustcapital.com/pomp⁠ to receive a $100 USD funding bonus. ======================= Introducing Espresso - the world’s most interactive portable display. They have a portable screen that is incredibly light, comes with a nice stand, and the user interface is very easy. Anyone who listens to this podcast can go to ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠us.espres.so/pomp⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. They have a brand new offer waiting for you. ======================= Meanwhile is the world’s first licensed and regulated life insurance company built for the Bitcoin economy. Protect your loved ones with sound money built to manage life’s uncertainty and a broken financial system. Their BTC-denominated Whole Life Insurance policies allow HODLers to pass more BTC on to their loved ones and a tax-advantaged way to access BTC for liquidity during their lifetime. Visit their website at ⁠https://meanwhile.bm/⁠ to join the waitlist for a policy and to learn more. ======================= Pomp writes a daily letter to over 265,000+ investors about business, technology, and finance. He breaks down complex topics into easy-to-understand language while sharing opinions on various aspects of each industry. You can subscribe at https://pomp.substack.com/ ======================= View 10k+ open startup jobs: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠https://dreamstartupjob.com/⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ Enroll in my Crypto Academy: https://www.thecryptoacademy.io/

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:02Anthony Pompliano?

  What's up everyone? This is Anthony Pompliano. Many of you know me as Pomp. You're listening to the Pomp Podcast, which is my effort to find the most interesting people in the world and sit with them for hours while I ask questions in an effort to learn. So it would mean the world to me if you would subscribe to the show on your favorite audio platform, watch episodes on YouTube, and tell your friends and family about the podcast. My goal is to help millions learn from the world's most interesting people. So let's get into today's episode. Mike Maples is a founding partner at Floodgate and the author of a brand new book called, "Pattern Breakers: Why Some Startups Changed the Future." In this conversation, Pomp and Mike talk about startup capitalism versus corporate capitalism, how startups win,

• 0:46Anthony Pompliano?

  evaluating founders, stress testing ideas, pattern breaking actions, embracing chaos, finding opportunities, startup investments, and his new book. Please enjoy this conversation with Mike Maples.

• 1:01Speaker 01

  Anthony Pompliano runs Pomp Investments. All views of him and the guests on his podcast are solely their opinions and do not reflect the opinions of Pomp Investments. You should not treat any opinion expressed by Pomp or his guests as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his personal opinion. This podcast is for informational purposes only.

• 1:25Anthony Pompliano?

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• 2:10Anthony Pompliano?

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• 2:55Anthony Pompliano?

  I got a gazillion tabs open and different windows for different activities. There's my web browser, my text messages, I have Slack open, and I got a notes app. I normally work on a desktop and can be very, very productive. But everything falls apart the second I leave my desk. If I'm traveling, if I go to a coffee shop to do some work, or just want to work from the kitchen table. My laptop doesn't have enough screen space. I lose my command center and my productivity falls off a cliff. It's a major problem, but this is where Espresso comes in. They have a portable screen that is so beautiful that you think Steve Jobs came back from the dead to create it. The thing is incredibly light, it comes with a nice stand, and the user interface is so easy that I figured it out. How to do it in less than three minutes? If you listen to this podcast, you know that's not an easy feat.

• 3:39Anthony Pompliano?

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• 4:24Anthony Pompliano?

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• 5:08Anthony Pompliano?

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• 5:14Anthony Pompliano?

  All right, guys. Bang, bang, I've got Mike here. Mike, one of these ideas that you have is startup capitalism versus corporate capitalism. And I find it really interesting because capitalism is the shared word across those two phrases, but startup versus corporate, most people think about as two completely different worlds. Explain what you're talking about when you talk about this startup capitalism and why it's different than maybe, you know, your grandfather's capitalism or this thing that we've known previously.

• 5:39Speaker 02

  Yeah, and if it seems confusing, I guess I should confess that it started with me being confused. And so, one day about 10 years ago, Twitch was acquired by Amazon for 970 million, and we made like 84 times our money on this. And you'd think that that's a good thing, but the scary thing about that was I'd forgotten I was a shareholder at Twitch. So I had invested in a company called Justin TV, and it pivoted into SocialCam and Twitch, and then SocialCam was bought by Autodesk, and I just thought that was the company. And so I had to go back, I had to explain to my investors that there was this, we had owned these shares in a company called Twitch that just got bought for all this money. What would

• 6:23Speaker 02

  you like me to do? Do you want me to restate my financials? And they all said, no, we're good. Just send us the money. And they sent me some champagne and stuff like that. But that same week, I had to help a founder shut down his company. And he did everything right. He did the business model canvas. He had a high performance culture. He did all the stuff you're supposed to do. Textbook. In fact, it could have been Harvard Business School case study, except for the fact that it failed. And I saw this happen over and over again. Like, you know, people tend to retrospectively talk about these startups like they knew what was going to happen. And even the founders themselves quite often misremember what happened. And clearly, the VCs often do. And so I was like, like, what's going on here? How do I,

• 7:05Speaker 02

  how do I make sense of the fact that 80% of my exit profits have come from pivots? Because Twitter was a pivot from Odeo. Chegg was a pivot from College Classifieds. Okta had started out as Sacher. Lyft started out as Zimride. And I'm like, okay, let me get this straight. In the success case, there's an 80% chance the idea I'm looking at isn't going to be the same idea. So like, what am I even investing in? And, you know, I started to think about what Nassim Taleb used to say about the lucky fool. And, you know, maybe I was a lucky fool, and maybe, maybe I should just retire before I get exposed, you know? And so, so then, where does this idea of startup capitalism versus corporate

• 7:48Speaker 02

  capitalism come from? I just went down this total rabbit hole for like, three years, trying to say, okay, there's something to understand here, or I'm just going to retire. And what I concluded was that a startup capitalist is different from a corporate capitalist. And that a corporate capitalist creates value in many of the ways that probably would be familiar to your audience, to lots of people who study business. It's Hamilton-Helmer's seven powers of competitive advantage, right? It's economies of scale, network effects, And process power, cornered resources, or it's Michael Porter, five forces.

• 8:31Speaker 02

  But you know, fundamentally, what is a corporate capitalist trying to do? They're trying to persistently compound their advantages. And the way a corporate capitalist investor makes money, the way Buffett and Munger make money, is they bet that a company will persistently compound longer than you think it will, more intensely than you think it will, and that the value of it doing so is more than you think it is. And when they're right about those things, they make money because you never want to interrupt something that's compounding unnecessarily. But then I got to thinking, as I did this study of all these startups, a startup has none of those powers. A startup starts with nothing.

• 9:11Speaker 02

  And so then you start to say, okay, well, how do startups create value if they're not persistently compounding an advantage? What I came to the conclusion was that a startup creates value by changing the subject. And so a startup wins when it denies the premise of the rules. A startup wins when it refuses to be compared. You know, like a Cybertruck. Nobody looks at a Cybertruck and says, how's that compared to an F-150 after they see it? And nobody, when they got in a Lyft rideshare for the first time, said, oh, yeah, but how's that different from taxis? And so like the startup capitalist wins by changing the subject, by changing the rules entirely.

• 9:56Speaker 02

  And both are valuable. It's valuable for an institution to persistently compound its ability to create value. But every now and then you need to shake things up. Every now and then you need to change the rules and not stagnate. And so what I learned in writing this book, Pattern Breakers, that I've been working on is, unlike the corporate capitalist who leverages these seven powers, the startup capitalist leverages a different set of powers. And the product itself is a reference implementation of the idea, but there are powers beneath the idea that the startup capitalist harnesses.

• 10:37Anthony Pompliano?

  How much of this like changing of the subject or you know, I almost think of it like Judo is kind of using the weight of the incumbent against themselves. How much of it is intentional versus some of these founders and some of them tend to be, you know, quite young stumble upon it. And then in retrospect, you know, as an investor, you can look and say, that's what they did. That's how they were successful. But the founder isn't really intentional upfront.

• 11:00Speaker 02

  Yeah, I would say that that's a very perceptive question and it reminds me a little bit of the difference between science and engineering. And so a lot of inventions, right? Like the steam engine, the steam engine was invented before people really understood the science of thermodynamics. And the Wright brothers flew a Kitty Hawk before people, they had to revise, I think it was Bernoulli's law, you know, to accommodate what the Wright brothers had discovered. And so, you know, there's kind of this, there's kind of this narrative that scientists come down the mountain with an abstract equation or theory, and then the engineer applies it in the real world. But quite often, it's more messy than that. Quite often, it's the tinkerer who discovers something. And then, and then through the process of

• 11:44Speaker 02

  discovery, it feeds back into science, which feeds back into engineering. And so like what I've, what I've learned is that ultimately, a theory is an explanation of how things work. And the person who's following the theory or embodies the theory doesn't necessarily have to know what the theory is to be benefiting from the explanatory aspects of the theory that explain what they did. And so what I'm really trying to do is offer ways to explain why startups win, you know, why do some startups have unbounded upside, even if they seem to do everything wrong, you know, like Twitter guys, they changed who the CEO was all the

• 12:27Speaker 02

  time. They had the fail whale quite often. I can assure you, they were doing no business model canvas kind of stuff, or like reading the latest book on entrepreneurship best practices. But they were massively successful and changed media and changed the future. Whereas there's these other companies that seemingly do everything right. But it turns out that better doesn't matter when it comes to startups. You have to be radically different to have any chance of altering the future. And so then you start to say, okay, well, what are the powers that the founders use to change the subject, to change the future? How do they, how do they avoid the comparison trap entirely?

• 13:06Anthony Pompliano?

  What are those powers? Like you as an investor who's been incredibly successful, how do you evaluate when you're meeting with a founder? Like, are they changing the rules? Are they flipping the script? Are they kind of positioning themselves correctly and doing something radically different? Is it just like a, when you see it, you know it? Or is there some way for you to evaluate it?

• 13:23Speaker 02

  Yeah, I think what I, what I've learned is that the best, the best founders, like, like, it's funny, people like often say that venture capitalists are good at pattern matching. And I, and I kind of reject that, right? I actually think that great founders are great at pattern breaking. And that it's my job as a, as a venture capitalist to identify the pattern breakers. And, and my, my belief is that pattern breaking has two main elements to it, each of which has its own set of powers. The first is just pattern breaking ideas. And pattern breaking ideas, it propose a radically different future that empowers

• 14:04Speaker 02

  people in ways that change how they think, feel and act in the future. You know, Lyft was a pattern breaking idea. You know, Lyft and Uber and ride sharing is a pattern breaking idea. Twitter was, Twitch turned out to be, you know, the cruise robo taxis turned out to be. So that's the first part of it is a pattern breaking idea. We could come to like, what, what defines that in a second. And then the second thing is, it's not enough for your idea to be right. You have to engage in different behaviors. So there's the, the pattern breaking actions that the founders, you know, pattern breaking actions include the willingness to be disagreeable at the right times. It includes the ability to start

• 14:48Speaker 02

  movements that move people to a different future. And so it, it, it's more involved in the aspects of persuasion and storytelling and disagreeing with the right people and attracting the right people over time to your movement. And so those are really the two things, right? Pattern breaking ideas and pattern breaking actions.

• 15:07Anthony Pompliano?

  Now, the ideas, I think, many people will say, hey, somebody had a good idea, you know, maybe I come up with a good idea at some point, but is there activities that you've seen? Are they, you know, actively looking for the idea? Or do they, again, do they just stumble on it? Like, how does somebody maybe generate their own pattern breaking idea if they want to?

• 15:26Speaker 02

  Yeah. So what's interesting is, what I find is often the case is the founder has an idea and they want to know if it's worth pursuing. And so, so I like to say to faders, "Look, I'm not in the idea generation business. That's not my job." But what I can help you do is I can help you stress test your idea. And so, like, in, most people think of failure as not succeeding. Whereas, in my view, the only way to fail in a startup is to lose your time. So, like, you fail in a startup by being two years in, and now realizing that you're doing this out of obligation rather than passion. "I've got employees, I've got investors, I've crossed the Rubicon."

• 16:11Speaker 02

  And so, like, I would rather take a big risk and fail in nine months and know we failed, and get our time back, knowing that that risk was something we took to pursue great upside potential. And so, when I stress test an idea, I ask three fundamental questions. What is the inflection? What is the fundamental insight? And is this idea from the future? And what's interesting is, lots of people have ideas, but if I say, "Okay, great." What inflections does your idea embody? Quite often, right, they'll struggle to answer that question. Or I'll ask, "Okay,

• 16:54Speaker 02

  what is it about your insight that is non-consensus and right about the future?" Quite often, people will struggle answer that question. Or, "Why does your idea come from the future? Why is it from the future rather than you just thought of a startup?" And so, like, I like to say, if you want to have a great startup idea, it's a paradox, but don't try to think of a startup. Because if you think of a startup, if you try to think of a startup, you orient your foundation in the present, and you try to find problems in the present for present people presently unserved.

• 17:30Speaker 02

  And the great ideas are born in the future. The great ideas come from living in the future before the rest of us and observing what's missing in the future and then building what's missing. So I know on the ideas standpoint, I just threw a lot at you, but like, you know, each of them has elements that are probably worth exploring a little bit.

• 17:51Anthony Pompliano?

  Yeah, what's interesting to me, I think, is like this idea of if an idea is from the future, you have to understand kind of where the world is headed, right? It's, you know, the classic, like, if you're different and wrong, you're just wrong. But if you're different and right, then that's where kind of value lies. And so having an understanding of kind of where the world is headed. And if you look at many of the examples that you use in the book, you know, these people, I think, whether intentionally or not, had a, almost like a gut feel or an intuition based on many different data points and facts and information that they had, this is where the world is generally heading. And then they were able to come up with an idea. But it strikes me that you probably would not be able to generate a, you know, kind

• 18:33Anthony Pompliano?

  of pattern breaking idea if you don't have some degree of understanding of like where the world is at least headed, because you've got to figure out what's in that future world.

• 18:41Speaker 02

  I think that's right. And this is where, this is where there's some similarities back to corporate capitalism. So I imagine both of us are kind of Howard Marks fanboys. I read like every one of his memos the minute they come out. And he had a, he had a memo about a year ago, maybe two now, called I Beg to Differ. And it was an extension of some of his prior memos about being non-consensus and right. And he makes a really great meta point about life, which is if you want to outperform, you always have to take a risk of departing from the consensus. You can only be slightly better than average if you do what the consensus does by definition, right?

• 19:23Speaker 02

  There's no coin that have both sides that say win big, win big. If you're willing to go after winning big, you have to be willing to lose. It's axiomatic because if you, if you depart from the consensus, you're either going to be right or wrong. If you're right, you'll outperform. If you're wrong, you'll underperform the consensus. And so it's your willingness to risk failure that enables you to succeed. That's true in any investing. I don't care what it is, right? There's, there's, it's axiomatic that if you're going to outperform the market, you have to depart from the consensus of the market. So what, what was so hard for me for so long was I was like, what does it mean to be non-consensus and right if you're a startup?

• 20:06Speaker 02

  And what I started to realize is that it's not about being a contrarian. When I, when I talk to most founders, they almost feel guilty that they came up with their insights. They're almost like, you know, so like Marc Andreessen, when he came up with the Mosaic browser, he wasn't paying attention to the fact that there was going to be a digital superhighway and that it was going to be created by the government or Time Warner or by Microsoft Network or AOL's Wal, Wal, Walgarden. You know, Andreessen is just a minimum wage student at the University of Illinois in a supercomputer lab and he's tinkering with the initial technologies of the internet. And he's trying to make the internet immediately more useful to him.

• 20:49Speaker 02

  And so like he was building what was missing in the future. And because he was tinkering directly with the technologies of the future, he experienced firsthand the empowering capabilities of the inflections that made up the internet. And this is how entrepreneurs get insights. They're tinkering with technologies and by experiencing firsthand their empowering conditions and their limitations, the entrepreneur escapes the traditional patterns of thinking, feeling and acting that characterize most people and they start to engage in new patterns of thinking, feeling and acting. And by building the stuff that's missing all around them, by figuring out what's wrong with what's new, that's how they come up with insights.

• 21:34Speaker 02

  And so contrarianism in startups is kind of another form of conformity because you're trying to be contrary to somebody. Most of the great startups don't happen that way. They come from everybody's living in a desert and I just wandered into an oasis. But now it's obvious why the oasis is different, right? Like, I don't have to explain why it's different. I live viscerally why it's different. And so you're just hoping that you're in the right place when you discover what's missing.

• 22:02Anthony Pompliano?

  There's an element of being in the game as well. And I think that if you go back to this idea of like startup capitalism versus corporate capitalism, corporate capitalism has a lot of bureaucracy. It has a lot of kind of like cover your back, you know, make sure you don't get fired. Like, there's a lot of maybe not being so much in the game as much as like, you kind of want to be like around the game, but actually it's dangerous to be in the game because you're the person who could be blamed if something goes wrong. But startup capitalism is almost all about the only people who generate value and kind of are involved are the people in the game. And so you've got to go and tinker with the technology and do these things that maybe other people are too risk averse to actually play with.

• 22:42Speaker 02

  That's right. You know, Steve Blank once said this really well to me when I first started to get to know him. He said that founders are not necessarily smarter than corporate leaders or vice versa, but they have a different risk profile. So like, if you're, if you're a corporate manager, it's a career limiting move to be part of a failed project. And if you're part of a successful breakthrough project, you don't make a billion dollars, right? And so your upside is very different from an entrepreneur's upside. And your downside is different too, because there's a persistent set of things that you've done across your career. You've invested in your career at that company.

• 23:26Speaker 02

  Whereas the founder is like, okay, I guess it didn't work out, but I got my time back. I can pursue something, something else. And so like the startup capitalist thinks of risk not as something to avoid. If they think of risk appropriately, they think of risk as something that you take. A risk can be risky, but still have a high expected value. It could still be worth pursuing. And so the startup capitalist has a different risk profile, which changes their willingness to try new things.

• 23:57Anthony Pompliano?

  I think that makes a lot of sense. Let's switch to pattern breaking actions, right? So somebody's come up with the idea, ideas are not very valuable by themselves. You know, they make you feel good, but people have to then go and act on them and have to actually put this into execution. What have you seen there that really drives those pattern breaking actions?

• 24:18Speaker 02

  Yeah, I'd say that there's really, there's really a couple of, a couple of key thoughts. There's movements, storytelling and disagreeableness. And so like what I've, what I've seen about startups is it is a set of grievances by a minority against the majority. And so a lot of the great startup capitalists that I've studied, their go-to-market strategy is more resembling a social movement than it is a business movement. And so, for example, like if you, if you think of movements, normally you think of there's a leader, they have a grievance with the present, they find a set of people who share their grievance with the

• 25:01Speaker 02

  present and they start moving to a different future together. That's, you know, that was true with Martin Luther King, right? And civil rights, it's been true in a lot of different fields. So what, what a great startup capitalist does at first is they realize, hey, my idea breaks patterns. Most people aren't going to like it. Most people don't like to have their worldview challenged. What I need to do is recognize most people aren't going to like the idea, not waste my time with those people. Instead, find the people who are predisposed to potentially move with me. And it's those early believers that co-create the future with the startup founder. And so usually what a great startup is, is a set of

• 25:46Speaker 02

  early believers following the different future with the founder. And then what was once heresy becomes the conventional wisdom as more and more people start to adopt the new pattern that characterizes the future. But it's, it's, the founder has to do a couple of things. They have to find the set of people who are initially ready to move with them. They have to start a movement. They have to create an us against them narrative that creates a sense of grievance with the status quo. And then they have to make all of the early movers a hero right in their own story of their own life as they move with the startup founder. Like, it's probably good to use an example, like Airbnb did this brilliantly.

• 26:30Speaker 02

  So Airbnb didn't try to compete with hotels. The way, you know, before Airbnb, it was a virtue that a Four Seasons in Paris is similar to Four Seasons in Austin, Texas, or San Francisco, California. Brian Chesky says, well, if you're going to be in Paris, wouldn't you like to live like a Parisian? Or if you're in Austin, wouldn't you like to keep Austin weird and live like an Austiniter, San Franciscan, you know, go get, get a house in Belvidere, you know, in Sausalito or whatever? And so he turns the greatest perceived strength of the Four Seasons into its greatest weakness. And so, uh, great movements do that. You know, great movements say, hey, there, there's a set of assumptions that characterize the present and the status quo.

• 27:15Speaker 02

  I disagree with those assumptions. Uh, there is a better way to think about it in the future. And, and so Brian proposed, live like a local, have experiences that are sort of more artisanal and sort of more millennial correct. He tapped into the natural skepticism of millennials of big companies and branded firms and the man and corporations and all that stuff. And so he created a movement of people who believed what he believed. And then over time, it became a legitimate alternative to hotels and hospitality.

• 27:48Anthony Pompliano?

  And I guess like along those lines, um, it's impossible to kind of plan out every single step that he was going to take. But talking about being in the game and kind of getting the original idea is also as he's in the business, there's this unconventional thinking that is matched with the courage that is willing to do the kind of pattern breaking, you know, action. And so in some weird way, it's like these like little iterations where he probably somewhere along the way, a customer told him or somebody on the team or maybe he even thought like live like a local and getting that feedback from the market is like one piece of it. But then also having the courage to say, you know what, we're going to lean into this. This is the differentiator. We're going to actually make this a branding moment so that we can drive this kind of narrative across our customer

• 28:33Anthony Pompliano?

  base over time.

• 28:35Speaker 02

  So I love this point because this is the other thing I think I learned is that a lot of people think of a startup capitalist is like they ask, okay, is that person like an engineer? Are they a salesperson? Are they a marketing person or whatever? I've come to believe that the best term to describe them is artist. And like, if you think about it, artists do two things. They notice things that other people don't notice. You know, I'll see a blank canvas and Van Gogh saw a starry, starry night or like, you know, somebody will see a block of marble and Michelangelo sees Pieta. But they, but the artist has a special sensitivity towards noticing things that most of us don't have,

• 29:18Speaker 02

  right? Because most of us are just kind of going through our day. So I've noticed like some founders, they'll be talking to a customer, they'll be in their cubicle. And they'll look at a coffee cup on the shelf and be like, what's that logo on that coffee cup? And the customer will say, oh, it's company XYZ. And well, why do you have that coffee cup? Why, why is it interesting to you? And so what I find is that a great founder has artistry in the sense that in a given window of time or conversation with customers.

• 29:51Speaker 02

  The amount of information that they'll notice relative to most people is off the charts. So that's one part, but like the other thing that an artist does is they persuade us to abandon our logic. And so like when you, you know, I don't know about you, but I studied art history. And then after I studied art history, graduated from college, went to Rome, then went to St. Peter's Basilica. I walk in there, there's a Pieta statue sitting right there. And I'd studied this statue. I could have told you why it's famous and what Michelangelo did, how old he was and stuff like that. But I was just transfixed by it. Like it's just like you can't, you can't just have a clinical opinion of that statue.

• 30:35Speaker 02

  When you see it, it just, it affects you in a different way than you expect. And I see the same thing, you know, you go see the Starry Night painting and you, you can, you, you almost can feel the guy's emotion and anxiety and conflict that was in him and his spirituality. And it's like your, your experience of the art is totally different than your experience of studying the art. And so like most people would never succeed at persuading startup employees to join a startup that's going to fail. Or early customers to buy from a startup that's probably going to fail. So a founder has to convince people to do the non-logical early on.

• 31:18Speaker 02

  And they, and the reason that they succeed is that their early believers are animated by belief more than anything else. And so to me, that the artist is a good metaphor here. It's a, the artist thinks differently from other people. They notice things. They, they innovate in original ways, you know, Picasso with Cubism. But then Picasso has to go get people excited about Cubism, right? He has to, he has to create a movement of other artists who say, hey, here's another way to think about art. Here's another way of thinking about expression. And, and so most of the founders that I've met are like breakthrough, uh, people in other fields, scientists, artists. They're, they, they have more of this artistry than most people realize.

• 32:00Anthony Pompliano?

  Let's talk about chaos because I think one of the things I'm taking away from this, and obviously in the book you, you mentioned is,

• 32:08Anthony Pompliano?

  This idea that entrepreneurs, they don't just like survive the chaos, they kind of thrive in it. And when you talk about, you know, a Twitter scenario, you're basically describing like this chaotic environment where they are as far away from like order and planning and like intentionality as possible. And so when you use the juxtaposition of maybe some of the most successful companies didn't do all the things right, they broke the patterns, there was this chaos, and the companies that did everything kind of by the textbook, they weren't successful. Is chaos a necessary ingredient?

• 32:40Speaker 02

  I believe so. And so, and it starts with the idea. So, you know, earlier I talked about inflections. And so, an inflection is a change event that happens external to the startup. So like, with ride sharing, the inflection was the iPhone 4S shipped with a GPS locator in it. Now Lyft didn't invent that, Uber didn't invent that. But what an inflection does is it creates new empowering conditions. So now, for the first time, an application provider could locate somebody

• 33:20Speaker 02

  within a meter with an algorithm, which could have never been done before. So what the first thing that a pattern breaking startup does, whether they knowingly do it or not, is they use inflections to wage asymmetric warfare on the present. So an inflection is not just an improvement curve, it's a turning point. It's a window of time where something can now happen that could have never happened before. And so before, before the iPhone 4S, you could have been right that the future is going to have ride sharing, but it wouldn't have mattered. You couldn't have implemented a product that would have embodied your vision successfully.

• 34:01Speaker 02

  But now, all of a sudden, you could, which kind of leads to the insight. The insight that the Lyft guys had was, oh, that means you could do Airbnb for cars. And so like, the insight does involve creativity, the insight does involve invention, you know, like, like the wheel. For 400 years, it was only mounted horizontally to make pots. Somebody had to figure out you could mount it vertically to move wagons. So that, you know, inflections are all around us all the time. You might not know that the thing that's in your pocket right now has a new set of empowering capabilities that could change the future. So an entrepreneur uses the inflection,

• 34:42Speaker 02

  combines it with an insight to wage asymmetric warfare on the present. And so what they do is rather than by the premise of the current rules, they bend the arc of the present to a different future. And the inflections are their asymmetric weapon to do that. Without inflections, the entrepreneur doesn't have enough power to escape the rules and the patterns of the present. And so it's the inflections that allow them to impose new patterns in a different future.

• 35:12Anthony Pompliano?

  Now, what's funny about this is we've talked a lot about breaking patterns, disrupting the status quo, changing the rules, all things that you and I probably would nerd out about forever. Yeah, it was just fun, right? But I am fond of the saying that, you know, live long enough and you become the man. And the best example being, you know, maybe of Bill Gates, who if people go back, you know, he was the kid in the garage trying to take down the incumbent to now he would be the incumbent that people look at and like, oh, big bad Microsoft is going to come in and, you know, squash the opportunity. And so I know that you've also spent some time thinking about how the pattern breakers, some of them actually do remain pattern breakers.

• 35:57Anthony Pompliano?

  Some become incumbents, but all of them seem to be setting a new set of rules, setting culture, setting kind of society in a certain direction. So talk a little bit more about that.

• 36:08Speaker 02

  Yeah, and so it's interesting. And there's a couple of elements of it that I think are interesting. One is that I learned that most stories that are told about successful startups.

• 36:20Speaker 02

  Are lies. And the reason is that when you think about it, the company goes from being an upstart rebel renegade to being now trying to be a respectable mainstream brand. And in order to appeal to the mainstream, the startup tells a different narrative of what really happened. And so they, they end up watering down the origin story of how it really happened. And that is in the, it's in the incentives of the founders and the management team to do that. The other observation is that a startup is not a company. It's a temporary organization trying to someday become a company. The startup capitalist

• 37:03Speaker 02

  is creating value by changing the subject and progressing it that way. But eventually it does become a company. So like when Steve Jobs ran Apple, the iPhone was a pattern breaking product, whereas the Mac was a pattern matching product, right? It was a compounding business that they had. You know, when Jeff Bezos ran Amazon, the bookstore and the e-commerce line of business was the pattern matching persistent compounding part of the business. AWS was the pattern breaking line of business. And so I think that the great CEOs of the modern era understand that their job is to be the value creation officer

• 37:44Speaker 02

  in chief, and that some initiatives need to embody pattern breaking and some initiatives need to involve pattern matching. There, there, there are some things that you don't want to break the pattern, like it's awesome, and it's generating tons of profit and keep going. You know, Google search is kind of that way, right? You know, you want, if you're Google search, you don't want to interrupt that compounding train if you can avoid it. But you still have to find some way to have the pattern breaking initiatives as well to, to, you know, be vital in the future. And so some companies have managed to do both. But the companies that have managed to do both have had a tendency to organize in such a way that they, they keep those organizations separate and they keep the

• 38:28Speaker 02

  goals separate and they have a different risk profile and they have a different leadership style and all those types of things.

• 38:36Anthony Pompliano?

  How much of from the investor seat can you go hunting for opportunities versus you have to put yourself in a position to meet the right people who have the pattern breaking ideas? And, and you know, they're going to figure it out. And it is somewhat of a, you mentioned earlier, like you're not in the idea generation business, but part of your business is to understand where the world is moving over time. And so how much can be kind of offensively going and seeking out people working on a certain thing versus it's more so sitting back and trying to put yourself in a position to meet these people?

• 39:09Speaker 02

  It's been, it's been more offensive in recent years. You know, the seed got to be such a crowded, busy, noisy landscape. And so what I, what I started to realize is that if you wait for the entrepreneur to have figured it out, quite often they're pitching you and 20 of the usual suspects and you got two days to decide whether you want to get in trouble with this person for 10 years. And, and you know, like, I like to invest in people I would enjoy getting in trouble with because it happens every time. And so, so, so what I started to do is I started to use these frameworks to say to founders, hey, look, don't talk to me when you have the idea figured out. I want to give you

• 39:51Speaker 02

  frameworks to stress test your ideas and you decide, it's up to you, it's your company, your startup. But like, I, by the time they figure their idea out, I don't want them to feel the need to pitch anybody. I want to say, hey, look, you know, do we want to work together? We've, we've spent some time, you know, does it make sense? Do we like how each other thinks about stuff? So one recent company I've worked with is Applied Intuition, who's had a pretty good run lately. And I'd spent 14 months with Castor Unis before there was a startup to fund. And so like, I like that model a lot better. Because

• 40:32Speaker 02

  How can I go to startups and say, you need to be different, not better? And then say, I'm one of 2,000 seed funds. It's just totally hypocritical. And so I have to force a choice. I tell startups, if everybody's selling apples, don't be a better apple, be the first banana. I have to do the same as investor. I have to, I have to cause the founder to say, okay, I'm getting a different value proposition with this guy than the 2,000 other people. Otherwise, I'm just going to perform slightly better than the average on a good day. And so, so I have to find a way to do that.

• 41:07Anthony Pompliano?

  Now, one of the interesting parts of this is Howard Marks. He probably would say his incredible track record over time is because he performed just slightly better than average for 30 years. And when people took immense amount of risk, sometimes they were the best performer, other times they were the worst performer. Venture capital is a little bit different. Like, there is this power law to it. And so, how do you kind of balance this idea of like, the Howard Marks and kind of more like corporate capitalism and what it takes to invest there with the power law and the ability or the need really to go after these massive home run opportunities, which caused the, you know, very differentiated outcomes of either amazing returns or not so hot returns?

• 41:51Speaker 02

  Yeah, so, you know, for better or worse, like, I'm kind of a train spotter when it comes to startups, right? So, you know, there's these old British guys in anorak coats who write in journals about comings and goings of trains. Everybody's like, how could you possibly be so interested in something so esoteric? I'm that way with startups. So I have a list of all the startups I've found in the last 30 years, where you would have made more than 100x on the first check. And I study them and I get like the pitch that you would have had to decide in the seed round. And I figure out who was on the founding team at that time, what was known at that time? When did they achieve product market fit? Was it before or after all those things?

• 42:34Speaker 02

  Why do I do this? Well, I need to understand what performance looks like, right? So you're right, like Howard Marks has a great understanding that is ground in data and reality about what causes performance in his market. Buffett Munger did as well, right? Here's what I've learned about startups, and this is just the facts. This is just studying great funds. And so I talked to all the LPs. I've said, show me every 10x or better fund. And it turns out that the loss ratio, you know, break even or lose money is about the same between a 10x fund and a 3x fund. Basically, you regret the decision 85% of the time.

• 43:18Speaker 02

  So the question is, what is the magnitude of how right you are when you're right? That's what matters. And so like you can't afford to make startup investments where you can't make 20x or 100x on your first check. Like if there is no scenario where that can happen, you're not going to get paid for the risk you take when you invest startups. And so, you know, it's a high risk, high reward, high expected value business. But but it's it's your willingness to fail 85% of the time that gives you the opportunity to succeed massively in the cases that you do. And that and that's the counterintuitive thing that most people don't get. Like, pattern breaking is a rare event. It doesn't happen very often.

• 44:02Speaker 02

  And so in the case that the startup succeeds, it has to break the pattern enough that you get paid for it.

• 44:09Anthony Pompliano?

  And how do you know that there is a potential 100x? Is it just the magnitude of the opportunity or something else?

• 44:17Speaker 02

  Yeah, I think that the only way that you can have a sense of it is if you say, I think that this inflection is powerful. You know, I can look at it with my own eyes and see how it would empower people and who would empower and why it could change the future. I think that they have a fundamental insight that's not obvious. I think that their idea comes from the future. So I call it future founder fit. You know, I think this is the right person in the world to do this idea, given the future that they were in. And then I believe that this founding team has the stuff to move people to that different future of their design. And if I believe those things are true.

• 44:58Speaker 02

  I'll take the bet, even if there's an 80% chance that the idea itself will change. Because if your insight is correct, you still have a first mover advantage into the future. And so like, even if the instantiation of your product is off target, you could still iterate who the customer is, you could still iterate what the implementation is. If the insight is still valid, you still have all those empowering capabilities to change the future. Whereas if you disprove the insight, I think you're done. I don't think you have a startup anymore. You have, you have no reason to exist now. You have no ability to break any patterns. And so, but, but that's what I really look for. And I like to make fun of people who want too much certainty about what the product is,

• 45:42Speaker 02

  or how they're going to go to market, or how it's going to work, because it's, it's the potential energy of those inflections and the insights that leads to the future mechanical energy of that pattern breaking breakthrough. And the more obvious the dots are and how they forward connect, the more likely it is that the idea is within the consensus rather than non-consensus. And so you want something that's non-consensus, but powerful. And only in the future are you going to really discover if you were right, or if you find a path to being right. That's, that's the paradox that is also similar to Howard Marks. When you're non-consensus and right, you can't know that you're right categorically at first. You can only know that you're non-consensus.

• 46:25Speaker 02

  But you have to be willing to be wrong to pursue the opportunity to be right, if you're going to be non-consensus and right.

• 46:33Anthony Pompliano?

  I literally could talk to you, I think, forever about this stuff. I don't know if I'm a train watcher, but I'm pretty close. I'll try to be as diligent as you. Maybe tell everyone about the book and, you know, they read the book, what will they get out of the book? And, you know, why'd you write it?

• 46:53Speaker 02

  Yeah. So the main, the main reason I wrote it was I felt like,

• 47:00Speaker 02

  Founders, founders weren't getting the straight scoop about what ideas are worth pursuing. And so like, like these founders, like for better or worse, I love them, right? I just care about them as people, you know, I go to their weddings, I see them suffer. I see them suffer even when they win because the world says they cheated or that they're bad guys or whatever. And so I thought, okay, um, I wanted to write something that gave them better weapons than they'd had before, uh, that, that helped them, uh, fight an unfair

• 47:39Speaker 02

  fight on their terms. Uh, and you don't win in the startup game by executing better. Executing is important. You want to avoid non-forced errors, all that stuff, but like, you've got to pursue things that are worthy of your time and talent in the first place. And knowing the difference, like there are a lot of ideas where you'll tell other people, and they're plausibly good sounding ideas that are in fact, bad ideas because they don't have breakthrough potential and you get stuck in, you get stuck in the slog. So I want to help founders avoid the slog. The other thing I wanted to do is help founders protect ideas that sound stupid at first, but might be worth pursuing, you know, things

• 48:19Speaker 02

  like Justin TV, things like Airbed and Breakfast, uh, things like TW TTR that people will reflexively make fun of or dislike. And like, how can you know that, hey, wait, hold on a second here. Let, let's pursue it just a little bit more. Let's try to understand a little bit better. So the book is primarily for founders. Um, but I would say that it's also for anyone who's interested in understanding startup capitalism and how it's different from corporate capitalism and how, how value gets created by startup founders and, and why that's different and important from how value gets created by corporate managers or Fortune 500 CEOs.

• 49:03Anthony Pompliano?

  The book is fantastic, so I highly suggest everyone go and check it out. It's available on Amazon, everywhere else books are sold. So Mike, I appreciate you very much for doing this. I always learn something when we talk, which is a pleasure for me. I feel so selfish in asking so many questions, but we'll definitely do it again in the future as well.

• 49:22Speaker 02

  Yeah, thanks for having me. It's great to see you.