Mike Maples: Three Frameworks to Evaluate Startups and Founders | E1242

In a lively conversation, Mike Maples discusses the strategic nuances of seed investing, emphasizing the importance of playing offense with money and finding market inefficiencies. He highlights the need for a fund's size to align with its strategy, noting that successful seed investments require a clear insight about the future and the ability to make 100x returns on initial checks. Maples reflects on past investment successes and failures, underscoring the importance of founder-market fit and the challenges of maintaining focus amidst large capital influxes. He also shares insights on the cyclical nature of exits and the evolving dynamics in venture capital.

• The importance of being compensated for the risks taken in investments and consistently playing offense with one's money.
• The necessity of finding inefficiencies in the investment game to justify participation.
• The relationship between fund size and strategy, emphasizing that fund size dictates the approach and expected returns.

"In all investing, there's two: one is you got to get paid for the risk you take, and the other is always play offense with your money."

• Highlights the dual focus on risk assessment and proactive financial management.

"Your fund size is your strategy... the power law is real."

• Emphasizes how fund size determines strategic decisions and outcomes due to the power law in investments.

• Discussion on the feasibility of seed funds under $100 million, suggesting smaller funds can work with strategic investments.
• The role of well-known investors and their influence on investment rounds.
• The significance of fund size aligning with investment strategy to optimize returns.

"I think that you can do investments of less than 100K... that's a fund size of probably $10 million."

• Suggests that smaller investments can be effective with a smaller fund size, emphasizing strategic alignment.

"To me, your fund size is your strategy."

• Stresses the importance of aligning fund size with strategic goals to ensure successful investment outcomes.

• The debate on the value of follow-on investments and the importance of asymmetric information in decision-making.
• The role of dedicated partners to manage follow-on investments and their accountability for returns.
• The concept of playing offense with money, especially with high-potential companies.

"The high order bit to me in all investing, there's two right: one is you got to get paid for the risk you take, and the other is always play offense with your money."

• Reinforces the need for strategic risk management and proactive investment strategies.

"Iris is accountable for that 30%... and I can't strong-arm her into trying to protect some investment that's not working."

• Highlights the importance of accountability and objective decision-making in managing follow-on investments.

• The necessity of finding market inefficiencies to succeed as a seed investor.
• The challenge of operating in an efficient market and the importance of identifying unique opportunities.
• The historical context of venture returns and the unchanged physics of a successful fund.

"To the extent that seed investing is an efficient market, it's not going to be a good business."

• Emphasizes the need for identifying inefficiencies to succeed in seed investing.

"The physics of what a good fund looks like has not changed."

• Suggests that fundamental principles of successful venture investing remain consistent over time.

• The use of outcome scenario planning to evaluate potential investment returns.
• The importance of planning for significant returns on initial checks to achieve fund success.
• The role of valuation and price in determining potential investment outcomes.

"For this to make 100x on the first check, what would have to be true?"

• Illustrates the approach of evaluating investments based on potential high returns.

"I need to make 100x on my first check... I'm not going to get that by acting like an efficient market operator."

• Highlights the focus on achieving substantial returns and avoiding efficient market behavior.

• The role of partners in investment decisions and the importance of collective judgment.
• The impact of partner dynamics on fund performance and strategic alignment.
• The importance of having partners to share responsibilities and blame in decision-making.

"That's why you have partners; they're like children, you just blame them."

• Humorously underscores the importance of partners in sharing responsibility for investment outcomes.

"If I'm going to raise $150 million, I need to know I can make 100x on my first check."

• Emphasizes the critical focus on ensuring substantial returns to justify fund size and strategy.

• The speaker discusses the importance of having a clear investment strategy and being honest about the game being played. They emphasize the need for integrity in investment decisions.
• The investment landscape has become more competitive, but the speaker believes they have become smarter and more discerning in their approach.
• A "temperament advantage" is highlighted as crucial in today's market, allowing investors to avoid unnecessary risks and wait for the right opportunities.

"I think today having a temperament advantage makes a big difference."

• A temperament advantage involves patience and the ability to resist pressure to invest in overvalued projects.

"Investing is like a game where there's no called strikes, and so you just let pitch over pitch go by."

• The speaker references Warren Buffett's philosophy on patience in investing, emphasizing the importance of waiting for the right opportunity.

• The concept of a "circle of competence" is crucial, where investors focus on areas they understand and have historically succeeded in.
• Systematic overpricing leads to fewer deals, while underpricing presents more opportunities.

"If you know what your circle of competence is, if everything's systematically overpriced, you do fewer deals."

• Understanding one's circle of competence helps in making informed decisions about which deals to pursue.

• The speaker discusses the excitement around AI and technology investments, highlighting the need to find inefficiencies and opportunities in the market.
• They emphasize the importance of having specific conditions for AI investments to avoid overpaying.

"You have to play the game that's on the field, but you don't have to play the way everybody else plays."

• Investors should seek unique opportunities and not follow the crowd blindly, especially in high-excitement sectors like AI.

• The discussion includes the approach to pricing and deal structures, such as buying common versus preferred shares and negotiating convertible notes.
• The speaker shares insights on working with founders to achieve mutually beneficial pricing arrangements.

"Maybe we can get some type of a blended price if I buy preferred plus common."

• Negotiating deal structures can lead to better alignment with founders and potentially more favorable investment outcomes.

• The speaker addresses the timing of selling investments, considering market conditions and the potential for further growth.
• They discuss the importance of exit price inefficiency and strategic selling to maximize returns.

"There's two ways to make money: one is on entry pricing inefficiency, but the other is to arbitrage exit price inefficiency."

• Recognizing when the market values a company as if it will execute perfectly for years can signal a good time to sell.

• Strategies for managing fund economics include planning for liquidity events that significantly impact fund returns.
• The speaker emphasizes the importance of aligning with founders and strategic investors during liquidity events.

"It's an event that has the same impact on fund economics as an IPO."

• Planning for significant liquidity events can help seed funds maximize their returns and manage fund performance effectively.

• The psychological impact of being "in the money" is discussed, highlighting the balance between risk and potential further gains.
• The speaker acknowledges that being in the money can change an investor's psychology, but emphasizes the need for grounded decision-making.

"Once you're in the money and it's like you've still got that upside."

• Being in the money can influence decision-making, but maintaining a focus on risk-adjusted returns is crucial.

• The speaker reflects on past investments, noting the rarity of "100 Baggers" and the importance of tracking successful investments.
• They discuss the need for structured selling strategies and learning from past mistakes to improve future investment decisions.

"100 Baggers are pretty rare. I keep track of them."

• Tracking and analyzing past successful investments can provide valuable insights for future investment strategies.

• The speaker advocates for a case-by-case approach to selling investments, rather than following a rigid structure.
• They emphasize the importance of having a sober, fact-based opinion and being prepared to act when conditions align with predetermined criteria.

"Most of my mistakes have been in our early funds."

• Learning from past experiences and maintaining flexibility in selling strategies can lead to better investment outcomes.

• The speaker reflects on missed investment opportunities, highlighting failures not due to sober decision-making but rather a lack of imagination.
• Specific missed opportunities mentioned include Airbnb and Datadog, emphasizing the unconventional nature of these ideas at the time.

"Our biggest failures have been failures of imagination, you know, it's like when I passed on Airbnb."

• The quote illustrates the importance of imagination in recognizing the potential of unconventional ideas.

• The speaker outlines several frameworks used to evaluate potential investments: Insight, Inflection, and Founder Future Fit.
• Insight refers to whether the startup has a unique understanding or perspective.
• Inflection involves leveraging external technological or market shifts.
• Founder Future Fit assesses if the founder is well-suited to realize the startup's vision.

"One of our Frameworks is did they have an Insight, one of our Frameworks is did it harness an inflection, one framework is founder future fit."

• This quote provides a concise summary of the frameworks used to evaluate startups, highlighting the importance of insight, inflection, and founder suitability.

• Founder Future Fit is a key indicator of a startup's potential success, based on the founder's alignment with the future they are building.
• The concept is inspired by William Gibson's idea that the future is unevenly distributed, and successful founders are those who are already living in that future.
• Examples include Eric Yuan of Zoom, whose deep experience in video conferencing positioned him well to capitalize on the inflection point of remote communication.

"Great startup ideas don't come from trying to think of a startup; they come from a Founder who's living in the future."

• The quote underscores the importance of founders being deeply immersed in the future they aim to create, which enhances their ability to innovate effectively.

• Identifying a founder's unique insight is challenging, as many struggle to articulate their vision effectively.
• The speaker emphasizes the importance of understanding how a founder perceives the world differently from others.

"I always ask what's your inside development, how do you see the world in a way that's different to other people seeing it."

• This quote highlights the critical role of unique insights in evaluating a startup's potential and the difficulty in discerning these insights when founders cannot articulate them clearly.

• Product-Market Fit (PMF) is crucial for a startup's success; without it, long-term success is unlikely.
• The speaker notes that achieving PMF involves continuous adaptation and evolution, not just a one-time milestone.
• Startups should focus on achieving PMF before scaling, as premature scaling can lead to inefficiencies and cultural issues.

"I've never worked with a company that got product Market fit that wasn't wildly successful."

• This quote emphasizes the centrality of achieving product-market fit as a determinant of a startup's success.

• Large investments can lead to inefficiencies and distractions if a startup lacks product-market fit.
• The influx of capital often results in pursuing multiple initiatives that dilute focus and hinder achieving PMF.

"When you drop a 100 million into a company suddenly they do 10 other things."

• The quote illustrates the potential negative consequences of large investments on a startup's focus and effectiveness.

• The speaker discusses the concept of the 'messy middle,' where startups either break out or fail.
• Sustainable growth requires maintaining focus on core objectives and avoiding the allure of diversifying too quickly.

"Product Market fit isn't everything; it's the only thing."

• The quote underscores the importance of maintaining focus on achieving and sustaining product-market fit as the primary goal.

• An anecdote about Co-Tweet illustrates how unexpected factors can lead to success, even when initial prospects seem dim.
• The acquisition by ExactTarget and subsequent events resulted in a significant return on investment, despite initial doubts.

"We end up making 23 times our money; it was like a forward fumble."

• The quote highlights the unpredictability of startup success and the potential for unexpected positive outcomes.

• SpaceX is identified as the company of the year due to its significant advancements in space technology and its potential to become the most valuable company globally.
• The speaker acknowledges the power concentrated in SpaceX and its founder, Elon Musk, while focusing on the company's achievements.

"If you're the most important dominant company in outer space, that's a big deal."

• The quote emphasizes the strategic importance of SpaceX's position in the space industry and its potential global impact.

• SpaceX is recognized for its significant impact and dominance in the aerospace industry, especially in providing broadband and launching various payloads into space.
• The company's role as a platform supplier for outer space is highlighted as impressive and influential.

"Their ability to just provide Broadband arbitrarily anywhere in the world... SpaceX becomes a platform dominant supplier for outer space and I think that's pretty impressive."

• This quote emphasizes SpaceX's capability to offer global broadband services and its potential to be a leading platform supplier in the aerospace sector.

• 20 VC is acknowledged for its impressive $400 million fundraise, particularly notable given the European context.
• The accomplishment is described as legendary, reflecting the significant responsibility and achievement involved.

"I'm gonna go with 20 VC... $400 million fundraise... in Europe, I mean that's something you should be proud of."

• This quote highlights the remarkable achievement of raising a substantial fund in Europe, marking it as a noteworthy accomplishment in the venture capital space.

• Elon Musk is named Founder of the Year, while Charlie Munger is recognized as Investor of the Year.
• Charlie Munger's influence, along with Howard Marks, is noted for shaping investment philosophies.

"Founder of the Year Elon... investor of the year... it's Charlie Munger... Charlie Munger and Howard Marks have influenced my view of how to be a good all-around investor more than anybody."

• This quote acknowledges the significant influence of Charlie Munger and Howard Marks on investment strategies and recognizes Elon Musk's contributions as a founder.

• Bitcoin is predicted to become more valuable than gold, with potential for a financial ecosystem to develop around it.
• The discussion includes a speculative price prediction for Bitcoin by the end of 2025.

"Bitcoin becomes more valuable than gold... there's an entire Financial ecosystem and rails around it."

• The quote suggests a future where Bitcoin gains significant value and an ecosystem develops, indicating substantial growth potential in cryptocurrency.

• The need for accountability in government spending and business operations is emphasized, with examples of inefficient government entities receiving more funding.
• The importance of setting goals and measuring success to allocate resources effectively is discussed.

"You'll have a government entity that has a bunch of money that produces terrible results... if the entity achieves the goal it gets more money and if it doesn't achieve the goal gets less money."

• This quote underscores the necessity for accountability and goal-oriented resource allocation in both government and business sectors.

• The cyclical nature of exits in venture capital is discussed, with insights on how to capitalize on constrained liquidity windows.
• The challenges of raising large funds based on past exit conditions are highlighted.

"Exits are cyclical too... every 15 years or so you get this window of about 18 months to two years... if you want to do really well the secret is to have a bunch of very good companies in flight when that happens."

• This quote explains the cyclical nature of venture capital exits and the strategy of timing investments to maximize returns during favorable market conditions.

• The purpose of seed rounds is to test insights about the future with minimal capital, focusing on proving a non-consensus insight.
• The importance of constraints in early-stage startups to understand business fundamentals is emphasized.

"The purpose of a seed round is you have an insight about the future and you have a massive risk that you're hoping to take out."

• This quote highlights the strategic use of seed rounds to validate innovative insights and reduce risk in the early stages of a startup.

• The philosophical contributions of Christianity, such as the concept of forward-moving time, human rights, and unconditional love, are explored.
• The distinction between boundaries and conditions in relationships is discussed.

"More people should pay attention to the core tenants of Christianity... the idea of unconditional love which is a little bit harder to explain in a sound bite."

• This quote emphasizes the philosophical aspects of Christianity that contribute to societal values and personal relationships.

• The importance of doing one's best and recognizing individual comparative advantages is a lesson learned from family.
• The desire to incorporate more outdoor activities and sports into family life is expressed.

"What I learned from my dad is that you as a person have intrinsic motivation... do your best because there's only one you."

• This quote reflects the personal philosophy of striving for individual excellence and recognizing unique strengths, as influenced by family teachings.