What we've come to realize is that a startup isn't really a company at all a start-up is a set of founders with hopefully a set of proprietary insights that are a result of them living in the future.
Hello and welcome. I'm Shane parish and you're listening to the knowledge project a podcast dedicated to mastering the best of what other people have already figured out. I'm going to help you better understand yourself and the World Around You by exploring the ideas methods mental models and hard-fought lessons learned from some of the most incredible people in the world. The knowledge project is part of furnham Street a website dedicated to helping you think better and live better.
Burnham Street puts together a free Weekly Newsletter called brain food our team scours the internet for the most mind expanding books articles and resources so you can spend less time searching and more time learning discover what you're missing. @f s dot blog today. I'm talking with Mike Maples Junior like is a partner at the Venture Capital firm Floodgate and this conversation is all about mental models. Mike's developed a series of mental models for evaluating opportunities, and he's going to pull back the curtain and show us
The mental models that he uses to find the risks worth taken you're going to love this conversation. It's time to listen and learn.
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Mike so happy to have you on the show.
Yeah. Well, thanks Shane. Thanks for having me. I'm a big fan of the
podcast. Can you describe what your typical day looks like as a VC?
Well, it's funny the typical day when I'm winning is I get to meet with the folks and the opportunities that I'm excited about and the days were I'm doing not so well as where I'm just reacting to crazy and bound and you know, you kind of learn over time that you gotta you gotta be.
The best you can at spending time with the folks that you think are living in the future and are going to make a difference in bringing it forward for us all so most of my day is spent trying to spend time with people who are living in the future
when you're being reactive. What are some examples of the things that come in. Oh friend from
high school says, I have a buddy who started a company and can you meet with them? I think you're going to think it's amazing family friend says, hey, can you can you connect me to Mike jr.
I'd like to pitch his startup lawyer buddy will send me something from his client. We meet with this startup. I think it's really exciting. And so it you have people that you've known through your whole life that you respect and you value the relationship, but they don't always necessarily have a grounding in the types of startups that you're looking for. And so those are tricky.
Yeah, how do you say no in those cases and maintain that relationship? It's hard,
right and I
Only two nice about it. I probably say yes too often and you know in the end you'll have so many hours of the day and you got it. You got to decide how you want to spend it who you want to spend it with and and I also think it's good to just have some Serendipity and not be too dogmatic about who you're going to meet who you're not going to meet and so you just you just try as hard as you can to meet with as many people as you can that the other hard part about it is the more people that you meet with the more follow-ups you have. This is always been hard.
Me you you want to help everybody you want to make intros for everybody. And and if you take more meetings, you're going to have to do more of those and you have it's more likely you can't get it all done.
One of the things that we had chatted about on the phone that I really liked about floodgates approach was the concept of mental models that you guys have developed and we're going to we're going to dive into those during this conversation. But can you give me an idea of how you landed on the idea of metal? What is a mental model and how did you land on this idea?
Well without flattering the interview host too much. I have been a big reader of Farnam Street for a while and have liked a lot of your podcast episode some friends with Nepal and just got into the notion of mental models and then I went down the rabbit hole and I read books about by Charlie Munger. Yeah. I read this book that I'm sure you've heard of thinking fast and slow by Common and so I got I got interested in the following question. There seemed to be a lot of mental.
For investing or operating companies, but they didn't seem to apply to startups. So I looked at companies that we should have invested in like Airbnb and we passed on it and none of those mental models would have been helpful. And that's a problem because at I invested $250,000 in European be at the time it now be worth a billion dollars and then there's other companies that we did decide to invest in Twitter or twitch.
OCTA lift will OCTA was called stasher Twitter. Didn't know it's called self twitch was just in dot TV and so lift was zimride. And so I started to realize that we didn't really have mental models for startups. And so I got really interested in the question of how would you come up with mental models for startups or is it just purely random? And so I spent a couple three years trying to dig into that question. It's
kind of like when you're in your
In these investment choices, are you actually investing in a company like is a start up a
company? Well, I think that's a really insightful question because I've concluded that one of the fundamental insights is that it's not and so when you think about a company a company has a brand they have products they have Supply chains. They have or value chains if it's a software company, but they have resources processes and values and capabilities that give them a market position.
A startup has none of those things. And so what we've come to realize is that a start-up isn't really a company at all. A start-up is a set of founders with hopefully a set of proprietary insights that are a result of them living in the future. And so, you know, what a startup has to do to become a company some day is they have to achieve three or four crucial breakthroughs one is they have to have a breakthrough?
Site, and then they have to have a breakthrough value proposition and then they have to have a breakthrough killer predictable growth strategy and all of those things require capabilities that don't really exist in normal companies in terms of the team and how they operate and what success looks
like. Can you walk me through those miracles in a little bit more detail? Like what is the inside? What does that mean?
Sometimes people will ask me.
How do you get a good startup idea and the counter intuitive answer to that question is don't try to think of a start-up and people are like what are you talking about? That's that's a crazy answer. Well, it turns out that most of the great startups come from a great insight and a great Insight usually occurs when someone is living in the future and they notice something that's missing. So if you take somebody like Marc Andreessen, he didn't try to think of a story.
He was in a computer lab at the University of Illinois and they were trying to experiment with the internet and share notes and documents a collaborate and the internet wasn't useful to him. And so he built Mosaic both the browser and the web server to make the internet immediately more useful for him. And so insights are kind of a play on William Gibson's quote. He wrote a bunch of sci-fi cyberpunk novels the the
Future is already here. It's just not evenly distributed. And what what you find is that most of the really great startups are people who are living in the future and they noticed something that's missing and then their job, it's almost like if the metaphor of customer development is experimenting which we'll get to write the metaphor of insights are the time traveler and somebody's living in the future and they notice something important and then their jobs come back to the present.
and bring early True Believers with them into the future and eventually accelerates to a whole lot of people so, you know insights are the Bedrock of a great startup and the failure mode and insight development is to live in the present and to look for Market white space because if you're if you're looking for gaps in today's markets chances are lots of people have tried that and if you're looking for gaps in today's market, you're not realizing that
Sometimes the Insight defines the market and that you know markets in startups aren't about mapping the territory or geography markets with startups or about finding something valuable about the future and then starting a movement of people who believe what you believe until everybody believes
how important is the team with the idea like when you're evaluating these opportunities you could have this most like execution.
Sounds like it's sort of multiplicative by zero right? If you have a great idea and you can't execute it. You're just it's not going to go
anywhere. That's right. So the you know, the Insight is a necessary prerequisite because it really contains the potential energy of the idea. Right and if you want to have you I have it in sight. That's so powerful that if you're right you change the rules in markets and you create this massive movement with massive asymmetric upside but to your point you also have a team and
And teams are different in startups than they are from companies because I like to say that in a company. It's more like a marching band people need their sheet music and they needed a dance in formation and play their instruments. In exact terms. Whereas I don't know if you've ever been to New Orleans and seen improv Jazz, but it's you know with improv Jazz you have a tune but you're kind of going in a direction and usually the lead performer.
To do a riff and goes in a different direction the rest of the band just kind of goes with them. And so that that tune is never going to play it exactly that same way ever again and and startups are a lot like that there these close-knit teams of people who enjoy the craziness of the ambiguity and they they enjoy improvising and they understand that startups are ambiguous and that you're you're trying to improvise your way to success rather than you know have
Objectives and key results and a lot of the basic management Frameworks that larger company needs
and then a so you have an Insight you have a team that are working towards this inside. And then the next thing you have to do is the value how do you test the value proposition like just because you have an idea and you have a you decent team doesn't mean that people are going to pay for it.
That's right. So once you have a non-consensus and right insight and you have a team of people who have the stuff then then you go into this mode.
Of the value phase or what. I sometimes call Value hacking and what you're trying to do in value hacking is
figure out what you can build that is unique that people are desperate for and if your Insight is truly powerful, it will connect with somebody desperate because you'll be solving problem in a novel way that's never been solved that way before and that's an order of magnitude noticeably better for those people. And so the trick is value hacking is to say okay in the Insight phase. I posed a truth.
On the value hacking phase. I need to discover the truth. I need to validate that it's that my idea was true. And the way that I do that is I find the people out there who believe what I believe and who are desperate for the product that I'm going to deliver. And then and only then do you start to you know, only when you've proven your value hypothesis, do you start to test your growth hypothesis?
That's really interesting. It strikes me from the outside looking in and please correct me if I'm wrong that a lot.
Lot of startups focus on growth over
values and I yeah, I call it fake
growth. Is that what happens when you're acquiring customers with you know, this unlimited sort of VC money that's coming in without sort of training a prophet. Like how do we think how should we think through this at this point in time?
Yeah. So the way I see it is that the value phase or value hacking is really about seeking the truth rather than selling and so if the truth of
Value proposition is super compelling then growth becomes the exercise of syndicating the truth. And if the truth of your value proposition is not present you have to grow by throwing money at the problem growth. You have to spend money on marketing programs and you have to persuade people to buy rather than teach people to buy and so value hacking is this phase where you get this scar tissue and muscle memory, but it's incredibly valuable.
Isabel because now all of a sudden, you know how to deliver value in a way that nobody else knows and so what what happens in too many startups is and I think venture capitalist or at least is guilty of this as anybody is they go read on a Blog somewhere that says if I want to raise money in the future, I have to do two hundred thousand dollars of Revenue month and so pretty soon. They're trying to get their trying to grow their revenue 15 percent a month. Well, that's just artificial numbers in a spreadsheet.
What what people need to think about is how do I have a value proposition? That is awesome that is resulting in customers literally pulling product out of me desperately and then I could start to think about growth because I've a value proposition. That's true. And now I only have to teach people to buy rather than to persuade people to buy but you would have a value proposition that is so strong that the customers in your target audience would be irrational not to buy.
If they knew the truth, and then your then you scale in terms of the markets Readiness to adopt Your solution, you know kind of a long the technology adoption curve.
What are the odds that somebody can lead through all four of these different phases. So it sounds like there's different skills involved in sort of inside versus running a team versus discovering the value proposition and then growing it.
First of all, this is why 10 companies
Out of 10,000 every year create 95% of the value in the startup business. It's just incredibly rare to have a combination of an awesome Insight an incredible startup team. That's like a jazz band with a composer running it who could persuade the world to join their movement and then create a value proposition that super compelling and then switch gears yet again into predictable growth and start to convert from 0 to 1 to 1/2 x
s mode and so over time the jazz band starts to morph into being a marching band and the founding team and the particular the leader has to be willing to upgrade the skills of the team as value gets created differently through time. And and you know, that's why people like Bill Gates and Mark Zuckerberg are so rare is that they they were learn at all's who at every phase of the company were able to shift gears and focus on how value had to get created at that particular.
The point in
time last time we talked about this I sort of elaborated on this Theory I have which is at no point in time where they the best CEO at that particular point in time, but they are the best most adaptable CEO that can take the company through the the entire
process. Yeah, and it's funny that you mention that because in the we have all these different types of mental models for startups, right and we've alluded to some of them. We have Insight models and team models and value models and growth
Models and one of the one of the team models is you want to have a leader in particular who's a learn at all. And so the thing I think you would have noticed about Mark Zuckerberg or Bill Gates is if you'd met with them once a year, it would have been like you're meeting with a different person and these people just have this ability to just absorb new ideas like a sponge and they're incredibly mentally flexible in their ability to acknowledge when they might be wrong about something.
Or when they don't know how to do something and so there they kind of have this combination of determination, but sort of a lack of ego around what they don't know and sort of a willingness to go fill the gaps and what they know.
How did you come up with the mental
models? I wish I could say it was by being smart, but it was it was as much as by being dumb. So like if you look at what Charlie Munger talks about is great investors, they read a lot.
They're genuinely curious and they try not to repeat avoidable mistakes. And so so I went back in time and I looked at all the companies that we had passed on that we should have invested in Airbnb Pinterest who else paid your duty and a plan. I did a forensic analysis of it. I found the initial intro email and who the source of that intro was. I looked at all the notes. We took I looked at the pitch deck.
At the time we saw it and I even looked at the notes between us and the pass email I sent and then I studied what happened in that round. What price did it get done at what? We're all the future rounds who said? Yes. Why and then I when I get a chance, I actually interview the founder a few years later. And the reason this is so important Shane is that startups are so random that you can literally forget how it happened.
So for example, we invested lift when it was zimride back in 2010 and it would be very easy for us to believe we knew more than we knew at the time. We made that investment same with Twitter same with twitch same with OCTA. And so in the ones that we did say, yes, and it was a big win. We try to not breathe our own fumes too much and we similarly try to go back in time and say what what went right and what it would get right and did we get it right on purpose or by accident the mental models that
Just from understanding what it was that we should have noticed about that startup. So for example, Brian chesky, I should have noticed the notion of an urn secret and with with twilio, I should have understood the why now and with lift we did understand the why now and with twitch we did understand the why now, but it was kind of a combination of where we should have said. Yes in a combination where we did say, yes.
Yes, and then try to understand what questions reveal the answers that would cause you to say yes and and by extension. What should you not pay attention to? So for example, when Airbnb presented to us the presentation didn't work because they had it on the server. They could load it when Lawson it twilio presented to me. It was a clumsy conference call where we could barely connect and even he acknowledges and ink magazine. It was terrible pitch and he realized it was terrible.
Our discussion and it but that he changed it was awesome pitch and then the rest is history. And so what should I think about that? I probably shouldn't criticize his pitch too much because his company's worth over 10 billion dollars. Who's the dummy? I'm the dummy right? Like I have to as an investor. I have to have the humility to say. Well maybe the pitch didn't matter that much. Maybe there's another question. I needed to get to the bottom of rather than evaluate the pitch for what it was.
Was is there a point where you'll trust the team to come up with the inside but skip the inside
usually the questions that I ask now are about teasing out the Insight the capabilities of Founders. Okay, it helps me because I can I can look at a wide variety of markets. So you could imagine we get deals for adtech we get deals for agriculture for cryptocurrency for marketing technology for
Bottoms Up B to be SAS offerings be almost anything you can imagine and it's very difficult to be an expert in all those markets at the same time. But when you ask a Founder questions like okay, why do you think now is the time for this to happen? Why isn't it happened before? Why isn't it going to happen sometime in the future from now? Like why right now is the time a good founder regardless of the market there in will usually have a good answer to that.
It won't be a bunch of gobbledygook. It'll be something clear where you're like man, you know, that guy just changed my point of view on something. And so I find that these mental models are good. It's kind of like the Timothy Geithner Stress Test. No one single metal model tells you whether to invest or not, but it helps you notice things that you might have missed. If all you do is spend time looking at
presentation to the mental models help you get a higher batting average, or do they help you?
Bigger Awards when you're right
the ladder. So this is the other thing that's true about startup investing. So if you look at Buffett and Munger, they're investing in big companies with understandable businesses. And so would you invest that way your mental models are oriented towards avoiding avoidable risk and not you know, they look at risk almost as not knowing what you're doing in our business.
You have to look at risk differently because 10 companies a year are going to produce 95% of the value in the business. And so what you realize is that you're making a bet on a low probability of a huge outcome. And when that's what you're doing what you're really trying to understand is what risks are worth taking and the risks are worth taking in a start-up have less to do with the business for what it is and more to do with the power of the Insight the capability of the team
we here
A lot. I mean just in the news people that are somewhat familiar with investing about what goes on in these pitch meetings. Can you take us behind the scenes a little bit what kinds of questions do you use to hone in on insights Founders? Like can you give us something like just pull back this Veil a little bit here?
Yeah. And so first of all, I should say when it comes to pitching VCS your mileage will vary dramatically.
Right. So VC's very often can't even agree with themselves about what they're looking for week to week. So I am sympathetic to Founders trying to try to figure out right how to do it. But when I'm talking to somebody very early in the discussion I try to ask them just like what motivated you to do this.
Just like tell me what's up with that. Why did you decide to start this and you can learn a lot about whether it's a real insight by why they decided to do this and so answers that I don't love our I think that real estate technology is going to be huge. So I studied real estate technology for nine months and I found this area of white space in the market that may be a valid opportunity, but I'm more skeptical of
those.
Is that because you you went into it looking for something versus you're solving a problem that you're
encountering? Yeah, so it kind of goes back to the Insight notion. So I like to say don't think of a start-up right? So the problem with thinking of a start-up is you immediately put yourself in the present. So one of the examples that I like to use on our on our podcast is fanbase. So sterile area near off tolia who are great entrepreneurs now, they're the founders of next door.
They started this thing called fanbase. It was a social network for sports fans and the Venture people that they pitched it to said. I think this will be the biggest company we've ever funded and when you think about it, the problem with living in the present is your idea is actually sound plausible because you're talking about present issues in the world or present opportunities in the world, but the problem with living in the present is usually the disruptive power of the ideas big enough. So whereas
When you're living in the future and you notice something that's missing, you know, Marc Andreessen notice that you couldn't make the internet useful Todd McKinnon when he was at OCTA understood what was happening in the cloud and understood the problems that the early adopters the cloud were having when you notice problems that people are having when they're living in the future. Your intuition is far more likely to be right because you're you're solving a problem in the future that is going to one day be obvious to more people whereas if
Or solving a problem that's a gap in the present the odds that lots of people have thought similar thoughts and already tried. It is super high.
So you're almost you're getting out of competition to
that's right. And so, you know great insights avoid the Trap the best competitive strategies. It's not compete with anybody. And if you if you find a non-consensus and right Insight, then you've got much more time to develop the idea without the threat of competition.
What are some of the other questions you try to hone in on?
I try to find out how committed the team is. So so for example, I don't react super well to we're all still working at our jobs and we can't we can't wait to leave as soon as we get funded. So I am like look if you're not passionate about enough to leave your job to do this full-time. Why would I be passionate enough to write a check? And so I like people who say I'm doing this and they would
Do it even if they couldn't raise the money they because they'd know they'd find a way and it's like I'm doing this. I'd love to have you on board. But this is happening. Are you in or are you not in and so, you know teams that are tentative teams that are sort of I'll do it when I get validation of the funding. Not my not my Tempo.
That's really interesting. Yeah.
Yeah, like what I find is that great startups and I experienced this myself when I when I helped start motive or when I
Help start Floodgate our Venture firm. I found that my regret for not having tried. It felt much stronger than my fear of failing. I had this feeling of if I don't do this somebody's going to do it. I'm going to watch them do it and I knew all along it should be done. And so when you get that feeling not starting is not an option and so you have to stop doing what you're doing immediately and go full-time hundred percent into it.
And so when when it's not all team members all in I think that's a real problem. I think startups are so impossible that if you're not a hundred percent committed you just almost have no
chance. What are some of the exclusion filters that you use to avoid the noise or avoid situations that you don't want to be involved in?
Well, sometimes it could be a surprise. So one time we were pitched by somebody who said that they were in the Guinness Book of World Records for
Tetris and you know we had this great meeting bunch of other stuff and we were going to have a second meeting and just on the side we're like, huh? I wonder if he really does have the Guinness Book of World Records at Tetris. Let's just check that out. So we look to the Guinness Book of World Records the guy was it in there and we looked around for more things wasn't in there. And so then we called and said hey, I know this kind of crazy but we're doing our due diligence and you know
What year were you in the Guinness Book World Record records for Tetris? And they said that you know, I'll get back to you and you know kind of didn't call us and then they said it was at the challenge of Book of World Records, which I've never heard of. I don't even know if it exists and then next thing you know, like how I Go Radio silent, they're like, yeah, we raise the money somewhere else. But like I find that when somebody lies about something that is in no way germane to their business.
I'm like that's that's a red flag for me write that like that's somebody who has a difficult relationship with the truth and facts and reality Elon Musk right? Will sometimes say well this cars would be ready before it's ready. But to me that's a different type of problem than lying about something that doesn't even
matter there. Any other lies the like what are the different types of lies that we tell ourselves
most of the lies that we tell ourselves relate?
To not facing reality, right? So startups are impossible. And usually there's there's kind of this big Boogeyman risk that if we don't overcome this risk, we're going to fail and so I'm a big fan of like getting that bogeyman right front and center and punching it in the face and like going dead at it. And so the best Founders I know know what are the most important risk that stand between themselves and success and
they tackle those risks early because if you eliminate those risks you massively improve the probabilities of winning as well as you make the company more valuable you learn more faster, you know a whole bunch of good things go your way. Whereas the reverse of it could be the company wants to give its product away, but they don't have a good strategic reason to give it away. And and really what you what you learn is they're giving it away because they don't have enough confidence in
Proposition to charge a price for it.
And it's like, okay. Well, you know, we'd be better off charge it a price with products half done because you know, then we're going to find out how visceral is the pain and how compelling is the value that were here to deliver for them? How do you
teach people to Face Reality? Like if I was one of your kids and I walked up to you and was like teach me how to better deal with reality. What would you tell me?
Well, I think some of it particularly in startups.
Is a level of artistry. So I think that I think that when I'm when I'm working with a start-up wouter there are things that I can do to help them avoid avoidable mistakes. I can help them have better hiring process. I can help them. Think about what kind of meetings they want to have or how they think about sequencing the risk that they take out or how they think about iterations or that kind of thing. But all of that on some level is science and the only
Reason that I possess it is that I have a database of companies that have been really successful. So it's it's not that I'm smarter than the founder. It's just that in that very rare case. I have a database of great examples that they don't have yet that they haven't seen before but you know Beethoven composed his Symphony when he was deaf and so there's no music theory class. Beethoven takes to become Beethoven. It's so there's a there's an element of it. It kind of goes back to the Jazz Band.
Notion, but there is a I believe a big element of startups where a business function is not the right way to describe an entrepreneur entrepreneurs aren't experts in business functions as you and I would think about them. Yes, very often their technical but the defining characteristic usually of the leader is that they're an artist in the sense that they notice things other normal people don't notice and they present their ideas and ways that move people to act in ways.
Ways that where they're abandoned their logic?
That's really interesting. I hadn't thought of it that way before. Yeah, so
if you think about it, like I don't know one time I went on this what I graduated from college. I got a eurail pass and I went all around Europe that I went down to Rome and and Vatican City. They had st. Peter's Cathedral and the letters on top of the Dome are like six feet tall and you could barely see him and then I walk up and there's a statue by Michelangelo called pieta, which he did what he was 21 years old.
and it just I don't know if you've ever had this happen to you Shane with a piece of art, but you just like you can't even describe what you're feeling when you see it and it's like it's Elation and confusion and like excitement all the same time and you're just like how in the world did this guy do this and I just stood there kind of transfixed by it and to me that's like artists they have a sensitivity to
two things that most people don't have they can feel something emotional or compelling or powerful in something that other people would just not even see but then they have that added skill of being able to render it or deliver it in such a way where you're moved beyond your logic and startup teams are a lot like that the founders in particular the leader they have to convince a bunch of people to do something that most people in the world think is crazy and you know, you're not going to
You're not going to use just logic to convince people to do that. You're going to have to get people to join a movement that they believe in that they're literally moved by the same way that that statue moved me and say Peter's Cathedral
would you say that? It's are the founders charismatic or is there a myth of carrot Charisma that leads to this sort of people following you you're seeing thousands of them a year effectively, like what percentage of them are using Charisma versus idea. Like, how are you getting people can
Compelled to follow you into
this Pursuit. Yeah, I think Charisma helps but I think it's more about the power of the vision. So, you know, Steve Jobs super charismatic obviously, but Bill Gates and Mark Zuckerberg, I wouldn't say are you know standard deviation more charismatic than most people but I think that both of them believe they were working on something important and that they were doing Kick-Ass exceptional work and they attracted people
Who believe their vision and wanted to work hard on a great project with them? And so I think that that's really the defining characteristic is they have a vision that compels a set of like-minded people and they all feel like they're in on a secret together and they believe that they're going to convert everybody else to their point of view until one day. Everybody has their point
because it's so obvious to them that everybody should
completely completely and so it's not like they're like, huh? I wonder if it's going to work.
Or not it's like they're not they're not even really thinking about it through that lens. Like when I talked to the Instagram guys, they're like, I never remember wondering if it would succeed. I always just remember loving the project and enjoying working on Instagram because I love photos and I couldn't think of anything. I'd rather work on this cool photo app
when you're making an investment in a company say like Instagram as an example because you just brought them up. What how do you think about monetization because you might be like, oh it's a great idea, but it might not
Or do you not consider that do you sort of probe around that is that the ultimate outcome like at what point does that come up in your thought process?
Well, first of all, I wish I had invested Instagram, you know, that would have been a good one. Don't we all get pretty good one in general?
It depends so I think different companies have different iteration tempos. And so if you're a consumer mobile app, you might iterate twice a week or even more often and if that's the case I care very little about how you're a monetize. I care more about are you coming up with clever ways to get distribution to spread your idea very quickly.
And if they can iterate a lot, I may not even care that much if they have distribution yet because they have a whole lot of iterations left in front of them before they run out of money. But if it's if it's a company that's selling business to business enterprise software for more than a million dollars a customer.
I need to be pretty convinced that they can make money selling that software because you know, if you're selling like say autonomous vehicle simulation software to General Motors, you don't get many chances at the plate. You can't deliver half a loaf or you can't just say hey just kidding. I've changed my mind with the product is right. So you've got you know, you've got to deliver something. They really care about their desperate for and you got to get paid for delivering that and so I think monitor
Nation is a function of the iteration Tempo that's innate to the idea. But also just the field that the idea is going to be in if it's consumer mobile how I think about monetization is really different from B to B Enterprise or you know, even somewhere in between like SMB SAS or things like
that. Ok, let's start diving into some of these models and how you think of it things. But before we do that, what is a mental model?
Yeah. Well the way I look at a mental model is it?
It's a way to think better. And so, you know, and I got a lot of this from your site Shane back in the day. Right was that lots of people tend to go through life taking one problem at a time deciding one problem at a time. And I think it's helpful in living a better life to kind of acknowledge that there are better ways to decide things and sometimes you know, there's a better way through experience or reading books or what not and sometimes
Times you don't know their what the better way is so I look at mental models as Frameworks for making decisions that maximize the probability of the best outcome.
It's a great way to put it let's start with Insight models. So some of the Insight models owners aren't let's start with the urn secret. What is the urn
seek? Yeah. So a great example of the urn secret is Brian chesky at Airbnb. So it's basically some work that you did to discover something that most people would think is non-intuitive. So,
The case of Brian chesky. He didn't have any money. He wanted to go to a design conference. He just come out of Rhode Island School of Design and he couldn't afford a ticket so he put his apartment and an air mattress up on Craigslist and he got four to five hundred people saying they wanted to rent his room and you know, keep in mind how it counterintuitive that must have been in 2007, you know a year later. There was the craigslist killer ants and you know, who's going to who's going to want to stay?
It's danger stranger's apartment and who's going to want to invite a stranger into their apartment that you know, that's crazy. But he had hundreds of people wanting to do this. But Brian took it a step further. He said huh? That's interesting. Why did that happen? Oh the town was out hotel rooms. Why was the town of hotel rooms? There was a conference, huh? I wonder if that happens a lot when there's conferences. And by the way, what's up with the hotel business? Anyway, what's their business model how long they've been in business?
Why do people go to hotels and he started to realize that the main reason people go to hotels is because of trust and he started to realize well, if you could have a trust rating perhaps you could have all the benefits of a hotel business without having to own a hotel. Hmm. So, you know by the time he starts Air B&B he has a lot of learned secrets that are counterintuitive but have been sort of validated by the fact that he was willing to do the work to discover whether
True or
not. I like that a lot. Let's talk about adoption or
inflection. Yeah, so I like to say that y now has two components technology and flexion and adoption in flexion. So like in the case of lift, for example, you had to believe that enough people would have smartphones so that enough people who wanted to be Riders would have a smartphone enough people had to be want to be drivers would have a smartphone because if not enough people had smartphones. It doesn't matter how
Good the service is so back in 2006 when the smartest phone was a Blackberry lift couldn't have worked no matter how good the idea was. So to me an adoption inflection is a bunch of people either are using or about to use a technology or product that no longer was the case and so smartphone penetration was a great adoption inflection for example,
and the ability of
To get very accurate to I would assume
contributes all exactly that would be a technology inflection. And so a technology inflection is usually an enabling technology that's never existed before such as super accurate GPS location or it could be an exponentially improving technology curve. It could be how much money does it take to sequence genome or how fast does it take to print something in 3D or that kind of thing, you know.
No, Moore's law has been kind of the fundamental driver that's animated technology inflections, you know this idea that chips get twice as fast every 18 months but technology inflections produce these kind of exponential improvements in a whole lot of different areas in data analysis and disk storage in GPS accuracy. And what's interesting now Shane is that in a world where there's so many of these phones you in order to make the phones.
Perform the functions that they want to perform these chips can now be repurposed to other devices. So you wouldn't have drones as cheap as they are if it wasn't for the iPhone app for Android because now you have cameras and sensors and chips that never would have been built just for drones but now our mass-producing could be harnessed by drones and by other
devices, that's a really good Dente. So for the Y now, we need technological inflection and adoption inflection.
And talk to me about the idea
Miss. Yes, the idea maze sort of brings them all together. This term was coined by a friend of mine named Balaji srinivasan. And so the basic idea of an idea maze is it's not enough just to have an idea to say. Hey, I have this idea. Let's let's do ride sharing what you what you want to say is okay who's tried that before? Well Ubers tried that before but they're doing it with black cars and not people sharing rides.
Okay, has anybody ever tried it before with people sharing rides and you know at the time there weren't many I think sidecar might have been one but then lift had a few differences to their implementation than what sidecar had and then they also had just some clever things in terms of how they marketed it and how they got distribution. But what what you want to do when you go through an idea maze as you want to you want to look at every previous.
Attempt at the boundary of your idea. Oh, am I going to charge for my software? Okay, great. Has it ever been built in open source. Am I going to charge for it by the copy buy a subscription or by the download? Oh with his head ever been tried before by somebody and so the idea maze helps you think in a very structured way what have been the prior attempts in my category of idea that have worked or haven't worked and if
They have been tried. Why is it going to work this time? What hasn't worked before what a lot of people tend to do, which is an answer. I don't love is my team is awesome. That's why now. The other teams haven't been as awesome as my team. So we're going to win when they haven't because they weren't as smart as we are that may be true. But that's not a very insightful answer. You know, it's kind of a it's kind of a hand waving answer.
Hmm. Yeah. What about think wrong? What?
Hell is
that yeah, so incumbents have a harder time retaliating against a startup that has a orthogonal asymmetric attack. So like let's suppose that you want to go before we
go away. What the heck is going on? Okay. Yeah.
So like let's let's imagine that that I want to sell a product and ninety percent of the people who are going to use the product or had to be people who also use sap.
Sap charges by the seat it would be better for me if I can charge by the transaction or some other way because if I charge by the Sea sap can say oh, yeah. Well, we're going to put that in our products someday. We'll just give it away or will charge an extra $2.00 a seat for this and you know, this startups charging ten bucks a seat. So and then it freezes you in the sales cycle, whereas if you're charging in a totally different way.
It's disorienting to the incumbent right because their entire value delivery system is around pricing by the Sea delivering chunks of Code by the Sea supporting the chunk of Code by the seat upgrading the chunk of Code by the Sea and monetizing it by the Sea and so that would be one example would be pricing but thinking wrong is all about saying I'm going to take the way the incumbent does something and do it.
Opening of it and by the way charging by the transaction may not work but it's think wrong is like it's more of a thought experiment. It says let's imagine I do the opposite of what the convention is and follow the thread all the way through and if it if by following that thread all the way through you actually get to good answer you're like, wait a minute. This isn't crazy. That's the right kind of crazy because you don't want to just have a product that's different. That's the what you want to have a business model.
Model that's different, which is the
how hmm Switching gears just a little bit everybody talks about total addressable market in terms of like justifying almost any valuation for any company and one of the models that you have under inside is the myth of total addressable Market. Can you talk to me about that?
Yeah. So in a company markets can be mapped, you know, you can say, okay. I'm coming out with Windows for college students, or I'm coming out with Smart Water.
Rather than fancy packaged Gourmet water. It turns out that in startups. I don't think markets can be segmented that way. So so like a market in a traditional company the way people think about markets is I'm Lewis and Clark and I'm trying to map the territory and understand where their opportunities and where's the market real estate? I would capture but in startups you're living in the future. So on some level there is no market yet right. There was no market for browsers in
In 1993 and there was no market for ride sharing in 2009. But what markets in the startup world are movements and so trying to quantify the total available Market. It's wrongheaded. It's more about quantifying the potential energy of that Insight. So like I like to say in physics you have potential energy and you have mechanical energy. And when when you're holding an object in the air, it's all potential energy when you drop it hits the floor.
Makes a bang. It's converted to mechanical energy and markets in companies are more like the mechanical energy of it available mappable market and markets in a start-up our movements yet to be created of innovators in on a secret together and the market happens is a function of more people joining the movement until someday everybody is in the movement. It's a big
Market. Are there any comments that are so strong that you wouldn't want to fund a start-up in that space because they
Could just dominate by flipping a switch
sometimes but it goes back a little bit to thinking wrong. So clay Christensen has taught us that you don't want to operate in an incumbents what he calls value networks. So for example, let's say I want to start a new Airline.
Southwest has it right because there are ports at Love Field rather than Dallas Fort Worth JetBlue started out faster than Southwest but they run their planes through the same airports as American Airlines and all these other guys. The reason that Southwest has a different better business model in the long term is there not Hostage to the incumbents value networks. So if you're if you're running your planes at Dallas/Fort Worth
the big Airlines will Lobby the local government to give you the worst Gates and to do other things to handicap your business will similarly if I see a consumer startup and their strategy is to get big by having a business model that resembles Facebook. I get worried about that because Facebook can coop their business really easily. Whereas the the idea is I like the best or ones where their quote unquote thinking wrong. There's something about there.
- that is so fundamentally orthogonal, right which is kind of like, you know the opposite direction if you will that even if the incumbent decides to counter attack, they would have to change their business model to do so and they don't have the skills or the values or the capabilities internally to do that very well. So like here's a great example Google, you know, when Google comes into business everybody saying it's over Microsoft's one.
And nobody could build Windows apps without being co-opted it's over. Well Google did a Flippin of all of like Microsoft's value chain. First of all, you didn't have to have it installed on PC. You could just get it on the internet and they didn't make money by selling per seat software. They made it by running ads. And so none of Microsoft's assets is a company were available to them to attack Google and in fact quite the opposite. Google was able to grow
Very rapidly and Microsoft when they did being they just didn't have the internal skill to Be an Effective competitor with Google on Google's playing
field. That's really it's like Microsoft was playing with one hand tied behind its
back cry my favorite example in history's the telephone versus the telegraph. So the telegraph company was the biggest company for communication. They can do transcontinental telegraph's and Alexander Graham Bell shows up with a telephone and they say what could you do with this?
Telephone. Well, I can make calls 250 feet, but you can talk to the person on the other end of the line rather than do Morse code or you know code over these transmission lines and they say well what good is what good is being able to hear somebody from 250 feet away. That's useless. Right? We can we can communicate with people across the entire country.
And so Alexander Graham Bell's like yeah, I guess you're right. Well what he what he did was he over time improved the voice coils the amplifiers all the technology for making the calls progressively longer and by the time you know, Alexander Graham Bell's phone could make a call across the entire country. The telegraph guys are screwed right because you're right the telegraph guys have no idea how to make telephones or how to perfect the Technologies and so
The clay Christensen used to call this The Sword and the shield like The Shield is your your go-to-market strategy is so different and the customer context that your Char getting is so different that the incumbent doesn't feel an incentive to attack you they just say I you can have that market that's stupid product stupid idea and that so that's the shield that gives you time to perfect the technology. The sword is the skills that you build.
Time but the incumbent lacks and as you build the skills the skills come up with a momentum by the time the incumbent realizes that your threat the asymmetry of your skills compared to theirs is too overwhelming for them to respond
effectively. Wasn't that the many mills and the rebar to the Christians and uses an
example absolutely right in the pattern is always the same. It's the incumbent says, oh you're going after market or you're charging with a pricing model or your
You're doing something that I don't really care about it's not really a threat to me. And so they give the upstart time to satisfy. The early desperate customers who are unsatisfied and then over time as they build their skills and their capabilities. They become more effective attackers in the core markets the
incumbents. What I liked about that models so much is that at every point in time the incumbent was making the decision that they were basically taught to make in business school Yeah by seed.
That market share by seating the lower sort of gross profit to somebody else by Outsourcing more but and then you wake up one day and you're you're sort of
irrelevant. That's right the problem with not having a compelling insight. And so these Insight models that we're talking about is when the incumbent sees you the notion of your attack will be too obvious and their ability to respond to the attack will be too powerful.
And so part of the value being in non-consensus in right is not just that you find desperate customers of value. What only you can deliver for them. The incumbents are disoriented by how you go to market because the Insight around your idea is novel not just in the technology but in how you deliver the technology
do you think we're losing a lot of competitiveness right now by Outsourcing manufacturing.
I'm a little bit more optimistic. I actually
I think that 3D printing is going to be a bigger deal than some people realize it's so I think that you know, I like to I like to say that every sector of the economy is going to get reimagined from a traditional hierarchical Corporation to a software-defined network that has machine platform and crowd intelligence. And so I believe that 3D
eating will be the way that we get network manufacturing and like lift is an example of a network capitalist ride surface. Whereas a taxi is a corporate hierarchical ride service. And so I think in the market after market we're going to see that the software-defined network approach
wins. That's fascinating. Yeah. I'm going to have to think on that one Switching gears to a little bit team models. One of the ones I wanted to bring up was disagreeableness has one of
Mental models for a team. Can you expand on that?
Yeah, so it's funny if you think about the 20th century the archetype worker was sort of like the organization man and you know kind of the Cog in the business the person that stated a company for a long time and kind of part of the reason they got ahead is because they were well liked and they had good political skills. And you know, they're just likable what I find in the great startups that I've seen is
is the great leaders are very often willing to be disagreeable and they're not motivated as much by approval Seekers or prove. They don't seek approval as much as they seek the actualization of their Vision. I think it comes from this idea of lack of memetic behavior to have you ever talked about Rene Girard on your podcast. No so you oh man this I think your listeners a like this
Oh, so Rene Girard was this French philosopher? And he had this theory that he called mimesis and his basic idea is powerful. He basically said that most desires that humans have are not innate desires but their desires that rise because they see other people caring about it. So like why why do we want to have go to the best school? And why do we want to have the best car or the best job in the most money and live in the best country club?
And have designer kids and live in a fancy house. It's because we think everybody else wants that.
Oh that explains the lake hedonic treadmill
exactly. So so that so the idea of memetic behavior is that people tend to mimic the behaviors and seek the approval of others way more than most people realize and that it's literally baked into our operating system as humans. And so if you think about what does it mean to have a non consensus and right in sight?
You are not engaging in mimetic behavior. And so what you're doing instead is you're saying I think I've come up with a novelty and a heresy and I'm going to go prove it. And in order to be a heretic you've got to be willing to deal with the disapproval of the crowds and you've got to be willing to say I don't really give a damn what the crowds think I'm right they're wrong. And so you're no longer defining your decision or your objective.
Action based on approval seeking you're defining it based on truth seeking Ed, you know all great inventions, you know, it's not just in business. It's euclidean geometry Galileo understanding the sun's at the center. Not the Earth. All these things came for people who are Heretics in their time and they were they were able to put forth those theories because they were more preoccupied with their vision of the future of the truth and they were in getting everyone to agree with them right then and there
there's a great
quote by Lou Brock the baseball player who said something along the lines of show me somebody who's not willing to look like an idiot and I'll show you somebody I can beat every time.
Yes, exactly exactly the most the great startup Founders particularly the leaders not necessarily the people on the team, but the leaders have been willing to be disagreeable if particularly of being agreeable is approval say asking seeking not in the service.
Of advancing the cause and you know a lot of people in capitalism and particularly startups, they get a bad rap in the press and it's because they're largely disagreeable in some ways. They do things that are you know, most of us wouldn't have the courage to be that disagreeable but on some level I think that if you change that about them, it's kind of like if you change too many properties of carbon the diamond will no longer cut
glass. Yeah. I have a theory that people with extreme
strengths also have extreme weaknesses, but they stand out a lot more right both in both ways. That's
right. And you know history history has many allegories of the person with a contrarian idea attracts followers and then get sacrificed. So that was kind of another Another Part of Gerard's thinking right. It goes all the way back to Christianity when you know, Jesus was a heretic and you know don't want to get too far down the rabbit hole, but like there's you know,
Gerard's genius was understanding the patterns that flow from a medic Behavior as course rate in
society talk to me about what it means to be
antifragile. Yeah. So I this term I think was coined by Nassim taleb. The basic idea is that some things get stronger when they're stressed rather than weaker. And so for example, if you lift weights, you're damaging your muscles in the short term, but the fibers grow
Back bigger the long-term and so some Founders when they're under pressure actually get better. Whereas most people get stressed out and freak out. They're more likely to panic under pressure. And so these these anti fragile people sort of have you know, what I call the MacGyver Jean. I don't know if you ever saw That 80's Show MacGyver, but he was this guy who could Escape From Any prison and he could, you know use chocolate to like fix a radiator or go crazy stuff, right and
A lot of the great Founders that I've known they face these situations where they've got one hour left to find a million dollars in the corridor and there's no book. You can read about business. It's going to tell you how to do that. You just have to completely improvised and be anti fragile and it's a little bit like James Bond, right? Like when when James Bond is, you know, about to get killed by the evil villain like that's when he does his best work. Yeah. It's so right you got to like you get into those situations where you just call up your talent.
It will and just come up with some crazy kooky solution where you get out of the
Trap talk to me that the Builder and the Persuader.
Yes. I think that the most obvious example in history would be jobs and Wozniak and so was was the Builder and jobs was the Persuader and and that's not saying that jobs isn't a product guy and jobs as a technical, but I think we can agree that jobs had incredible persuasive skills and that jobs could get
To you know, they even called it literally a reality Distortion field which by definition is getting someone to abandon their logic. Whereas like Wozniak his original design for the Apple to is just poetry in electronics particularly when you compare it with what was there in the day, but very often we've seen teams that have someone persuasive and you know, Elon Musk and Steve Jobs or kind of at the radical extreme awesomeness of it, but you know, usually
Really somebody usually the leader is a good Storyteller at some level because they have to cause a whole bunch of people to abandon their logic and join a new cause that most people disagree with and then the Builder is the person who is living in the future and understands the technical trade-offs and how to build it co-create the future with other people better than anybody else does yet?
What makes for a good story?
It's interesting, you know, I'm friends with Nancy Duarte who worked with Al Gore on this.
Movie Inconvenient Truth and she studied a whole bunch of great storytellers everything from the Gettysburg Address to Steve Jobs as iPhone announcement to Martin Luther King's I Have a Dream speech and she found that there was a pattern to all of them and without getting down too much the rabbit hole. There's a few things that are interesting one is there's a beginning a middle and an end and the beginning describes the big idea that represents a
future better world that I'm exhorting you to join me to go find this better future world, and then the middle is a sequence of tension. So it's this is bad, but it could be better. This is bad, but it can be better this bad, but it could be better and if you look at like say Star Wars, right Obi-Wan's like hey come with me to take on the Empire. It looks like I can I'm supposed to stay here and it is Uncle get killed and he's like, okay, I'm going to go and then they get
after and then it's like it's so like most great stories follow this Arc and what entrepreneurs who tell stories well succeed at is they realize they're not the hero in the story the audience of their message is the hero of the story and what they're doing is they're helping that person go on a hero's journey to co-create a better future and that's true whether you're pitching a customer future employee venture capitalist, and so the great start
It UPS are kind of a crazy Journey that a bunch of people embark on.
Where everybody's in on a secret together and so in order to make that happen, you got to be a good Storyteller.
I think that makes a lot of sense.
So to me like a great metaphor for an awesome entrepreneur is kind of like Yoda. So like Yoda is a mentor with special tools, right? Like in this case the force or a lightsaber that allows the protagonist, you know this case Luke to get to the outcome. He wants and change the world and
What the what the entrepreneur has to realize is they're not Luke. They're Yoda and the set of people in the world that they want to move to their Vision or look the way you get them to move to your vision is you help them understand how they get to be the hero of the story that you're helping them
co-create when you're telling this story and you're sort of assembling your team. How important is it to Seco contrarian team
members. I think that that helps a lot the way I like to say.
It is most startups don't realize that you have to have contrarian insights as well as contrarian recruiting strategies. So for example, if you look at the PayPal Mafia, none of them were established in Tech before they join PayPal. So you had Peter teal is a law school guy yet Max levchin, who's you know, a young engineer? They recruit Reid Hoffman who did it?
SeaWorld at Apple which was a failed initiative and then he'd done social net which is a failed startup. He recruited key through a boy from a law firm, you know, David Sachs all these people in the PayPal Mafia were people that he knew in his Stanford network of people that Max knew in his University of Illinois network, but like discovering undiscovered Talent is a key superpower of great startup teams, because like if somebody's making a ton of money at Google or Facebook,
So why are they going to join your startup for less money and more risk and less status? Most people won't but if I'm Chi through boy, and I'm in a law firm and I'm like, yeah, this job is okay, but it's kind of soul-crushing and then Peter teal says hey we're going to go on this adventure. We're going to change how money happens we have to work together. Again. That's a pretty good story. And so like I like to say that the great startups find people who are one day going to be great before the world knows they're great.
And going after people that the world already knows is great it can work for you. But usually you have to be a very established entrepreneur, you know, if like Jim Clark found a Netscape start a company he could recruit establish Talent OR Reid Hoffman started to copy he could do that. But if you're dropping out of college to start a company the first set of people you go after I think our genius great people that the world hasn't discovered
yet another aspect to that.
That I think is super important. Is that a lot of large organizations can't handle contrarian thinkers. They other you know, they don't value them to the same extent that you could value them in a smaller organization. They don't listen to them. They're unhappy in those roles. Even if they do get hired but most of the hiring process at these large organizations seems to be actually designed to get rid of contrarian thinking
totally right and it's like if you're marching band, you're not necessarily looking for Katrina.
Ins and so whereas if you're a startup you want people who say hey, wait a minute, you know David Sachs says to Peter teal. Hey, wait a second here beaming money on Palm pilots and emailing payments isn't working as well as what we're seeing customers that like putting the PayPal logo in these eBay auctions and like it's happening all the time. We should look into that and and somebody's just following
The rules isn't going to notice that but somebody who has some level of jazz Artistry. In addition to just the CEO is more likely to notice that you know, like Artistry when you're in a start-up it's about asking the customer. Hey, what's the logo on that coffee? Mug? What company is that? Why do you have that coffee mug there, you know you talk to these other companies. Who do you like at these companies?
Someday, you're going to try to hire that sales guy or some day. You might partner with the company that's logos on the coffee mug. And so it's like part of being an entrepreneurial artist is seeing, you know, seeing the emergency signals that you weren't necessarily looking for explicitly, but that reveal themselves and you see them with a sensitivity that an artist would see an emotional thing that they can put on canvas for their
art always be curious, right exactly.
Switch gears talk about value models. I want to talk about the four different types of experiments the so I think there needs solution assumption and validation. Can you walk me through
those? Yeah. Well the main thing when you're trying to find somebody's needs you're trying to not sell and you're trying to not talk about yourself. And so for example, when I was an entrepreneur we used to have this rule of 20 and maybe I could even go through all three of these by doing this so
Rule of 20 was you talk to 20 people that don't really know you but that are in your target market segment, but they're not talking to you just because they're your buddies the first five discussions you have you just sit there and you just ask them about how they do their job. And you say nothing about what you do nothing at all. And so I when I was at motive we had this product that would do Tech Support over the Internet. So when you had a problem rather than get on the phone and call support you could send Telemetry to the support organization.
Securely over the Internet which saves a whole lot of time. So I'm sitting there in a guy's cubicle and the guy gets on the phone. He gets a call. He starts talking on the phone and I was like how did you know to ask those questions? And he says, oh Joe told me and I said who's Joe and he said Joe is the guy. This is at Netscape that Jose the guy that knows Netscape Sweet Spot server the best.
It's not like where did you get those questions? He goes. Oh right there a points to a cork board. And there's the five the five questions.
And then another call comes in. He asked the exact same five questions, right? And I was like, oh that's interesting. So I look over this guy's cubicle and there's hundreds of people asking the same five questions. Now what entrepreneurs would normally do would say, hey, would it be cool if I could have those questions be asked digitally and sent to you by Telemetry every time and like flag the differences of what you expect to see but you don't want to do that in the needs.
Face because you want to get out of the mode of talking about yourself you want to experience life as they live it so first five interviews were exactly like that just an hour watching people asking questions whenever they did something. Why did you do that? And then the next five interviews or more around the solution experiments? It's like hey, I've noticed the last three calls you took you ask the same five questions. What's up with that? And then they say you
Ali they say something similar but then you say like where do those questions come from? And like do you get different types of problems where you have to ask different questions and like is there like a is that documented? Like what's how does that work? And they show you all that stuff? And then the next set of questions are hey, I'm curious. I've noticed you're taking all these calls. Would it be better if just like you could just get that digitally without asking because isn't you know like all that stuff you asked, you know open this file?
On this command tell me this version tell me this date that's knowable. That's objective facts. It's not subjective. And you know, you're on the right scent when they say oh, yeah, we tried that already before but it didn't work and most people think that's bad but it's good. And the reason it's good is because they know they have the problem and they've actually done something to try to fix it and they failed at fixing it. So now if I could show you that I can do it now all of a sudden I've got their attention and then the next
five interviews are hey, you know what? This is super early. I'm just thinking out loud, but like I'm kind of thinking about doing a system that does this and I've noticed from some of the folks that I've talked to so far that they're having these problems and like am I just am I am I smoking something here or like a like and you know that you're kind of on the right track if the person steals the Whiteboard marker out of your hand. Yeah. It starts Drawing Your solution for you.
It's a I've been thinking about this for years and I can't get management to do this. And when are you going to come back and show me your product so like that? Sorry, that's a long-winded answer Shane. No, this is great. Some of what I was describing was needs experiments, which is the first five of then validation is the next set and then assumptions are wouldn't it be good if and solutions are more. Hey with this product be interesting to you. I'm just kind of thinking out loud here, but like
Just tell me tell me your reaction to this in all these experiments. You'll notice that you're you're trying to avoid letting your ego be in the mix. This is like a detective work exercise where people get hung up is they feel pride in what they want to build it. So they think their job is to convince somebody that what they're building is awesome.
Would it be awesome if I built you this product and the problem with that is a lot of times customers will lie to you because they want to make you feel good this AI that's kind of cool and then you come away saying I just had a great meeting with that customer. They think what we're doing is awesome. And it's like they were just saying they're just being nice because it's easier to be agreeable than not.
Yeah. It's really hard to get to the objective truth. And even when it's there in front of you, I mean, we're so protective of our ego and our ideas.
We think of this at Farnam Street sort of his outcome of her ego, but it's so easy to get your ego wrapped up in what you're doing and it feels good. And this was my idea and you sort of see a little bit of positive traction, but you missed the big picture which is maybe it doesn't resonate or the time you're committing to it is not you know, there's a higher opportunity cost somewhere else.
Yeah. I like, you know, we like to say at Floodgate that ego is about who's right and Truth is about what's right and and you know if in
Site development is about posing a great Theory or question or incite the value phase and those mental models are about discovering the truth of that
Insight. One thing I would say is just in my own experience. It's been a lot easier to put the truth ahead of myself running a business then it was working in a business.
Yeah. Yeah. It is funny because like what I've learned is that facts are stubborn and if the facts of
Rydia don't turn out to be true. You're out of business someday, like the facts are going to suddenly be repudiated. Whereas unfortunately a big companies some people get ahead by having an ego Centric approach or whether it's trying to command a room and meetings or you know, trying to amass political capital and reorder things like that. And before you know, it people get caught up in that
stuff. There's also like a labeling issue, right, like people call you and knowledge workers. So if you're not coming up with the right answer,
Then what are you right until you sort of like this? I think this happens at a subconscious level and then you look for things that validate you you ignore things that don't you sort of alienate people who disagree with you or might be pointing something out. Yeah it
totally and right like in a start-up you have this Advantage because you could say it's not me that's bad or me. That's wrong. We ran an experiment and the hypothesis was invalidated. Yeah. It's that simple, right and it's like the good news is we learn something even if the worst
Is an experiment that a hundred percent confirms everything you believed because then you just wasted time right teaching yourself what you already knew even negative data is good in the sense that you now know
more you learn something and talk to me about the Herbie model.
Yeah. So the Herbie model, I like it comes from a book called the goal that I'm a huge fan of and the there's a chapter in the goal where there's a bunch of Scouts on a hike and
they're all screwed up. There's people way out in front of everybody. There's people clumped in the middle. There's people way in the back and so the scoutmaster goes the patrol leader and says your patrols of mess you got to fix this. So it turns out that the solution is to figure out who's the slowest hiker and it turns out that the slowest hikers Herbie. And so what you do is you put her be in the front of the line because the only way you can have a smooth organized hike is everybody hikes same Pace as her be if people are in front of her.
Going to they're going to hike way up front of them. And if they're behind him, they're going to be punched up, but nobody can get strung out. Right? Nobody's going to be way behind. So then you ask can we meet the goal if we're hiking at this speed and if the answer is you can't you really got three choices. You could kick her be out of the patrol. You can make her be go faster or you can just accept that you're not going to make the goal that that's the patient to go and the way they make her be go faster in the book is they start taking
Taking stuff out of his backpack and distributing it to other people until he's no longer the slowest person. And so the reason I love the Herbie metaphor for startups is I think a lot of startups get very bad advice. They get advice that is sort of exhaustively correct, but what they don't realize is that when you're a startup you can't do everything. Well, you got to do the small number of very important things A-Plus well,
It's so I like to use the metaphor of her be when I interact with startup. So when I talk to a Founder rather than give him advice about all the things they could be doing instead. I just ask. Okay. Well, why don't we start by just talking about? What's our her B. Let's say that our her B is that when customers try our product? They're not sticking with it. Well, then investing more money in sales and marketing is useless. In fact, it's worse than useless. We're just going to get more unhappy customers that say bad stuff about us.
And so product Market fit can be thought of as progressively eliminating. All Herbie's until there are no more herpes and then you're in a mode where you can invest in growth because it's frictionless like that a lot. Yeah, and it's to me it's a much better way to interact with the founder because if we get together every two weeks, there's plenty of stuff that we could talk about but we always start by saying okay. Is it still the same Herbie? Whereas I'm doing the founder disservice if I see
Bunch of clever sounding stuff but it's always different and it's
defocusing how structure those meetings like every two weeks. Is there an agenda is it sort of like let's meet for coffee and wing it how much time and effort you spend preparing for that meeting.
It really depends. I can't turn somebody into an artist and I can't I could never know their business as well as they know it or what it takes to succeed as well as they know it and if I can then I backed the wrong file.
Under so the way the way I do it is I try to I try to help them find issues that they maybe haven't seen before because they haven't seen as many startups as I have and then I just say hey you might want to look at this, but I'm not attached to whether they take my advice right? It's more like mmm. I've seen something that looks like that before. It looks like quicksand to me. Here's why.
But it's your company, you know, you decide but you can help Founders a lot by helping them avoid avoidable mistakes, right? That's where the mental models come in and you know, you're saying to the founder. Look I'm not coming down from the mountain saying I have the answers. I'm not telling you how to run your company I'm saying that there's a bunch of counterintuitive lessons. We've documented them. It's your mileage may vary and you can listen to it you could decide not to but I'd sure hate for you to fail because of something that you could have known about.
Out to avoid because we just didn't talk about it. So that's mostly how I think I helped and then I try to help them think big I try to help raise money. I try to help I try to help with the roller coaster when the chips are down and people feel you know, bummed out when there's bad news. I think we've also been able to help a lot in terms of our brand and our networks, but that's that's different for the meetings. That's that's a different set of things we do.
What do you do when you realize you've made a mistake?
Take backing of particular company. Do you sort of cut bait and like? Okay. Well, they'll sink or swim. Do you dive in do you try to sell it? What do you what's your thought
process? Well, I try I try very hard to acknowledge. First of all, this was a failure on my part because I picked either the wrong team or the wrong opportunity, which is my job on a very fundamental level, right? That's a very core part 2 how I create valued my business, but what I found
Found is that when you replace the CEO involuntarily?
He almost always make the company worse. So if a CEO says look, I'm kind of in over my head. I need your help recruiting somebody that can work. Hmm. But if you have a fundamental difference of opinion with the founding team or the CEO, usually my default is hmm. That's a shame. It's your company. I'm not going to I'm not going to try to run it for you because I think that if I try to write it for you to be even worse off and so I mean, who am I to think that I could spend?
And two hours a week running somebody's company. You can't write so I think that this is a mistake actually that a lot of VCS make I try to always ask myself. What would I want from my VC if I were a strong founder and if the person is it a strong founder and probably doomed anyway, and if the person is a strong founder the last thing they need is me to tell them how to run their business
makes a lot of sense. I'm always trying to imagine like what would I want if I was on the other side of the
table? Yeah. Yeah, and it's like knowing what the strong founder would
Want and strong as a port like week founder might say I want you to tell me what my strategy is then I'm like, well if I have to do that, I've already made a decision. That's too
late. Yeah, Mike before we come up to the end of this. I want to talk about growth models. Let's start with
acquisition. Yeah. So the way I think about it is you got four gears in a machine that need to operate in Harmony. And so acquisition is it's literally acquiring customers whether it's a consumer and you
Users for mobile app or customers for SAS app or even an Enterprise app, but like in acquisition you're always asking a set of Economics oriented questions about how efficiently you can you acquire a customer. What is the lifetime value of a customer / the acquisition cost? What is the payback time of an acquired customer? What are the channels that are working best for acquiring customers? What are the ones that are not working? So well, you've got the economic.
Puts that you care about but then you've also got the leading activities of the types of programs that you're going to run to produce those outputs and then engagement is okay. I mean user now am I going to keep using it or am I going to stop using it and engagement involves things like onboarding the user it involves making sure they have a guarantee positive experience within a certain amount of time making sure that they don't lose interest or enthusiasm about the
the product and then monetization is how to make money from an Engaged customer. That was pretty straightforward. Although there's a whole lot of different ways. You can write there's freemium their subscriptions or sads. There's application downloads. There's digital virtual Goods bunch of different ways and then enlistment is how do I get those people to tell other people so, you know, one of the great career sticks of true product Market fit is
Exponential organic growth and exponential organic growth happens because your enlisted customers tell cross referenceable other people this product rocks and it's the most efficient way to grow because you have your Zealot Advocates indicating the truth of your value. And so this goes back a little bit to her be again as well Shane. So, you know, Jeffrey Moore would probably say these four gears they operate at different.
Beads and what you want at the limit is them to be all operating at the same speed. Right? So like if a company maybe they want to grow their recurring revenue and they want to grow it with a certain amount of time and a certain amount of burn. That's that's what the machine produces and then each of these four gears acquisition engagement motivation and enlistment. They turn as a set of flywheels there are integrated together and all the gears.
Can can rotate only at the speed of the slowest gear. And so you're you're not only trying to make the gears go faster, but you're trying to make the slowest gear no longer be the slowest and when you're in the growth mode you want to do that. It is predictable of a fashion as you can so in the value phase. It could take years to get a value proposition because you're running experiments and seeking truth in the growth phase. You've decided to shift gears. You've said I know what works now, I'm
From 0 to 1 to 1/2 x mode and so what I have to do is I have to copy the thing that works in a predictable pattern and what we do is we create these growth gears that operate in harmony to produce a growth output
machine and you want to spend up until I would assume the value per customer right like you just want to put that flywheel in motion and
go that's right. And so we might say an acquisition. Okay. We want our lifetime value of our acquisition cost to be 5 x and we want our
Acquisition payback period to be six months. Well, then the question becomes what would we need to do to guarantee that would happen as a business and then we asked the same for gauge but we ask the same for monetization the same for enlistment and all of those things when they're achieved cause the gears to operate in harmony. Yeah, and when those when those things aren't a cheat if any gear is not going fast enough. We need a process that alerts us immediately when we're off track.
Because if we don't fix that broken gear before, you know it you start rapidly consuming Capital because you're growing and
efficiently. Yeah, definitely and the last one I want to talk about is the VP of nothing.
Yeah. So like, you know earlier we talked about how startup teams kind of jazz band it. So startup teams have Artistry and startup teams make something that's never been made before and Delight people with what they made. That's a very different skill set than
operating these gears scale and so I like to say that you know Founders are kind of like MacGyver in the in the value phase or the Insight phase but they migrated to being VP and nothing in the growth phase because what we need to do is we need to find people who already know how to execute those growth cures and on-the-job training doesn't work in the growth mode of a start-up because if we have to 10x our Revenue in 18 months we
Can't learn that on the job. We have to have people in those roles that know the job and can be trusted to execute.
You. Don't get a six-month window to become productive.
Yeah. So like it's funny, you know, if you think about the Continuum of startup to accompany, it starts out with an Insider knowledge advantage and then it slowly over time migrates to having an execution advantage that makes a lot of
sense.
I think culture would be the ultimate Advantage though because even technological advantages seem remarkably short term these days executional advantages are are real advantages, but they also strike me as short term whereas cultural can persist.
Yeah, I would agree with that and I think in today's world a reality based culture is particularly important, you know, egoless reality-based is a big deal because you know the data exists more than ever.
Get to the truth of things and so you want have a truth-seeking
culture. What are the best CEOs that you're working with right now due to Foster true seeking culture within their organizations.
That's a really good question. And I don't want to I don't want to play too many favorites. One of the guys that I think deserves a lot of credit would be Todd McKinnon from OCTA because he's you know now it's a company with more than 2,000 employees and he's gone from the very
Genin when it was called sash or and they weren't sure what it was to now a market cap of over 12 billion and a very successful proprietary position and cloud. And so I give I think that if a CEO goes that far the distance it's axiomatic. They've done a lot of things right in terms of building the culture
and makes a ton of sense. Listen Mike. This has been an amazing conversation. I want to thank you so much for your
time. Hey, well, thanks Shane. I'm a huge fan.
Of your site and your show so
it was an honor to be included. I appreciate that.
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