Mike Maples: Lessons from SVB; Crisis Management Tips; USD's Status as the Reserve Currency | E993

1. 0:00 – 1:00

   Intro

   1. MMMike Maples0:00

      The Western world has not been adequately responsible with how it treats its money. The solution to every problem has always been, print more money. At some point, that's not gonna work. You know, some people are extreme in their predictions and think that something really catastrophic is gonna happen very soon, other people think not. But it's inevitable that the dollar will not be the reserve currency if we are not more responsible with the stewardship of our money.

   2. HSHarry Stebbings0:31

      (intro music) Mike, I am so excited for this. I always learn so much from our discussions. I'm worried that you're gonna invoice me one day, and I'm gonna get this massive-

   3. MMMike Maples0:39

      (laughs)

   4. HSHarry Stebbings0:39

      ... shock from your advice and the bill that comes. But thank you so much for joining me today.

   5. MMMike Maples0:43

      Well, thanks for having me. It's fun to talk to you.

   6. HSHarry Stebbings0:46

      Now, I would love to start, we're gonna focus on actually the lessons that founders can take from what's been happening in the last few weeks with SVB. But I just wanna start, tell us a little bit about yourself, and bluntly, why you're so well-placed to advise early-stage founders on the lessons that they can take from the last few weeks?

2. 1:00 – 2:23

   Who is Mike Maples?

   1. HSHarry Stebbings1:00

   2. MMMike Maples1:00

      Yeah, well, I suppose that you could regard me as one of the OG seed investors. And so, I've been seed investing since, uh, 2005, and, uh, some things have changed a lot, but some things remain the same. And I think that one of the things that I've seen in this situation, and I've seen in other situations like it with COVID or with, uh, the financial crisis of 2008, is that you have a choice about how you want to respond to a crisis, both in the moment and in terms of how you want to get better in the future. And so, uh, to me, that's w- what probably places me well in this situation is that, um, you know, I've seen this movie a few times before, and I've learned, uh, what the best founders do, you know, in response to these different situations and how it makes them better in the future.

   3. HSHarry Stebbings1:50

      I remember when I was 17, I failed all my school exams and I was just a complete failure in my own mind, and my stepfather told me, "It's not that you fail, it's how you respond to failure that determines the type of person you are." And I always remember that one.

   4. MMMike Maples2:03

      Yep, I agree.

   5. HSHarry Stebbings2:05

      Now, I wanna start, now, there's been a lot of, like, analysis on what went wrong, finger-pointing, who to blame, that's not what we're doing today. We're doing the takeaways and the practical lessons that founders can incorporate into their daily roles. So, when we think about lesson number one, you said to me crisis lesson number one is scenario planning.

3. 2:23 – 31:23

   Lessons from SVB

   1. HSHarry Stebbings2:23

      Mike, can you walk me through, what is the scenario planning lessons that founders can and should take away?

   2. MMMike Maples2:29

      Yeah, so it's interesting, uh, one of the things I noticed during what was happening when the SVB bank run occurred, there was a very wide variance in the quality of response that we saw, uh, s- for some founders versus the others. Some founders would be in a position of saying, "Look, if we can't get our money back within a certain amount of time, we're out of business."

   3. HSHarry Stebbings2:54

      Right.

   4. MMMike Maples2:54

      Or, you know, they, they were talking about what they hope would happen, uh, but the problem is there are some things that you can't control. And so, the best founders, what we saw, they were doing scenario planning. They... and with scenario planning, what you try to do is you try to map the choices that you have, you know, the different options, against the- the different uncertain outcomes. And so, like- like, um, maybe an example that would resonate with everybody was when COVID-19 happened, there were lockdowns, and nobody knew how long that the lockdowns would be. And so the lockdowns might be three months, they might be six months, they might be 12 months or longer. And given those different scenarios, what are your choices? Don't change my plan, reduce my plan by s- certain amount of expense, or reduce my plan by a whole lot more expense? But what you get is, like, a- a matrix, and then you start to say, "Okay, within each of those cells of the matrix, what will we need to do?" And so the best founders that I worked with during this crisis with SVB were very clear about, "Okay, we think we're gonna get our 250,000, but there's a scenario where we don't get all of our money back and we don't get it back quickly. And in those scenarios, this is what we would face, and this is what w- the choices we'd have to make if we get no more money from investors, uh, or if we get some money from investors." And that's the kind of conversation that you wanna have. You wanna be very sober, very matter of fact, very clear about what the options are, none of this, "Oh, woe is me. How did this happen? This isn't fair," because you don't- you don't have the luxury to think those thoughts. You don't have the luxury to worry about who's to blame. You don't have the luxury to- to wish things were different or hope things get better.

   5. HSHarry Stebbings4:46

      So, Mike, I do just wanna drill down a little bit deeper, 'cause I want this to be as granular as possible, and I also, sadly, don't think this is the end (laughs) of, um, banks collapsing, so I think this might be practical f- in the future. Um, but it's what do scenario plans actually look like? How are they communicated? Is it by email? Is it by phone individually with investors? Is it in a timeline basis? Is it in, like, Bard shot? Like, how are they actually presented to you in the best way?

   6. MMMike Maples5:13

      Yeah, I think that the guy that did it best this time, in our portfolio, was probably Michael Gao at SmarterDX. And so he did a whole bunch of work, and then had a call with Ann and some of the other investors on Saturday morning, and was basically like, "Okay, uh, if- if- if we only get our... if we only have our insured deposits, uh, we have to make payroll, and then we have to figure out what we're gonna cut, you know, what's essential, what we would have to cut, and then we have to figure out if we would wanna put more money in the business." And to be honest, the way he conducted himself and the way the company's executed so far, I think Ann and I would've been very enthusiastic about putting more money in the business, right? Because some companies, if you have a chance, and I don't mean this by taking advantage of a situation, but if you have a chance to own more, you would, if you could come to a deal that's fair.... um, and then, and then, you know, the other scenario was, uh, we get a fraction of our money back, and it takes a while. And- and so then he talked about the implications of one week versus a month versus longer. And then the- the- the third scenario was we just, it gets solved this weekend, but we didn't really talk about that scenario, right? Because if that, if that, if that happens, w- we're good. Uh, but- but that, to me, was an example of really handling the situation well, and it wasn't just he sent us an email, and it wasn't just that he sent us a matrix, but he was like, "Okay, we're partners in this business. We all have a stake in what's the best decision. We all have a stake in what we're gonna do, so let's- let's approach it like we're business partners together in building this company." And so I thought he handled himself really well, and he led the discussion, right? He wasn't like, "What are you guys gonna do to bail me out of this?" It wasn't any, it was- it was very much like, "Here's a set of options we have, and like-"

   7. HSHarry Stebbings7:06

      Right.

   8. MMMike Maples7:06

      "... how do- how do we think about what's the best option?"

   9. HSHarry Stebbings7:09

      Mike, how many of your founders did scenario planning? Respectfully, I probably have one or two out of maybe a hundred?

   10. MMMike Maples7:16

       I- I'd say a fair number, but we were, we were fortunate in that, um, when COVID happened, uh, I had a webinar with our founders called Own Your Runway, and it was, um, one of the, one of the aspects of the agenda was scenario planning and the importance of it. Like, I- I actually think scenario planning is good not just for crisis management, but it's good for uncertainty, right? So, uh, I'm a big fan of Annie Duke, uh, who wrote the book Thinking in Bets, and y- when you think about it, startups, you don't wanna have too much of a rigorous, deliberate plan, because you- you don't know how all the uncertainties are gonna play out. What you really wanna do is be empowered in the face of uncertainty rather than reacting to uncertainty, and scenario planning lets you have confidence and precision about the actions you take depending on what occurs a- as events unfold. So, I think it can be, it can be good for any situation, not just a crisis situation.

   11. HSHarry Stebbings8:12

       I totally agree with you there. Um, can I ask? I was worried. I spoke to a couple of founders, and they were like, "This is why actually we like multi-stage funds at seed, because if it comes to situations like this, they just have a lot more capital to put in and to reinvest in uncertain situations when we need cash and we need it fast." Do you worry that there's gonna be, like, this centralization of power back to multi-stage funds just 'cause they have these huge reserves?

   12. MMMike Maples8:38

       I don't know. Um, if anything, I see the multi-stage funds somewhat retreating from seed.

   13. HSHarry Stebbings8:44

       Huh.

   14. MMMike Maples8:44

       So, I think that in the last few years, they made a whole bunch of seed investments, many of which aren't working, and they haven't engaged with their founders as tightly as they could, right? And so I think that the multi-stage firms, like any firm, your fund size is your strategy, so if there's a crisis, you're gonna tend to worry about the companies that move the needle in your large fund less so than, "Oh, I wrote a million dollar check to this company 18 months ago."

   15. HSHarry Stebbings9:12

       Can I ask, what makes you think that they're re- I'm just curious here, but what makes you think they're retreating? I had Dave Tisch on the show, and he talked about the five on 25 product that these wonderful funds have created for us. Um-

   16. MMMike Maples9:22

       Yeah.

   17. HSHarry Stebbings9:23

       ... I- I don't see them retreating, though. What makes you think that? 'Cause I'd love to know.

   18. MMMike Maples9:26

       Yeah. Yeah, a- and retreating may be too strong of a word, but I think that they are now, some of them are now seeing, um, the impact of writing a whole lot of seed checks, and not having their top people managing those relationships, and now being in a situation where they raised a whole bunch of funds with a lot of money really quickly, and they need to make sure that their fund returners have the capital and, uh, help that they need to- to even break even from the last round. You know, if- if- if I have a billion dollar fund, I'm gonna worry about those types of things more than I'm gonna worry about the next million dollar check or protecting the company I wrote a $2 million check for nine months ago.

   19. HSHarry Stebbings10:13

       Totally. No, I- I agree with you there in terms of the concentration of time. Final one before we move to lesson two. Uh, uh, Dave did say also that signaling was one of the biggest lies in venture. Um, do you think signaling's a lie or do you actually think it's very real?

   20. MMMike Maples10:26

       I- I- I tend to agree with Dave there. I- I think signaling is overrated. I think that, uh, companies that perform well always raise money, and companies that perform so-so can sometimes benefit from a positive signal, but u- u- usually, usually not being able to raise is a function of not getting product market fit more than anything else.

   21. HSHarry Stebbings10:48

       Yeah. The one thing I think does make a difference is when you have partner churn at multi-stage funds, though.

   22. MMMike Maples10:53

       Yeah.

   23. HSHarry Stebbings10:53

       If you can be orphaned at multi-stage funds, even if you do well, if there's no real owner, it can be a lot more difficult to have your internal champion to lead the A, I find.

   24. MMMike Maples11:02

       Yeah, I think that's fair.

   25. HSHarry Stebbings11:04

       Now, lesson number two, before I go too off course. Uh, you're gonna have to bring me back-

   26. MMMike Maples11:08

       Okay.

   27. HSHarry Stebbings11:08

       ... unlike me being the one bringing you back.

   28. MMMike Maples11:10

       Sure.

   29. HSHarry Stebbings11:10

       Uh, financial agility. So, crisis lesson number two, financial agility. What should we learn about financial agility from the last few weeks?

   30. MMMike Maples11:19

       Yeah, so you know, a lot of what I saw, especially the Twitter sphere, was, well, you know, CEOs should know how to manage risk, and they should know that FDIC only insures $250,000. I think that's the lo- the wrong lesson, right? Like, I look at it like startups are impossible. Startups start out dead and have to prove they're alive, and they have one job to do, which is get product market fit, and that means answering one very specific question, which is, what can we uniquely do that people are desperate for? And anything that you do not in the service of that is wasted errors of energy. Your time is the only thing that's zero sum. And so a decision to become a part-time hedge fund bond expert i- it subtracts from your efforts to get product market fit.And so, the way I look at it is, the real lesson is one of financial agility. What, what you want is not to become an expert at finances. What you want is to create the conditions where you can move quickly, no matter what happens. And so, like, what might that look like? Uh, one best practice might be have at least three places to keep your money already set up, and have some amount of money in each one. You'd probably want them to not be 100% correlated, so if you have a, if you have an account with us, with BBR First Republic, you probably wanna be in a big three bank as well. Um, you probably wanna have a, if you have the capital, at least three months runway at each account, um, and then put the balance in the, the least risky account. If you have less than that, you might wanna put three months in the least risky one and divide the rest. Uh, and if you, um, you also want to create pathways between the accounts, and so if something happens, you don't wanna be typing and surfing online to figure out your wiring instructions, right? You wanna be, like, mind like water. Okay, we need to move, zap money from point A to point B, these are the people authorized to do that in our firm, these are the wiring instructions immediately available, let's go. Because it's, it's the ability to move fast that saves you. Y- you're, you know, you get yourself in trouble if you only have one bank account and, like, you wanna move fast but you can't because now you're opening other accounts and you gotta wait a couple weeks to get approvals, and everybody else is doing the same thing. And so if you, if you already have your own sort of mini rails between your accounts, you're, you're protected much more from random occurrences. And that's independent of insurance, right? That's independent of a lot of things. And now you don't have to worry about am I buying short-term bonds or long-term bonds, or like, stuff that a founder shouldn't really have to worry about too much.
4. 31:23 – 33:58

   Are VCs to blame for the bank runs?

   1. MMMike Maples31:23

   2. HSHarry Stebbings31:23

      Can I be honest? It really pissed me off when I saw a lot of people say, "Oh, VCs are to blame for the bank runs." I was like, are you kidding me? Have you studied the mechanics of how banks work and SVB's balance sheet? It was not VCs that caused the bank runs.

   3. MMMike Maples31:36

      Yeah. And I, and I sort of look at it, um, there's this philosopher one time, um, Schopenhauer, who said something to the effect of whenever somebody misbehaves or acts inappropriately or in bad faith towards you, um, don't let it be a reason to get angry. Think of it as a, an opportunity to increase your knowledge.

   4. HSHarry Stebbings31:56

      (laughs)

   5. MMMike Maples31:56

      And so, you know, there are some learnings from the fact that, uh, people don't seem to like VCs very much, or don't seem to like techies very much, or think that it was a bailout. You know, it's incredible to me that you could put your money in a bank, that there's not transparent reporting, that the federal government said was okay, and now, it's like somehow an entrepreneur's fault because th- the bank's assets weren't what they said they were, and that you would have had to be a financial guru reading footnotes to know that that was the case. Like, it's incredible to me that anybody would say that remotely resembles a bailout.

   6. HSHarry Stebbings32:31

      The one thing that I do struggle with is, like, given what we kn- like, knew at the time, there were people who actively came out in support of SVB. As i- if you have a fiduciary duty to the money that your LPs have given you, and you are aware of the situation, to come out and actively encourage your companies to keep your money there, to me, is a clear obfuscation of your fiduciary duty. Now, I don't think that's causing a bank run. I think that's actually just honoring the loyalty to your LPs.

   7. MMMike Maples33:00

      Yeah, and I mean, like, um, that's not the decision I would have made, right? I'm not gonna judge who made what decision, but my view is that it's not my money. And, uh, and, uh, you know, if I was the Stanford Endowment, if I was, uh, you know, Sloan Kettering, what would I want Floodgate to do? Uh, you know, that's what I need to be doing. Uh, and so-

   8. HSHarry Stebbings33:22

      I agree.

   9. MMMike Maples33:23

      ... that was, that's kind of the North Star in my view of how you decide those kind of things.

   10. HSHarry Stebbings33:28

       Yeah, I totally agree. Um (laughs) , sorry-

   11. MMMike Maples33:31

       (laughs)

   12. HSHarry Stebbings33:31

       ... I'm not trying to pull you into something there. Um-

   13. MMMike Maples33:34

       Yeah, you know, I, I try pretty hard not to comment on how other people do their job, right? I, it's hard enough for us to do a good job, but, so it's like, I have a set of beliefs about how certain things could be handled, but like, you know, other people, s- mileage may vary. (laughs)

   14. HSHarry Stebbings33:51

       I totally get you. Uh, Mike, I do wanna-

   15. MMMike Maples33:53

       (laughs)

   16. HSHarry Stebbings33:53

       ... do a quickfire round with you, um, so-

   17. MMMike Maples33:55

       Okay.

   18. HSHarry Stebbings33:55

       ... it's gonna be a short statement. You give me your immediate

5. 33:58 – 35:58

   Will the economy improve by the end of 2023?

   1. HSHarry Stebbings33:58

      thoughts. Will we be in a better or a worse place by the end of 2023?

   2. MMMike Maples34:03

      I'm afraid we will be in a more difficult place by the end of 2023.

   3. HSHarry Stebbings34:07

      What does that look, is th- is that more bank runs? Is that like, or worse? Uh, how does that look? I'm genuinely, I have no idea.

   4. MMMike Maples34:15

      I think that, that, um, the western world has not been adequately responsible with how it treats its money.

   5. HSHarry Stebbings34:22

      So.

   6. MMMike Maples34:23

      And, uh, the solution to every problem has always been print more money. And, it, at, at some point, that's not gonna work. You know, some people are extreme in their predictions and think that something really c- catastrophic's gonna happen very soon. Other people think not. But it's inevitable that the dollar will not be the reserve currency if we are not more responsible with the stewardship of our money in the United States. If th- if, if, if we cannot do that, if Washington, DC cannot wake up and be a more responsible steward of our money, th- there will be one crisis after another, and the people impacted by these crises will have to respond in a way that has nothing to do with market forces or nothing to do with whether they're running a good business. It'll just be external random shocks that they have to deal with, that they couldn't plan for, that wasn't their doing. And so, I hope that, um, our leaders in Washington can start to even adopt some of the things we talked about here, being more transparent, um, not, uh, sort of obfuscating things, not, um, playing politics. You know, we need to do a better job separating politics and economics, and we've, we, we've, not doing a good job of that right now.

   7. HSHarry Stebbings35:45

      Should the Fed just guarantee all depositors across all banks to prevent bank runs?

   8. MMMike Maples35:51

      I'm not, uh, y- I have some opinions on that, but I think I probably should abstain from that.

   9. HSHarry Stebbings35:55

      (laughs) Sure.

   10. MMMike Maples35:56

       Um-

   11. HSHarry Stebbings35:56

       I'll bet.

   12. MMMike Maples35:56

       ... to me, to me, the,

6. 35:58 – 39:58

   The Fed Printed Too Much Money

   1. MMMike Maples35:58

      the, the, the thing that we need to do is to zoom out and say, "When are we going to get more responsible with how we treat the dollar? And when are we gonna get more responsible with resisting the urge to always print money as the reflexive response to everything?" You know, the amount, the amount of money that we printed during the COVID crisis is just a scandal. And, and, you know, they wanted to print more. It, it's just, it's just crazy. And so, you know, it's just been a series of unforced errors. We print a ton of money. Everybody says, some people say, "That's gonna cause inflation." Other people say, "No, it won't." Well, of course, it was gonna cause inflation.And of course, it was gonna be not just a short-term inflation, everybody who was paying attention thought that. And so now, lo and behold, we have inflation, we gotta jack up interest rates, and so that creates another set of problems. But like, all of these things were just a sequence of unforced errors, where if we'd just been more responsible with our money and not played politics with our money, we'd have been so much better off. And, and I just think it's a real shame, and I think we need to... I th- I think we need to learn from this, you know, kind of in DC and in our economy and how we, how we treat the money going forward.

   2. HSHarry Stebbings37:09

      The trouble is the alternative to QE is to make more money.

   3. MMMike Maples37:13

      Right.

   4. HSHarry Stebbings37:13

      And that's really freaking hard when you're comparing how much money we've printed. And so it's like, well, one side's impossible and the other's really easy. Let's just do that easy side.

   5. MMMike Maples37:25

      Yeah. And the problem is, eventually, y- you'll... The, the doing too much of the easy thing for too long backs you into a corner. And, you know, we're... The Fed is progressively backing itself into a corner where it has fewer and fewer good options. And that's why I think we're gonna have some challenging situations ahead. I'm not, I'm not a macro forecaster. It's just that, like, sometimes I think that the best way to predict the future is to have a firm grasp of the present. Uh-

   6. HSHarry Stebbings37:54

      Yeah.

   7. MMMike Maples37:54

      ... I think I learned this from Howard Marks. And if I look at what's happening in the present, we have not had an honest discussion about what it means to have responsible stewardship of our money. And if, if we're not willing to have that grownup conversation, we're not willing to act on that conversation, the future is not gonna be as good as we want it to be.

   8. HSHarry Stebbings38:14

      What trend are you seeing that you don't think others are seeing?

   9. MMMike Maples38:18

      This would be a, a, a longer discussion, but I think that, uh, AI is gonna potentially change how companies can be built. And so before I started Floodgate, the way funding worked was you funded technical milestones. So, you know, I've got a router, it's gonna go 10 times faster than the other guy's router. If I can prove that I can build that thing, I get more money. Uh, now, if you can, if you could solve that, there was no market risk. Li- like, so, i- in the old days of tech, um, you funded technical risk, right? If I can cure cancer, if I solve that problem, there's no market risk. And so you would fund projects where if you could build the thing, people would want it. Then came the era of the LAMP stack and lean startups, and this is really what enabled firms like Floodgate and th- early seed funds. What we realized was that at the other end of the spectrum, you had market risk. And so Kevin Rose had started Digg for $1,500 over a weekend, and so there's no technical risk there. The only question is, given that just about anybody could have built bi- Digg, who's gonna be the first, who's gonna be the first company to get product-market fit? So it became, who's gonna get adoption first? Who's gonna get distribution first? And so lean startups and seed funds had the insight to understand that you could fund market risk takeout rather than technical risk takeout. And as, as you increased your certainty that people wanted what you were building, then you escalated your funding and you escalated your commitments, which was a different model.

7. 39:58 – 43:33

   Why It’s So Expensive to Start an AI Company

   1. HSHarry Stebbings39:58

      Do you think, do you think the capital intensive nature of startups is kind of going in a U-shape form, which is like, you know, when pre-Floodgate or at the start of Floodgate, it was actually very high starting companies, then you got kind of the democratization of tools and amazing tools which made it much cheaper to start companies? And now when we look at most AI companies I speak to, and I'm naive here, I don't actually know the breakdown in costings of starting an AI company-

   2. MMMike Maples40:19

      Yeah.

   3. HSHarry Stebbings40:19

      ... but all founders that I speak to in AI tell me engineers are extremely expensive, uh, obviously AI engineers are extremely expensive, the data is extremely expensive, the storage is extremely expensive. Like, we're taking everything back to actually it's really expensive to start AI companies today, and you need-

   4. MMMike Maples40:34

      Yeah.

   5. HSHarry Stebbings40:34

      ... four or five million.

   6. MMMike Maples40:36

      Yeah. And so, so I... So there's expense, but to me, the important question is the type of risk that's gets, getting funded, right? And so what I find interesting about AI, and this is why it'd be a longer conversation, but I think that it's the emergence of what I would call big T technical risk simultaneous with big M market risk. So, what do I mean by that? So, some ideas require $100 million of mass compute to prove that you can do it. You know, you're, you're saying, "I'm solving an important problem that's gonna make a bi- big difference in humanity, but it's gonna take massive computing resources for me to train the models and for me to run the computing cycles to solve it." And so, you know, maybe, maybe you raise not $100 million right away, although some people are, but you raise enough money that you can take out enough of the technical risk to prove that that amount of mass compute down the line is justified. So, I would call that big T technical risk, right?

   7. HSHarry Stebbings41:35

      Right.

   8. MMMike Maples41:35

      You're... And, and, and, you know, the key to success, I think, is to pick technical problems where there's unambiguous desire in the market for the solution if you have it, right? Like, it's, it's dumb to take... It's dumb to solve a hard technical problem that nobody wants if you solve it, right? Th- that's just dumb. You wanna solve a technical problem where people unambiguously desperately want it if you solve it-

   9. HSHarry Stebbings42:00

      I, I-

   10. MMMike Maples42:00

       ... but it's hard to solve.

   11. HSHarry Stebbings42:01

       I always think of actually Vinod Khosla who said, "Like, I will take as much technical risk as you give me-"

   12. MMMike Maples42:06

       Yeah.

   13. HSHarry Stebbings42:06

       "... but I just don't want any market risk."

   14. MMMike Maples42:09

       That's right. So now you have the opposite end of the spectrum, big M market risk. You know, you've got, um... You used to have the LAMP stack and AWS and stuff like that that let you reduce the cost of experimentation and getting people to adopt your products. Well, now, you know, people can write code faster. Now people can check their code, they can generate things, they can create programs, they can... You know, I think if anything, it takes even less to develop an idea using AI than it did with lean startup, uh, techniques. And so, okay, there's gonna be a lot of companies that do really cool stuff.... but there could be a thousand just like 'em. And in that, and in that scenario, all the benefits go to the cu- the customer, which is great for customers. But, you know, when you're a startup, you've gotta not just create value, you gotta capture value for your startup. And so, I think with big AM market risk, the key is gonna be, how do you thrive in an environment where the market risk goes way up if, if that's the type of product that you're building? And so, I think that there are solutions at both ends of the spectrum, but I think they're not obvious, and I think that there's gonna be some people who succeed by understanding that.

   15. HSHarry Stebbings43:23

       Mike, um, in loss years, we saw fund deployment paces increase significantly. Yours did not, uh, if I'm right. Yours was actually-

   16. MMMike Maples43:31

       Yeah.

   17. HSHarry Stebbings43:31

       ... a much longer duration.

8. 43:33 – 49:08

   Fund Deployment Pacing

   1. HSHarry Stebbings43:33

      How do you think about fund deployment pacing?

   2. MMMike Maples43:37

      Yeah, I feel like, um, one of the most underappreciated variables that a fund can control is its timeline.

   3. HSHarry Stebbings43:45

      Yes.

   4. MMMike Maples43:45

      So, the more risky the investments that you make, and let's, let's face it, seed is as risky as it gets, pre- seed and pre-seed, the more time diversification works to your advantage. And so if you're, if you're raising a fund every 18 months at the height of 2020 to 2022, you're gonna be paying high prices the whole time. You're gonna, you know, you're gonna be exposed completely to whatever risk was involved in that window of time. And so, the, the advantage of time diversification is you don't have to try to predict the future. It's, it's a lot like what we were talking about earlier with financial agility. What you're saying is, all things being equal, if I invest over a five-year time horizon, which is, you know, our Fund 6 was from 2017 to, uh, early 2022. If you, if you invest over a five-year time horizon, if the market corrects, you've got a bunch of companies that already got product market fit, right? You're not, you're not suddenly triage mode of all your c- you know, companies the last two funds, you know, y- you might be worried about 20% of your last fund. And so, and, and, you know, you're not paying high prices the whole time, you know, you're, you're paying the prices that, that characterize the market, but you're able to diversify that over time. And so I think that if you're... th- the riskier you are in terms of the stage that you invest, the better it is for you to have a longer time horizon.

   5. HSHarry Stebbings45:12

      Can I say, I think reserves are an irresponsible way to deploy capital. And that's a bold statement, but I say it because you've been doing this a long time. I've not been doing this anywhere near as long as you, but eight years is long enough. My winners have not been obvious early, and my losers were often obvious winners early. And so, it's very difficult to project out which are the winners and which are the losers within the timeframe of your reserves deployment.

   6. MMMike Maples45:41

      Yeah.

   7. HSHarry Stebbings45:41

      How do you think about that?

   8. MMMike Maples45:43

      Um, let's see. We, we could do a whole episode on that someday-

   9. HSHarry Stebbings45:47

      (laughs) Go ahead.

   10. MMMike Maples45:47

       ... but I'll, I guess I'll, I'll net it out. Um, what we do at Floodgate is 70/30, and the reason, I learned this from Dave Swenson, like, your allocation decision is a... So, so Dave Swenson at Yale once told me, "Your allocation decision is one of the most important decisions that you make." So, you know, if you're a, uh, individual investor, how much are you gonna put stocks and bonds and cash and those types of things is a huge determinant of success. And so allocation at a VC sense is how much upfront, how much in reserve. Um, pro rata rights are a right, and so there, there's an amount of reserve that's valid if you play offense with those reserves, if you're not just backstopping companies that are, uh, have uncertain performance, because pro rata rights are a right. They, they are a competitively advantaged use of your money if you use it correctly. Uh, the second thing that we did was we have a partner dedicated just to follow on investing. And so the person that writes the first check doesn't get to decide who writes the follow-on check. Uh, that's Iris in our partnership. And to us, that's a matter of governance. And so Iris says, "Hey, look, I'm accountable for the same type of returns that every other partner is, so I need to play offense with my money, so I need to decide where I put my money." So I'm wanna harvest our pro rata rights in a way that I'm playing offense. So I think if you do that, you can do well. I think that the risk adjusted returns of acting that way could be quite good. But, but, but I think a lot of people don't use reserves well and don't put most of their money in their top companies.

   11. HSHarry Stebbings47:21

       Is the partner who led the investment and is closest to the founder not best positioned to write the follow-on investment? I understand the decision-making separation that comes from having a separate partner, but is that knowledge not all bestowed upon the one who wrote it and has that relationship?

   12. MMMike Maples47:37

       Well, I mean, b- b- it's, w- we're all in the same firm, right? So we talk about these. But, but I would say that, um, I would like the person to write the first check to be irrationally committed to the success of the company. And so I want them to be trying every way they can to help the company succeed. And so, um, I think it's better if someone like Iris can sort of say, "Hey, look, we want everybody to succeed, but I, you know, I, I'm... my job is to put the most money in the best companies." And so, you know, c- five years into Fund 6, right, we, we have a chart of these are the c- most valuable companies in Fund 6 based on valuations, not based on opinion. What percent of our reserves are in those companies? And, and, you know, if it's high, you can guess that we're doing a good job on the follow-on dollars. But like, to me, that's the, that's the valid way to think about it. You know, you don't wanna... what, what too many seed managers do is they say, "Oh, I, I know this company better than the rest of the world knows it, so I'm gonna put some more money in." But all too often, they know things that aren't so. And there's a, there's a reason that the company struggles to raise. Um, and so, uh, you know-... I, I, I, I try really hard not to overestimate our ability to fund companies that the market doesn't wanna fund when that's their job at that stage and we know more than the rest of the entire market. I'm pretty skeptical of

9. 49:08 – 51:39

   Mike and Harry’s Biggest Mistakes

   1. MMMike Maples49:08

      that.

   2. HSHarry Stebbings49:09

      What was your biggest mistake of the last five years? Mine was, uh, an overreliance on numbers, an over-

   3. MMMike Maples49:15

      Hmm.

   4. HSHarry Stebbings49:15

      ... academic, um, uh, assessment of a business, and I didn't take into account geography, political regimes, weather patterns, things that you're like, "Well, any great founder can overcome any market." No, they can't. They cannot overcome political regimes. It does not work. (laughs) Um, and I didn't factor that into decision-making and I just viewed business on spreadsheets. That was my mistake. What do you think your biggest mistake was over the last five years?

   5. MMMike Maples49:43

      You know, last five years, I feel pretty good in general, y- you know, I think that y- there are times where you bring your best self to work, you know, I, I don't think I was as good from, say, 2011 to 2013 as I'd been up until that point. I f- I feel like we were quite good-

   6. HSHarry Stebbings49:59

      Why was 2- why was 2011 to 2013 bad though?

   7. MMMike Maples50:02

      I was on too many boards and just, you know, um, I wasn't... When you're on too many boards, sometimes you don't learn fast enough, you're not, uh, present and, uh, mentally awake enough, and you're not, you're not incorporating lessons quick enough. Um, whereas the last five years, I feel y- you know, the numbers one day will, will reveal themselves one w- way or the other, but, like, you kinda know when you're executing, right? You know when you're bringing your best self to work. And I feel, I feel we've been largely successful at bringing our best selves to work, uh, but the, the regret I would have, uh, when I made mistakes has been somebody comes in with a product that is very similar to something I believe is interesting about the world, and I fall in love with the idea without adequately diligencing the founder's ability to make it real. And so I'm, I'm a sucker for things that are on strategy for how I think the future's gonna be, and then I overlook, uh, whether the founder really has the stuff to make it happen, um, but, you know, trying to get better about that as well.

   8. HSHarry Stebbings51:07

      Should founders have boards at seed? I was with an LP of mine the other day, and he was like, "Ah, Harry, you need to be on the board at seed for governance reasons." And I'm like, they, they're pre-product, they're trying to find customers. This is ridiculous (laughs) to suggest foundational governance requirements. I, I agree, but they don't need a board for that at this stage. Do you agree or do you think boards at seed are really helpful?

   9. MMMike Maples51:30

      I, I think it varies. You know, I like to say every company's its own snowflake and every, every company has its own situation. The one thing I would say though is, um,

10. 51:39 – 54:18

    Has a company with PMF ever failed?

    1. MMMike Maples51:39

       I, I had conversation with Michael Seibel a, few months ago. And, uh, so I funded Justin.tv when he was w- on the founding team back in '07, and he asked me a question that I really liked, which was, "Have you ever worked with a startup that got real product-market fit and failed or wasn't even wildly successful?" And I was like, "That's a really good question." And I thought about it some and I said, "I can't think of a single example." And then I, I asked him, "Okay, at YC, um, how about you? You've seen 3,000 companies. Have you ever seen a company get true product-market fit and not be wildly successful?" And I'm not gonna cast aspersions on a specific company, but he said he could only name one example out of 3,000 companies. And so what, what's the takeaway there? The takeaway is, it's like when Vince Lombardi used to say, "Winning isn't everything, it's the only thing." In a zero-to-one startup, product-market fit isn't everything, it's the only thing. It is the only thing. And it's like we need to answer a specific question, what can we do unique that people are desperate for? Eliminate distractions. And so, like, if, if it means I join the board to help the founder do that, great. I join the board. But, like, on some level, my job is to help the founder always return to true north. If we get product-market fit, we will be successful, almost no matter what else happens. And if we don't get product-market fit, we could do everything else right, it won't matter. So there's only one thing.

    2. HSHarry Stebbings53:13

       Do you believe that though? 'Cause product-market fit's so transient. I was in Clubhouse that I have-

    3. MMMike Maples53:17

       I don't that... Uh, uh, when it's real, I don't think it is. I, I think real product-market fit, um, is not transient.

    4. HSHarry Stebbings53:25

       So pro- so Clubhouse didn't have product-market fit?

    5. MMMike Maples53:28

       I don't think so. I think it had COVID market fit. I think it had-

    6. HSHarry Stebbings53:31

       (laughs) .

    7. MMMike Maples53:32

       ... a bunch of people staying home, bored out of their minds, trying to figure out what to do, and it became... it was kind of this meme-worthy thing. And, and by the way, I, I'm still rooting for Clubhouse, right? I like, I like, I like those people a lot. Um, but, like, product-market fit gets to something more profound, right? Like, product-market fit shows up in the world with something radically unique that, that people are desperate for that they can't unsee it. And, um, if you d- if you, if you achieve that milestone, it's very hard to fail.

    8. HSHarry Stebbings54:08

       Uh, I, I totally... I like that. Um, (laughs) very good. Um, okay, tell me, I wanna finish on this one. From a DPI perspective, which is the same as cashback,

11. 54:18 – 54:51

    Mike’s Biggest Win

    1. HSHarry Stebbings54:18

       what's been the biggest home run investment for you and how did it come to be?

    2. MMMike Maples54:23

       Oh, that's a good question. I, you know, I need to think about that some. I, I, I guess Lyft would probably be up there. Uh, you know, we, we did pretty well on that one. Um, (sniffs) yeah, because, you know, Anne invested like $750,000 at five and a half million post money in the seed round, and so we got a pretty good multiple on that and, you know, got, got, got cash out at good times.

    3. HSHarry Stebbings54:50

       Yeah. O- o-

12. 54:51 – 55:47

    What do LPs really care about?

    1. HSHarry Stebbings54:51

       sorry, final one. One LP said to me the other day, "The managers who will have trouble raising are those who had the chance to have liquidity, but didn't take it in the good times." Do you agree? And how do you think about kind of liquidity and the ability to take it over the next few years?

    2. MMMike Maples55:06

       I, I, I, I guess I agree in the main. I, I kinda feel like in the end, people care if you made 'em money or if you didn't make 'em money. And if you don't make somebody money, there's gonna be a lot of reasons that they don't like what you did. Uh, and, and if, if you didn't distribute things at a high, that'll be another reason that they didn't like what you did. And rightfully so, right? It's like, uh, uh, they're giving you money, they want you to send them back more money. And that's, that's the job. It is what it is.

    3. HSHarry Stebbings55:36

       Yeah. No, it doesn't... I, I, I do get you. Mike, I've loved doing this.

    4. MMMike Maples55:40

       Okay.

    5. HSHarry Stebbings55:40

       I always learn so much from our chats. Uh, thank you so much for doing this and I super appreciate it. (laughs)

    6. MMMike Maples55:45

       All right. Thanks, Harry. Good talking to you.

Episode duration: 55:47