How Mike Maples and Ann Miura-Ko Are Opening the Floodgates on Early-Stage Tech Entrepreneurship
If you’re the founder of a new Internet or mobile startup and you’re looking for Silicon Valley investors who can contribute some star power and hands-on guidance along with their capital, sooner or later you’ll probably send your business plan to Floodgate Fund. Headed by Mike Maples Jr. and Ann Miura-Ko, the Palo Alto, CA-based firm has $74 million under management, which makes it more super than a super angel fund but much smaller than most traditional venture funds; “micro VC” is probably the most used and most accurate label for this category, which includes firms like First Round Capital, Founder Collective, Felicis Ventures, and Harrison Metal. Floodgate’s investments, which range from $150,000 to $1 million, are also in the middle range for early stage startups—-not enough by itself to get most companies off to a secure start, but enough to bridge the gap between angel funding and a more serious Series A venture round.
Maples’ investments in Silicon Valley wonders like Chegg, Twitter, and Ngmoco (acquired by DeNA last fall for $400 million) catapulted him to number 17 on this year’s Forbes Midas List, the publication’s lineup of influential tech investors. Maples tends to portray his investing success as one big lucky break. And indeed, there’s some truth to that. His background is in business software rather than consumer-facing Internet services—he worked at Silicon Graphics and Tivoli Systems before co-founding Austin, TX-based broadband software company Motive in 1997—and he got into Twitter mainly because he’d invested in Evan William’s previous company Odeo, which folded. But he has also paid his dues, working at August Capital and Foundation Capital before embarking on his own investing career.
Maples’ firm was known until March 2010 simply as Maples Investments, but it rebranded itself that month as part of a bid to become more of a fixture in the Valley, where it regularly invests alongside other micro VC funds, angel investors, and even traditional Sand Hill Road firms. The change also reflected the fact that there was more to the firm than Maples. Miura-Ko, who got her PhD in computer science from Stanford University and still lectures at the School of Engineering, joined as a co-founding partner in 2008. She’s a Yalie and a former McKinsey consultant who learned the investing ropes at Waltham, MA-based Charles River Ventures; Forbes has called her “the most powerful woman in startups.”
I’ve profiled so many of the companies that Floodgate has funded—Chegg, Okta, PayNearMe, Stipple, TaskRabbit, and Vook, to name a few—that I figured it was time to meet Maples and Miura-Ko in person and find out how they think. So back in April, I spent a couple of hours with them at the firm’s eco-conscious new offices on Ramona Street in downtown Palo Alto. I’ve boiled down my notes on the conversation into the abridged Q&A below. We covered so much ground that I’m going to break the interview into two parts: today’s part covers Floodgate’s picture of the startup world today and how the firm singles out promising entrepreneurs and business ideas. Part 2, coming in a few days, looks at specific startup trends such as incubators.
Xconomy: Let’s start at the beginning. What’s Floodgate’s basic investing philosophy?
Mike Maples: Sometimes it helps to start even before the beginning. Ann and I have this really strong belief system that there is a fundamental change underway in the way innovation is happening. People talk about “lean startups” and people talk about the low cost of going to market, but we think it’s even more fundamental than that. We think the Internet has a constellation of things that have developed around it—offshore labor, search engine marketing, ubiquitous broadband penetration, variabilized-cost Web servers—that have fundamentally democratized the process of innovation. So what it costs to prove or disprove an idea has been fundamentally altered. When you project forward what this really means, we think it’s as important as Eli Whitney and the cotton gin, or Frederick Winslow Taylor and the birth of manufacturing, or Alfred Sloan and the invention of the modern corporation with General Motors. Our view is that the people who understand this shift are going to win in the next 20 to 25 years. That is not just a statement about entrepreneurs. That is a statement about the people who capitalize their companies.
Ann Miura-Ko: That is a trend I saw coming out of Stanford, where I was doing a PhD [starting] in 2003. When I first got there, there were students starting companies based on blade servers and open source software. It was fairly expensive. But by 2007 and 2008, I had students who were leveraging Amazon Web Services and other increasingly commoditized technologies. You literally had kids starting companies out of their dorm rooms. Before that, it was figurative but not literal. This commoditization of entrepreneurship is truly profound. Now any undergraduate at Stanford or any other university can actually start a meaningful business. The risks aren’t really in the technology, but in some unique insight the person has. And often it’s a market insight.
MM: These companies like Facebook that are among the most valuable in the world are getting started in five years and doing what used to take 15 years or 50 years. So not only is technology getting democratized, but once that winning recipe is discovered, the ability of the ecosystem to allow that innovation to scale at great speed has changed.
AMK: If you have democratization on the entrepreneurship side, there is something about capital that is being more commoditized. Even though people talk a lot about the gap between angels and VCs, in my opinion it wasn’t a capital gap, it was actually a gap in understanding how to get entrepreneurs to go from an idea to a scalable business that can actually then become a truly groundbreaking company in the future. Our fundamental insight was that it’s not just the capital, it’s our actual ability to shepherd our companies through learning and discovery.
MM: You may have heard of this guy Commander John Boyd. His nickname was “Forty-Second Boyd.” He could defeat anybody in a simulated dogfight in 40 seconds or less. He coined the phrase “Observe, Orient, Decide, Act,” or the OODA Loop. His philosophy was that the winning fighter is the more agile fighter. This was in a time when the Russians had more military might. You weren’t going to beat them by outscaling them. Instead you get inside their decision-making loop and you disorient them. The F-16 was designed not to be faster than a Russian MIG or to have more thrust but to change direction more quickly. It was designed to be an agile fighting machine.
What’s important about an F-16? The plane itself is important, but the mindset of the pilot and how they fight is important too. When we think about funding startups, we are trying to apply some of that thinking to the early learning and discovery process of a startup. We know when we invest in a company that the first strategy is almost always going to be wrong. We say, let’s just take that as a given, and the idea is to discover the winning strategy as quickly and at the lowest cost we can. How do we pick these companies? Part of what we look for is the entrepreneur who thinks like an F-16 pilot.
X: What attracts each of you to working with early-stage entrepreneurs?
AMK: I think it’s a personal choice. I invested before I went back to get my PhD; I was working as an analyst at Charles River Ventures. It was a great learning environment for me, and I had the opportunity to see how that kind of Series A investing is done. But when I was thinking through what I loved most, I was tainted by the fact that I had been teaching at Stanford, and I had these graduate students who had these fresh, amazing ideas. I had one guy send me four math papers instead of a business plan. I couldn’t think of anything else I would rather be working on than that type of entrepreneurship, where someone has this nugget of an idea and if you could just see that past all the haziness, there was something truly brilliant in what they were talking about . You see that time and time again—students who aren’t jaded, who are still inspired by their initial idea, and just want a little help to get to the next level. So this feels like an extension of teaching to me.
MM: Our personalities are aligned with this stage of investing, but for different reasons. Ann has taught classes and she gets excited by helping these young people translate their ideas into real companies. And a lot of people in these classes are young and inexperienced and don’t know how to run a business—they can describe their idea but they can’t describe what business they’re in. I came from the more visceral, entrepreneurial side. I think I have an appreciation for the frameworks and some of the processes that occur in entrepreneurship. But I am also a little bit of an improviser. I make stuff I up as I go along. We complement each other that way.
X: Is there a general way to describe the kinds of business ideas that attract you?
AMK: The thing we are fundamentally looking for is a unique insight that you have, whether it’s a market insight or a technology. And the way we characterize that is, it has to be non-consensus but right. There are tons of ideas that we find every day that are consensus and right. The Groupon model—everybody agrees that that is a lucrative model, so you see tons of startups creating Groupon for a particular niche. But at the end of the day, it’s a consensus insight. The place you make a tremendous return for an investor is when you find this one insight that no one else believes, but you believe, and it turns out to be right.
MM: In fact, the more people who think you’re wrong, the better. By the time the rest of the world catches up to you, you’ve made huge progress and created sustainable competitive barriers.
We have also found that our success is almost inversely correlated to how many people want to jump into a deal. If you really look back on it, there aren’t many hot deals where everybody is crowding around that end up being great companies. There are hot deals that have modestly good outcomes, but very few have the truly epic plate-tectonic-shifting outcomes. Usually the ones that do really well are the ones that you have to defend for the first couple of years.
AMK: The reason I love this sector of investing is that it’s a privilege to work with these types of entrepreneurs who have that kind of belief in their vision. Mike has had a longer career in investing than I have, but I have even experienced this. To have the opportunity to work with the Kogers from ModCloth, or with Leah Busque from TaskRabbit, or Gurjeet Singh from Ayasdi, who are all disrupting their industries, is just a privilege. Mike has had similar experiences with Kevin Rose and Ev Williams. They all took a chance on us. Our belief is that we have to pay it forward.
X: You used the phrase “lean startup” earlier. To what extent do you believe in the whole Eric Ries-Steve Blank methodology of agile software development and customer development and product iteration and all the rest? Do you believe there’s a science to being an entrepreneur?
AMK: This is the fundamental misunderstanding around lean startups. People think that it’s an algorithm, and that being a lean startup allows you to gather data to make entrepreneurship into a science. That is fundamentally wrong. The ability to discern where to go with your company is a vision, an art.
Mike understands this much more viscerally than I do, but I’ve always been frustrated by the notion that just because you’re gathering data, your decisions are necessarily clear, and that if there are a bunch of naysayers, you should switch gears. We are looking for that fundamental balance between tenacity and sticking to your vision and being able—when you no longer have faith in the vision—to completely scrap the revenue that’s already coming in the door and scrap code you spend weeks building and head in a new direction.
MM: A visionary entrepreneur will generally have an insight about a huge potential market, but they are not dogmatic about how to actualize that insight. That is where the iteration comes in. Neil Young at Ngmoco decided that the iPhone was going to be a huge platform for games. That was at a time when the conventional wisdom was that phones had not been good gaming platforms, and Apple had not even come out with an SDK [software developer kit] for the iPhone. There was no evidence that it would be any better for games. But he said, “Looking at the iPhone and knowing what I know about games, I think this is going to be an enormous market.”
Ngmoco never stopped chasing that opportunity to sell games on the iPhone, but they pivoted from selling apps to free-to-play. The really good entrepreneurs, in our experience, never really alter their core vision, and their fundamental advantage doesn’t even change that much, but the way to maximize that potential in the market could change in a pretty radical way.
AMK: That said, there is a very thin line between the “visionary entrepreneur” and, as we say, “the entrepreneur who is having visions.”
X: How do you know which is which? When do you trust that the entrepreneur is right about something like the size of the potenital market?
MM: That is the hardest one to answer. A potential market is like potential energy in physics. You can’t see it converting to mechanical energy. If it was an obvious market, big companies would go after it. So it has to be a huge potential market, and then you have to have a visionary entrepreneur who is better equipped to go at that market than anybody else, through their proprietary insight. As they explore, they might make a lot of course corrections. Christopher Columbus didn’t land in the part of the New World that he thought he was landing in, but he was going after a huge potential market, so even though he was off course, he landed somewhere compelling. We are looking for markets that have such huge potential that we have a lot of opportunities to course-correct.