The Birth Of Floodgate: Text Of My Discussion With Mike Maples

I sat down with Maples earlier this year. Below is a transcript of the talk. It’s sometimes easy to underestimate just how entrepreneurial an investor can be. When you read the stories below, you’ll see. There are many valuable investing nuggets in here, worth a very careful read…

—–

@semil: We are in the Studio today with Mike Maples, managing partner at Floodgate. Mike, welcome to the Studio.

Maples: Thanks for having me.

@semil: Years ago you were in Austin. You founded motive and went public. You were looking for the next thing to do. I think it would be really interesting to tell us how you came to the Valley and started Floodgate. Most people know you and think “Oh yeah! Mike started Floodgate,” but there is actually kind of a winding path to get there.

Maples: Yeah and I guess I got intrigued by two things at the same time. First of all, I just got intrigued by what at the time was being called Web 2.0. I was watching all these things happen. Blogs, user generated content, podcasting, broadcasting — all these things. I was just like, “I’m sitting here on the sidelines. I have got to get up to Silicon Valley.” Then I got intrigued by the Venture Business and I had no idea that you didn’t just apply for a job in the venture business, so I naively thought, “Well, I’ll just immigrate to Silicon Valley, and I’ll just….”

@semil: Because you founded this company and it went public and….

Maples: Yeah and I thought it’s like any other job. You just…you say, “Here are my qualifications and hire me.” That’s not how it really works. I’d never made an angel investment in my career. I’d never done a consumer startup. My profile as an investor was not very encouraging it turns out in hindsight.

@semil: You moved to Silicon Valley. What were the first things you tried to do, or what did you work on?

Maples: I was lucky enough that two venture firms gave me some time to spend inside their firms — Foundation Capital and August Capital. I think a lot of the insight for the micro-fund I had while I was there at those two places. I saw a plethora of entrepreneurs who wanted to raise just a million dollars. If you have a five hundred million dollar fund, you just can’t make the math work investing a million dollars. I thought, “What if you had a twenty five million dollar fund”? Then, if you made twenty 5x you return the fund on a million dollar investment. That’s where the seeds of the Micro-fund were born. That’s when I started getting intrigued by the idea and the fortunate thing is — being insight the two firms — I had enough data points to have some conviction that I was onto something.

@semil: You originally came here and thought that, “Hey, I want to be a Venture capitalist” Let’s say on Sand Hill Road.

Maples: Right.

@semil: Basically, you were told, “No” twice.

Maples: Yeah, I did not distinguish myself well enough inside of those two firms to be offered a partner role. I never really looked at it that way. I looked at it like I was thankful that they gave me the time.

@semil: Of course, of course.

Maples: They were awesome to me at the time.

@semil: Right. That also planted the seed for, as you were saying — no pun intended — to see a gap in the market, right?

Maples: Right.

@semil: Tell us a little bit about how you started forming Floodgate, or what became Floodgate.

Maples: Couple things were happening at the same time. First of all, I had no track record as an investor. I just decided the only way anybody is ever going to think I’m an investor is if I invest. I started investing my own money — $50,000 a quarter. I said, “I’m going to do this for 12 quarters and I’m going to either hit some winners, or I’m going to declare it a strikeout, failed experiment.” My first investment ever was Odeo — Evan Williams. I was begging him to let me in, because he had no reason to accept money from a washed-up enterprise software guy from Austin, Texas. He took some of my money.

@semil: Why do you think he took some of your money?

Maples: I think we just had a good chemistry. I think he knew that I was a real entrepreneur and hadn’t just played one on TV.He knew I was passionate about podcasting and I’d spent a lot of time really understanding his business.We got into that one. That didn’t work out, right? Odeo goes out of business and Evan gives the money back to all the investors. Nine months into Silicon Valley, I’m like, “I can’t get a job in the venture business. I’ve made one investmennt. It seemed to be going sideways.” I was feeling kind of like a loser. Then I met Kevin Rose at Digg, and it was the same thing. I said,” Kevin, if you don’t let me invest in Digg, I just have to warn you. I’m going to go on a hunger strike in your apartment.”

@semil: [laughs]

Maples: Which, I guess was an unusual tactic, at the time.

@semil: Yes. [laughs]

Maples: I invested in Digg. If it weren’t for Evan and Kevin, I’m not sure that I would’ve gotten enough momentum to ever really raise money, or ever — I’m not sure I would’ve ever gotten into first gear.

@semil: Kind of like you were saying earlier, it’s those entrepreneurs and founders really, who create opportunities for people like you and who are starting those companies.

Maples: Yeah, it’s funny there’s a lot of talk about how, “Well, the entrepreneur succeeded because their own gumption,” but also those early venture guys that believed in them and backed them. We were almost started in the reverse way. We — the entrepreneurs, and their generosity, and their belief that we could make a difference and a contribution — gave us the chance to get some runway and a running start. We’ve never forgotten that. Ann and I, when we think about how we practice the business, we’re always like, “We have to remember, that the entrepreneurs had our back when the chips were down.”

@semil: Right. In another story you mentioned — that kind of ties into that right? I think it’d be great for the audience to share just a little bit about your investment in Chegg, or the guys who started Chegg. I don’t know if it was called that before. You’re saying you knew them for about 18 months and they were about to turn off the lights. They came to you with an idea. Right? Really no one at that point would probably invest in them. Looking back on that, share a little bit about the narrative, but also what you learned from…

Maples: I met Aayush and Osman when they were relocated to California from the mid-west. This Chegg had started this Chegg post at Iowa State University. The original idea was we were going to be the Craigslist for college and college was is the ultimate local market. We tried that for about 18 months and we had moderate success. Then Facebook decides they’re going to do classifieds. We’re like, “OK, we’ve got like sixty days of cash left. If Facebook succeeds, we’re out of business. If they fail, we’re out of business, so we’re sure as heck are not going to raise money on this idea. We had been batting around this idea of textbook rentals a little while — for about six months, but we decided we couldn’t afford to do it because we’d have to buy books. Osman and Aayush are like, “Well, what we need is just 90 days to try it and all we want is a chance to try the fall semester.” They started this thing it was originally called, “Textbook Flix,” which clearly wasn’t going to fly as a long-term name, but we just wanted to try to see if it would work. We tried this Textbook Flix thing and we didn’t even have a warehouse. We would — whenever someone would rent a book, we’d ship it from Amazon. These students would be calling us and they’d say, “What’s up with this book from Amazon?” We’d say, “Oh, just ship it back to Chegg.”

@semil: [laughs]

Maples: “It’s no problem, just a clerical error. Sorry.”

@semil: Before you made this decision to back these guys on this 90 day — all hands on experience, how closely were you working with them up until that point? I know you had spent 18 months with them.

Maples: Back in those days it was pretty close, because Chegg was my first investment in my first fund. One might say I had a pretty good run at beginners luck because Odeo had turned into Twitter. Digg sort of went sideways, but Digg was a great investment to be part of.

@semil: Great group of people.

Maples: Great group of guys. I met the ngmoco guys because of Kevin Rose introducing me to Neil Young, and Bob Stevenson. It was a great project to be involved with. Then Chegg had the biggest early near-death experience. I was fresh off of just starring the jaws of defeat in the face myself, in terms of fundraising and being a VC. It’s only over when you decide to quit, so…

@semil: Then do you think that in today’s climate — that was a number of years ago — that people would make that kind of investment or would they now shut it down and start something new, or do you see that kind of stuff happening, or hearing about it?

Maples: I don’t know. I guess all I can say is that people ask me, “What is the most fun thing about the venture business?” Obviously, Twitter taking off like it did has been huge fun. Or when ngmoco set a world land speed record to a $400 million exit. The most satisfying ones are the ones where we were staring death right in the eyes. It seemed like there was no way out. You had to MacGyver some miracle just out of the ashes and you had no time left. Those are the ones where you say, “Man, if we hadn’t all gone in all together there would be no Chegg to discuss.” I’d say those are the most satisfying. The ones where the chips were down, it looked like there was no way out, and somehow we just MacGyvered a miracle.

@semil: I think that’s a good area to transition into like, how did you start Floodgate? You’re investing your personal money into Odeo, Chegg, and then how did you decide to actually go and ask other people for money and institutionalize this idea you had at foundation in August?

Maples: Yes, at first I thought that no respectable people would ever invest in me, other than folks who I’ve known from the past. There were some guys down in Texas who had believed that I could make some waves up here. I raised about — it was an unconventional fund. I would raise $5 million a year. Basically, I was like, “You guys can back out at anytime and I might decide I’m a crummy investor at anytime.” We did two $5 million tranches. By the end of the second tranche, it was clear things were working. We were in Chegg. We were in Demandforce. We were in reputation.com. Sendori was about to have an exit. Weebly was doing really well. Fund I was an epic fund for the ages.

@semil: You started very small, right?

Maples: Very small. t was just me, yeah.

@semil: Let’s just walk through the mechanics. How did you start it? How did you go out to raise money? How did you decide on $5 million tranches? How did you go out and source things? Maybe you knew some people, but not a lot.

Maples: Fund one was defined as that which I can raise in 30 days or less. I saw all of these guys out try to raise funds. They would put $25 million on the cover or something like that. They’d be raising and raising and raising. Pretty soon, you get the stink on you because you can’t raise the money. I was like, “I’m just going to tell a bunch of people I’m not sure I know what I’m doing. Invest an amount of money that you’re prepared to lose it all.” Austin Ventures, who had backed Motive and have backed [indecipherable 10:45] before, put a lot of the money in. I guess I’ve been involved with things that had made them money before, so they gave it a risk. I want my fund to be done before people know I’m fundraising. I was subleasing space from Retro Pharma. I couldn’t have a sign on the door, so I used to call it my undisclosed secure location.

@semil: How did you go out…I guess you was sourcing when you were at Foundation in August, but how did you find it going out without a brand? You were just Mike. Did you find that it was just all personal relationships? Did you have to kiss a lot of frogs? What was it like in those days?

Maples: In the early days, I decided this is a people-flow business and not a deal-flow business. I’ve always had this leap of faith that if you just spend all your time with smart awesome people, that the dots will forward connect. The deals will reveal themselves, and somehow you’ll get into some good ones. That’s when I would say, two meetings before lunch and two meetings after lunch every day. I just did that over and over and over again. I just wanted to get in as many reps as I could. At the end of the week I would say, “How many of these people were awesome and smart, and how do I increase and improve my ratio next week and the week after and the week after”? When you’re meeting the smartest people in the given area — at that time it was the consumer Internet — you’ll eventually going to learn a lot yourself, and you’re going to have something that contribute to the conversation. I would keep a set of notes about some themes that I thought were interesting, and I would share them with the entrepreneurs, and see which ones I agreed with or disagreed with. There was no doubt in anybody’s mind that I spoke with that I really cared about the space in a visceral way and I think that helped. I think also, back in those days, there were no other micro-funds other than maybe First Round Capital.

@semil: Actually, I was going to ask you about this next which is, if you time-shift everything — you sold Motive last year, and you moved here now — it’d be really, really different because you were one of the few doing this kind of model. I guess I would ask more reflectively, what would you think — over the last few years — has been the biggest change that you’ve seen across the venture model? Let’s say, from institutional or micro-angel VCs up to the big guys?

Maples: I would say two things. In the micro-space, I would say that it’s gone from being under-supplied to over-supplied. I think part of being a good investor and having a good company is you need to have enough insight when the world believes the opposite of that. Guys like me and Josh Kopelman, when we started micro-funds, people said things like, “Well, people have tried that stuff before. It doesn’t work. You’re going to get creamed. You’re not going to have enough capital. Consumer Internet is all about eyeballs. You weren’t here for the dot com meltdown.” Nobody really cared what we were doing back in those days. Everybody thought we are stupid, wildcat, or a fly-by-night sort of guys. Now, everybody wants to have a fund. Everybody wants to be a seed investor. Everybody wants to have some variation of the early stage. I think it’s been over supplied. Then if you step way back at the macro factors in the venture industry, right now, I see a bipolarization. Right now, people seem to think that seed deals and chasing the next Pinterest with a lot of money and momentum are the hot places to be.

@semil: Let’s unpack this real quick as we have it. One, if there’s an oversupply of seed capital, what are the things you believe could happen as a result of that? Or will that just be “this is the new normal”?

Maples: I just think that it’s kind of the circle of life. Sometimes there’s too much. Sometimes there’s too little.

@semil: You feel like it’s cyclical?

Maples: Totally.

@semil: In terms of this bipolarization side, in terms of a lot of capital in a small number of funds chasing momentum deals, what do you think could happen as a result of all that?

Maples: I think the venture business reminds me a lot of nine-year-olds playing soccer. When you see nine-year-olds play soccer, the soccer ball goes and everybody goes after it. Then it squirts out and everybody goes after it. What I find in the venture business is everybody is always really excited about the topic de jure, whether it’s seed funds, or super angels, or micro this, or what Yuri Milner was doing a couple of years ago with DST, Y Combinator accelerators. What ends up happening is that’s the soccer ball de jure. Somebody, like Paul Graham, deserves all the props in the world for doing a righteous job and having a great model. Now, there’s — I don’t know how many hundreds of accelerators? Most of them are nine-year-old soccer players. What I find is the venture business has a tendency…I would have thought that it was more evenly distributed where people invest, that there’s more contrarians and things like that. But in the end, I think most people follow the soccer ball right where it is. They do the nine-year-old soccer chasing thing. Next year, there will be a new fad de jure that everybody’s chasing.

@semil: Sounds like the perspective you’re sharing, in closing, that’s the perspective that someone would have who hasn’t spent a lot of time here. You’re still relatively new to the valley. You have that perspective.

Maples: Yeah, and I think that the key to being a good investor is not to chase the latest thing, but to be your best self and to have conviction that you have something to offer in your space. When you spin your wheels, that’s when you get away from that.

@semil: All right. Mike, thanks for coming in and sharing all those stories. It’s great to have you.

Maples: Thanks for having me. It’s great to see you.

Haystack is written by Semil Shah, and is published under a Creative Commons BY-NC-SA license. Copyright © 2017 Semil Shah.

“I write this not for the many, but for you; each of us is enough of an audience for the other.”— Epicurus