Mike Maples Jr. explains three forces that create startup opportunities: Moore's Law makes computing cheaper, Metcalfe's Law shows networks grow exponentially, and power law returns mean a few companies capture most venture value. Founders should chase high-leverage bets where these forces compound.
Chapters
There's 3 exponential laws I'm going to talk about, and I think they basically animate startup opportunity. I think that they are fundamentally the 3 asymmetric weapons of the startup. The first is one that probably most of you— so how many of you have heard of Moore's Law? OK, everybody pretty much, right? So Moore's Law says that the performance of computing doubles every 18 months at a given price. Now it's funny, we take Moore's Law for granted. But Moore's Law is very profound. Moore's Law guarantees that the tech industry will remain magical. And the reason that Moore's Law is so powerful is because of the power compound interest. Give me an incumbent of any arbitrary size, Give Moore's Law enough time and it will breach the advantage of any incumbent company, no matter how powerful that company's position is in the market. And so the thing that is so important for our industry about Moore's Law is it guarantees a continuous supply of new awesome companies that change the way we view the world and that could be potentially disruptive. How many people have heard of Metcalfe's Law? Just a show of hands. Okay, so not nearly as many people. So Metcalfe's Law is named after Bob Metcalfe. Bob Metcalfe is widely regarded as one of the prime movers of inventing the Ethernet. And so Metcalfe's Law is about network effects. So Metcalfe's Law basically states that the value of a network is a function of the square of the number of the nodes. And if you think about it, it makes sense. Every new node that gets added to a network has the potential to connect to all the prior nodes of the network. And so as the network gets larger and has more nodes, some people argue that it's not 100% exponential, but it approaches exponential increasing returns. OK, how many of you have heard of the power law? OK, not that many as well. This might surprise you. So there are more than 10,000 startups in a typical year created. And actually right now we're in a little bit more of a frothy time, so it's more like 20,000 to 30,000. 10 of those companies create 97% of all the exit value in the industry. That's really hard for people to get their mind around. By the way, this is why venture capital and startups are not an asset class. Most asset classes follow things like the capital asset pricing model, or they follow things like a normal distribution of returns, where you have a 1 sigma event this way for the better, and a 1 sigma event this way for the worse. That's not how power laws work. They work like this. So my first angel fund I had that had Twitter in it, we made more than 500 times on our investment. It didn't matter that 2 other companies in that group of investments went public. Twitter dominated all the returns. In the next fund we had, DemandForce returned 3 times the fund by itself. Lyft has that kind of power and the fund after that. And so here are some other statistics. So for example, what we find is in a typical startup year, the best startup of the year is generally more valuable than all other startups created that year combined. So Facebook was created in 2004, more valuable than all other tens of thousands of startups combined created in 2004. Paul Graham once told me at Y Combinator— and I think that the values have flipped now because this is about 3 or 4 years ago— he told me at the time that Dropbox was worth more than all 550 other companies that they had run through their accelerator at the time, and that Airbnb was worth more than all the remaining combined, and so on. So what the power law basically states is that generally speaking, the value of the best outcome will exceed the combined value of all the remaining outcomes. And then the value of the second best outcome will exceed the value of all remaining outcomes, and so on. OK, so I said that the first key thought was about exponential reasoning. This is tech entrepreneurship in one slide. Leveraging the power of Moore's Law and/or Metcalfe's Law to create an extraordinary outcome. That's the whole business. Everybody I know, well, for the most part, who's really done well in Silicon Valley was involved in one of those extraordinary companies, either as a founder, as an employee, maybe even as a lawyer. If you're not trying to be one of the top 10 companies of the year, you're competing with 9,990 other companies for 3% of the scraps in the industry. And so the first thing that I like to emphasize to people when they start a company is start a company that's worthy of your talents, that you think represents the absolute utmost gift you have to offer to this world and your life.
