Fifteen years ago, in 1996, while I was still a student at Carnegie Mellon University, I wrote an article (blog post in today’s parlance) about the future of computing. The article was really a response to a concept that Larry Ellison from Oracle and Scott McNealy from Sun were pushing at the the time. That of the diskless “Network Computer“. At the time I didn’t have the guts to call them out by name, but I did feel strongly about how the technical direction for the NC was wrong.

I mentioned this article in a conversation I had with the co-founder of a new startup. He tried to look for it an couldn’t find it and so emailed me to see if I still had a copy. I tried to find it on the Web and I couldn’t either. After all, this was Before Google (B.G.)  and also before the  Internet Archive and the Wayback Machine (which is a lot of fun when you’re feeling nostalgic or just want to laugh at what was cool back in the day!).

After a little bit of digging through old backups, I found a folder with drafts of a couple of my old articles/paper from 1996. At the coaxing of some folks on Twitter, I’m reproducing the article in its entirety here. Just as it was, with no edits. Before you read this, please be aware that this was written in 1996 - that is 15 years ago. I was still young, and had a full head of hair (really, I did). The Pentium / Pentium Pro was the state of the art processor. There was no WiFi, and CRTs still dominated the display market. Laptops were just beginning to appear. Floppy disks still existed. CD-ROMs were new and cool (no DVDs!).

Hope folks enjoy reading this piece of history (at least my history!) and get a few chuckles out of it…

Today’s computer a couple of years down the road….
A vision of what the next big thing in the computer industry might be.

Manu Kumar
(sneaker@cs.cmu.edu)
School of Computer Science
Carnegie Mellon University
Sunday, May 05, 1996

Introduction

I like most of my papers to be colloquial. It allows me to explain what I want to say rather than get lost in formality. So this paper is going to follow the same colloquial style.

Everybody and their dog is attempting to predict the future directions of the computer industry. Its extremely fast pace is leaving everyone guessing about what’s going to happen next. The person who puts his/her wager on the right choice is going to land up with some big bucks and others may fall from their high horses and lose their millions. It’s a gamble… a gamble with high stakes, high risks and most importantly, driven by a highly scientific and technological basis.

In my opinion, the fact that the industry is based on technology gives it a certain degree of predictability; and in this paper I chose to use what information I’ve gathered regarding the industry in order to predict the directions of the machines for tomorrow. What you have to keep in mind is I’m talking about tomorrow, i.e. the near future, although I may wander off a bit and become a bit more futuristic.

One caveat regarding this paper: it assumes that you are somewhat familiar with the current industry news and technological developments.

Today

The Web is taking (taken) over. It’s had an exponential growth. In fact, it’s growing so fast that the word exponential may very soon be an inadequate description. And now, all the big companies (Oracle, Sun, Microsoft etc.) are talking about integrating the desktop with the Internet. “Internet Appliance” and “Network Computer” are the hot buzzwords.

And I agree with them all. They are right. The Network Computer is the way to go. But, I don’t agree with everything that they propose. In the next few sections I discuss what I feel the Network Computer or Internet Appliance should be, and what I think would be some of the essential characteristics of it’s design.

Moving Down the Road

So now that I’ve laid the foundation…

The Network Computer

The network computer, is analogous to the dumb terminal of yester-years. Except that there’s one big difference. Somewhere along the way it got smart. In fact, it got intelligent enough so that you no longer need to be a whiz to use it. It just works. And how does it work? Well, that’s what’s coming up next….

Lawrence Ellisons’ description of the Network Computer (NC) with just two wires is exactly right. What makes it simple today to buy a television from a store, bring it home and use it the same evening(i.e. you don’t need an expert to set it up for you! …well, okay at least most people don’t!)? The television needs only two wires. You know exactly what they’re for. It needs juice (electricity) and it needs the antenna or cable plugged into it in order to receive the television signals. Similarly, the Network Computer, must have only two wires, the juice-wire and the net-wire.

The biggest problem with making computers as wide-spread as televisions are today, is the end user. The end user may not be competent enough to figure out the intricate details of plugging in the right wires, installing the operating system (well, most machines come with them installed now), installing the software they need…. and most of all getting it all right. Or even if the user does have the necessary level of expertise, he/she may lack the time or the inclination. The bottomline is that the end-user does not want to deal with all the complications of setting up a computer just right. (Actually, I’d be willing to argue that right now cheap and good computer support has a great market potential if it’s done right; but that’s a whole other story.) But is the user really a problem? Or is it the equipment? Why does a computer need to be more complex than a television?

The Network computer resolves all these problems. You bring it home. Plug it in to the electric socket and plug it in to the network socket Okay, so that’s being a little futuristic… but think about it, how skeptical were people when Thomas Edison, first invented the light bulb? I bet they said then, that it’s impossible to get electricity everywhere. Or when Alexander Graham Bell talked on the telephone for the first time, they must have said that it’s impossible to have a telephone in every home! But today, you can plug in 30,000 feet above the ground and you can call home from virtually anywhere. Okay, so maybe that’s an exaggeration, you can only plug in 30,000 feet above the ground if you fly first class on some airlines. But the point is electricity and even phones for that matter, at one point in time faced the same skepticism that the net faces today. It will happen.. you will have a network socket… but for now it may just be your phone line, ISDN line or eventually your Cable TV line.

So where were we? We brought the NC home, and plugged it in. There is no on-off switch.. you don’t need one. It is always supposed to be on (or maybe asleep… but never off!) So you plug it in and it come on. Now what? Before, I describe that, let’s take a little techie-diversion. I want to first describe address the technical issues as they will help in understanding what happens next.

Technical Details

So far the only thing I’ve mentioned about the NC is that it has two wires. Now depending on how futuristic you want to get, I forsee several different approaches to the NC. I classify them into Maybe Tomorrow, Maybe Next Week, Maybe Next Year and Real-Soon-Now (of course these are just to give you a relative time frame, so don’t take it literally).

Maybe Tomorrow: Tomorrow NC may look a lot like the desktops and portables of day. It’ll still have a keyboard, a mouse and all the regular parts of a conventional computer. It’ll have it’s own monitor, sound etc. The biggest difference in this Network Computer will be the Operating System and how it handles file storage (common difference to all)

Maybe Next Week: Drop the keyboard. Improve the pointing device. Add in a good Speech Recognition. Make it even more powerful, bigger in storage, but smaller in size.. small enough to move around easily (notebook size?).

Maybe Next Year: Make it even smaller. Put in some flexible high resolution display. Make it even lighter. Possibly cut one of it’s wires off completely and reduce the need for the other, i.e. the network is wireless, and the power consumption is low enough to give it a usable battery life!

RSN: Drop the monitor or whatever is being used for a display. Add in some holographic video. Drop the mouse. Add in some Intelligent Agents. …basically you could let your imagination run wild with this one. But let’s leave that for the time being and come back to realistic things.

Several of the technological advances necessary for achieving the different levels of functionality described above, are already being tested in research environments. However, it will still take a little time for them to be made usable by the masses and more importantly, commercially viable.

But the real big difference in the Network Computer I believe is in the storage model.

The Storage Model

The entire storage model of the Network Computer can be summarized in one word: cache! All the storage on your local NC is a cache. The entire local hard disk is nothing but a huge cache.

When you power on the Network Computer for the first time, it’s Flash ROM based Operating System boots up and immediately contacts it’s vendor(s) over the net connection. It then asks the user what his application for the machine is and then proceeds to “cache” the appropriate software… over the network. The user need not have any idea about how to install software, how much disk space it needs, where he must install etc. All he says is, I want to use this machine to write papers, or surf the net, or play games, or do development.. or any combination of the above. The machine is self-aware. It knows how much space it has, what the requirements for installation are where it should install etc. Of course, not all of this information is within the machine. The information is distributed… on the network.

So take for example a word-processor. I tell my NC that I want to write a paper. The NC checks it’s local cache to see if it has the word-processor software cached in it. If it does, it verifies that it’s copy in the cache is up to date. If not, the NC will automatically cache a fresh copy or apply a patch (differential updating) to update it’s own copy to the latest version. Then I can proceed to word-process to my hearts content.

The key idea is that the user has no floppies to deal with and need not know anything about the machine or about managing the software. The machine automatically updates itself and maintains itself.

The document is always saved… by continual checkpointing. And it is not only saved in the local cache, but uploaded to the secure centralized storage provided by the Network provider. Yes, your main storage is on a network file system, somewhere in cyberspace. So you can be anywhere in the world, as long as you connect to the net, you will always be able to get any of your files.

The obvious questions arise… what if you are not connected to the network? What if you want local storage so that you are not wasting time and bandwidth getting everything from the network all the time? How big should the cache-size be? And so on. Before, I address these questions I would like to explain the rationale behind this idea.

Rationale / Source of the Storage Model

The model given above is derived from the use of AFS (Andrew File System) developed at Carnegie Mellon University (principal architect: Mahadev Satyanarayanan). In AFS all files are stored on distributed file-servers. AFS clients operate by using a cache. Whenever the use needs a file, it is read into the cache. And used from the cache. If the file on the server changes, the cached copy is now invalid (depending on the version of AFS this is handled differently).

AFS relies on a connected network. If the network dies, AFS cannot function correctly. Coda, the next generation successor of AFS, is smarter. It allows for disconnected operation by allowing the disconnected user to continue using the cached copies.

The AFS and Coda is one piece of the background I needed to introduce before explaining the rationale for the model. The other piece is a more far-fetched. It may be hard for some to swallow at the time but this is where I forsee the industry heading towards. Eventually, you will not be buying software the way you do today.. in stores. Software will be sold over the network. And most probably, there will no longer be a single one time fee that you pay for a particular version of the software. There will be software subscriptions, just like magazines (in fact we can already see some of these in offers like the Visual C++ Subscription from Microsoft). The charge for software will probably be on a per-use basis. So you are no longer paying for a particular version of a particular software. You are paying for using the software each time you use it.

Let me illustrate with an example. I am writing this paper in a word processor. I use a word processor very often to write papers. However, I use a spreadsheet only once in a blue moon. Now, does that mean I should have to buy the entire spreadsheet package, even though I use it only a few times? In the pay-per-use software business model, at least in my opinion, both the consumer and the developer benefit. The price the consumer pay is proportional to the benefit he/she receives from the software. And the developer receives a proportionate payment from each user.

I spent a long time trying to come up with an appropriate analogy for this scenario. But “software” is so unique that it was hard to come up with a single example that would illustrate the point. One example, is of two people who have different appetites. The person who eats less pays less for his food. There person who eats more.. pays appropriately. Another analogy, is that of renting a car and paying by the mile. However, the main objection to these analogies, is that software unlike food and cars in non-tangible. It has nearly zero replication cost, especially if everyone is downloading it from the net; it does not get consumed or decrease in value with use. So then, why should users always keep paying the developers and software companies on a per use basis?

It’s a valid question. One I’ve been pondering over myself. Maybe the per-use price can be made so low that users don’t mind, and the software companies can still be profitable. Or maybe there can be a price ceiling imposed on the maximum payment on a per-use basis. Say, I use my word processor so often that if I use it everyday for a whole year, I would be paying the software company about two times as much as I would if I bought the package in a store today. In that case, maybe the maximum payment ceiling may say that if you have used the software n times or for n useful hours (the number of times a word processor has been used would be an inaccurate representation of amount of benefit obtained by using it… number of hours seems more suitable) and have hence paid n times x units of currency to the developer/software company, thereafter all subsequent uses will be free.

These of course are just some of the options. As an analogy, think of the different telephone/long distance plans. Each one has a different pricing structure, catered to the use of the customer (usually it’s catered to extract more money from the customer, but in most cases I think both the customer and the company benefit).

Software is never “complete”. I would be willing to argue that it is impossible for a software (or anything for that matter!) to be finished, completed, perfect. There is always room for improvement (it’s the largest room in the house!). A developer can always think of some bug which is still in the code. There is always some feature that can be improved. So in the pay-per-use Network software distribution model, the user can always be using the most up-to-date version of the software. (Of course, at times older versions are better.. in which case the user may actually tell his machine to not automatically update the software without checking first).

So with this little background given, let me tie it all in to the storage model given above. The NC’s hard disk functions as the cache in an AFS client. It caches all the software that a user need to use. Whenever the user uses a particular software the use is logged, either locally or remotely. (Privacy issues are bound to come up here. Which is where local (well, not really local… it would still be stored on the network storage, but in the user’s secure personal account) logging is better. Only the number of use-units is reported to the software vendor, for charging purposes.

Whenever the user begins to use any particular software, the version of the software is verified over the network. If the vendor has released a new version since the last time the software was used, the patch will automatically be applied, unless of course you the “advanced” user has told the machine not to automatically apply patches and check with you first.

Now the cache storage model is a little different from the regular caching models. It is an intelligent cache. The user can tell the cache that I use this file very often, so I don’t want to get it over the network each time… make sure that the most up to date copy is always in the cache(Cache Hoarding). Though initially, this decision may be made by the user, eventually, it can be made by a software agent which monitors the way the user uses the machine, and tunes the cache accordingly.

When the user is not connected to the network, the optimistic caching principle of Coda comes into play. The user can still work on whatever he has in the cache. The network copy will be updated the next time the user connects.

So this is what I consider the biggest difference, treating the entire hard disk as a cache. Now, let me discuss what I think can make this model work and make it happen really soon.

Java OS

Before I even begin this section, let me admit that I am biased. I am completely sold on Java.

In my opinion, the JavaOS that Sun has been touting for a few months now, can be made extremely useful. Think about it. All it is, is a simple OS. Which does cache handling and gets all it’s intelligence from the information on the network. It can be extremely lightweight (especially once the Java microprocessors that Sun is planning on come out) and yet have decent functionality.

The NC then just reduces to a nothing else but a Java run-time environment. Which can be manufactured very easily and extremely cheaply. (Costs are a big factor in technology!) The only “software” on the NC then is the ability for it to go on the net and find it’s vendor. Once the vendor has been located, the NC knows how to upgrade it’s OS. So it goes out gets the latest copy of the Operating System. From there on all the operations are handled by the OS. The advantage of the OS being done in Java is that it’s completely replaceable. The software that I’ve been talking about above is nothing else but Java applications which are cached on the local hard disk.

Of course the same thing is possible with Windows as well or with any existing commercial OS. But the idea is to have a very light weight operating system. A modular OS. A new OS, which is designed for such use.

Currently, performance issues seem to be the biggest hurdle for Java. But Sun Microsystems is developing Java micro processors. My hunch is that the Java micro processor or any other lightweight yet extremely powerful processor (StrongARM etc). may provide the necessary base for developing such a JavaOS.

Intelligent Agents

Let me add a small blurb on intelligent agents. Intelligent agents will become an integral part of the NC. Like the caching agent I described above which monitored usage and came up with a heuristic for the best caching policy. Or we can have browsing agents and filtering agents which prevent our puny little minds from the barrage of information coming at us. There has enough been said about Intelligent Agents, by several who I consider to be a lot smarter than I. Let’s leave it to the best, and simply acknowledge, that this NC will open new arenas (commercial arenas?) for Intelligent Agent use.

Conclusion

This paper is a real mess. It definitely needs some more reorganization. But it contains some of the points I wanted to make in some way, shape or form. The objective of the paper was to speculate on what’s happening next and possibly see if other’s agree with this speculation or not. I’d be happy to entertain your comments or suggestions or even discuss this with you in more detail.

You can follow me on Twitter at @ManuKumar or @K9Ventures for just the K9 Ventures related tweets.

When I started K9 Ventures, I did so based on a specific investment thesis which had a clear set of investment criteria. One of those criteria was ‘Capital Efficiency.’ We hear that term lobbied around often these days. It comes up most commonly in cases when investors talk about how “it’s gotten cheaper to start a company these days” (particularly in the Web space), and therefore these companies don’t require a lot of capital. That was my thesis as well.

In fact, when starting K9 I used my own startups as an example such capital efficiency. In my first company, SneakerLabs, the total capital raised was $1.15M. I started the company in December 1996, we sold the company in March 2000 (3+ years). We had just under 20 people prior to the acquisition at over $100M — that’s a pretty capital efficient company by any definition. My second startup (iMeet/Netspoke) raised a combined funding of around $2M — not a lot of capital for a company that grew to 60+ people before it was acquired. So I argued that I want to try and find companies which can follow a similar model. Raise a modest amount of capital and then have a great return. Sounds plausible right? Well, today I’m going to explain why I now believe that this thinking is flawed (for Silicon Valley at least, not sure about other geographies).

While the reasoning above is mostly sound, it doesn’t take into account one very critical variable: maturity of the funding ecosystem. I’ve since realized that the reason why my startups were so darn capital efficient was not because they didn’t need that much capital. In fact, our Valley-based competitors (eGain, Kana, WebEx, Placeware etc.) had raised a lot more capital than we had. The real reason was that we simply didn’t have access to capital. This was partly due to us being located in Pittsburgh, where there are only a handful on local venture capital firms (neither of which funded either of my startups). The other part was because I was still learning how the system worked and in hindsight didn’t do a good enough job of attracting venture capital from firms in the Valley or the east coast.

So, we were capital efficient, but only because we had no other choice. I now claim that:

“There is no such thing as a capital efficient company (at least in Silicon Valley). There are only two types of companies — those that attract capital, and those that don’t. And you obviously want to be the former.”

Let’s dissect that a bit. If you look at most of the recent (<5 years) Silicon Valley tech companies that we consider “successful” today, most of  them have raised a lot of capital. They certainly don’t meet the simple definition of capital efficient without additional qualifiers. Why is that? Because when a startup starts to do well, VCs all sit up and take notice. That starts a feeding frenzy that then results in VCs calling up the company and literally offering money on a platter. The entrepreneurs look at that and appropriately think — “if I had more money, I could do X or Y.” And more importantly, “things are good now, but what if they’re not in the future? Wouldn’t it be nice to have a cushion in the bank for the rainy days?” And so the company takes on more capital. (Sometimes companies take on more capital than they should which results in indigestion for the company, or what I otherwise refer to as the curse of over-capitalization, but that’s a topic for its own blog post sometime.)

By contrast, even if you’re a company that’s doing well, if the VCs don’t take notice, you’re going to have a tough time raising the capital you need. You’re not attractive enough for the $$s. So what’s your option? You either become more attractive for the $$ or you become capital efficient!

As an investor realizing this has been a critical bit of learning for me. It has caused me to change my criteria to not look for just “Capital Efficient” companies, but instead to look for companies which are “Capital Appropriate.” i.e. the amount of capital the company needs is commensurate to the size of the opportunity or to the size of the potential exit that company can have. If you’re going to be a multi-billion dollar company, then raising $50M or more isn’t a big deal. But if the opportunity is only that of a $100M company, then raising $50M to get there would not be a good path.

Yes, it is cheaper to start a company (at least certain kinds of companies), but if your objective is to go big, then chances are you will take on more capital than you originally planned. And in some cases it won’t be because you need it, but because it’s offered to you, or because you can.

Food for thought and fodder for discussion. And of course, you still want to be the company that attracts capital!

You can follow me on Twitter at @ManuKumar or follow @K9Ventures for just the K9 Ventures related tweets.

One of the investment criteria that I set for K9 Ventures is based on geography. Specifically, K9 only invests in startups where the entire team is located in the SF Bay Area. No distributed teams, no overseas teams, and definitely no companies that rely on “outsourcing” to build their core technology.

When trying to describe this constraint in a more light-hearted way, I often say that “I only invest within 30 miles radius from the Stanford Oval.” Now that last statement is a little off, since I have a portfolio company in Berkeley and one as far south as San Jose. Maybe if I make it 30 miles as-the-crow-flies, it may still hold! I must admit that I do also have some exceptions to this rule – LucidChart is based in Provo, UT, and Occipital is presently in Boulder, CO. But, in both those cases, I’m still working hard on getting them to move here!

I’ve already written about why I want the whole team to be in one location, but in that post, I didn’t address why I want the entire team to be in Silicon Valley. I get a lot of push-back on this point. Almost every day, if not every other day I have to explain my rationale for this. So I figured it’s about time to put this down into a blog post.

Most people, and especially those outside the Valley, think that the reason for this geographical constraint is because “Investors are lazy,” or, “They want their portfolio companies to be within driving distance.” I’ll admit that I am not a fan of getting on a airplane, but my reason for hyper-local investing has nothing to do with either of these common misconceptions.

There may indeed be some lazy investors, but I have yet to come across even one amongst all those that I have met in the Valley. They wake up earlier than a lot of entrepreneurs do, and, I get a lot of late night emails from VCs working through their email inboxes late at night. I’m not saying that VCs work harder than founders do, but they’re not slacking off either. And, even though I do enjoy meeting up with the founders in my portfolio for lunch every couple of months, the majority of the interactions with my portfolio founders still happens over email or phone. I suspect this is also the case for most VCs. So why then do I still insist on having the startups being located here?

Here’s why:

1. Serendipity: There is a serendipity to the Valley — things happen because you are here. It may be something as simple as you’re walking down University Ave in Palo Alto, and bumping into someone you know. You may chat for just two minutes, but in those two minutes, he/she may say something useful, or suggest you meet someone else. It’s that casual interaction that makes things happen. This serendipity is why startups in the Bay Area have a higher chance of success than those located elsewhere.  Until you experience this first hand, it’s hard to describe. It is even harder to quantify, and you can argue against it all you want, but this is the single biggest reason why I want the startups I work with to be located in the Valley.

   I’ll give the example of the acquisition of CardMunch by LinkedIn. Before CardMunch even launched its product, I ran into some folks from LinkedIn at an event and in casual conversation mentioned what CardMunch was trying to do. A few months later, after the product had launched, the CardMunch team went to an event, and happened to run into an engineer from LinkedIn. Again a casual conversation transpired. This happened on at least 3-4 different occasions, until one day I get a call from a friend at LinkedIn wanting to talk about CardMunch. When we were starting the company, we had speculated that this would eventually be interesting to one of two companies: LinkedIn or SalesForce. We did not expect to attract their attention this early on, but the serendipity of being in the Valley made that happen.

2. Funding environment: No one can question that Silicon Valley has the most developed venture capital and funding environment for startups. Even the place that ranks second to the Valley (arguably New York, which has overtaken Boston) is a far cry from how active and developed the funding environment here is. There are more venture capital funds, micro-VCs, super-angels, angels and incubators in the valley than probably in the rest of the world combined (exaggerating to make a point). The plethora of funding sources for every stage of development of a company makes for a very efficient funding environment.

   After being in the Valley for almost a decade, I now say that there is no such thing as a capital efficient company here — only companies that attract capital and those that don’t. But, if you are a company that attracts capital, there is no place better for it than Silicon Valley.

3. Eco-system: Experts of allkinds are here. They are the best in the field, and the best in the world. Lawyers. Technical experts. Designers. There is a culture of helping. A culture of paying it forward. A culture of re-investing. In fact, some would argue that it is this culture of re-investing that has made Silicon Valley the powerhouse that it is today. And to top it all off, the eco-system in the Valley is exceptionally fluid, i.e the flow of information and connections happens quickly and efficiently.

   I often meet founders from other cities who tell me that they already have a strong network in place in their hometown and moving here would mean that they would have to start from scratch. My response to them is always the same: “Don’t make the same mistake that I did.” That was exactly my reason for not moving to the Valley sooner. Having now been here I’ve seen first hand just how quickly entrepreneurs get plugged-in into the eco-system. Within a short period of time, the network that you build here in the Valley will be orders of magnitude richer and more useful than what you may already have elsewhere. The combination of your existing network plus your Valley network can prove to be even more potent.

4. Respect for Effort and Learning: Folks often say that the Valley tolerates failure — that here you’re allowed to shoot for the moon (or chase windmills) and it’s okay if you fail. In my view, the Valley often swings too far with this one. People start to glorify failure. IMHO it is not a tolerance for failure, but a respect for the lessons that can be learned from failure that matters. If you figure out why you failed, that does not mean you’ve figured out how to succeed. But like learning to ride a bicycle, if you fall down once,  in the Valley you’re not told that you’re not cut out to ride a bicycle. Instead, there are people here who will help you to get back on the bicycle and try again — provided you learned something from falling. Having a healthy respect for effort and learning is important. The Valley has that.

Put simply: “What happens in Silicon Valley simply doesn’t happen anywhere else.”

I did my startups in Pittsburgh, Pennsylvania. They were both highly successful. We beat the odds of being able to raise angel money in Pittsburgh, and we built an awesome team on the shoulders of graduates from Carnegie Mellon and by selectively stealing away the best talent from other local companies. Don’t get me wrong. I love Pittsburgh and I especially love my friends, co-workers, advisors, mentors, and investors. I love Carnegie Mellon — it is by far one of the most academically rigorous schools you could attend. Andrew Carnegie’s quote of “My heart is in the Work” is engrained into the soul of every graduate from Carnegie Mellon. But, now looking back, with 20/20 hindsight, if there is one thing I would do differently, I would move to Silicon Valley the day I decided to do a startup.

The Valley has a 10x multiplier to anything you do. Take two companies doing the same thing, having similar technology and I’ll bet that the company that’s located in the Valley will be 10x the size, or 10x the revenue, or whatever other success-metric you want to apply. For the four reasons mentioned above – the serendipity, the access to capital, the eco-system, and the tolerance for trying again and again till you succeed — the Valley outperforms.

Doing a startup is hard. Really hard. You have enough things working against you. Geography doesn’t have to be one of them. That’s an easy one to fix (even if you are in a foreign country and have visa issues, just remember that the mark of a true entrepreneur is resourcefulness. Real entrepreneurs find a way to make it work. In fact, real entrepreneurs will make it work even outside of the Valley). You want to stack the deck in your favor by at least being in a location where you have a higher likelihood of success.

As my friend, mentor, and one of my favorite people in the world, Jack Roseman (author of Outrageous Optimism: Wisdom for the Entrepreneurial Journey) once said to me: “If you want to be an actor move to Hollywood.”

Implications for investing: As a venture fund, if you’re in Silicon Valley you probably have ample deal flow to where you can focus on primarily investing in companies that are located here and still build an awesome portfolio. If you’re a venture fund outside of the Valley — even if you’re in Boston or New York, chances are you’re going to have to broaden the net. It’s a simple density/deal flow issue.

Likewise if you’re an LP, you have to make sure you have reasonable exposure to Valley investments. While I haven’t done a scientific analysis of this (LPs can afford to hire someone to crunch the numbers for them!), I would argue that venture funds that invest in startups in Silicon Valley have better returns than funds that use a regional-only philosophy (for a non-Valley based venture fund).

For me, and for K9 as a micro-VC fund with a solo-GP, the hyper-local investment strategy makes a lot of sense. Take all the reasons above, and add to that I don’t have to travel to find great investment prospects, which also means I get to spend that time instead helping portfolio companies, looking at potential new investments, or writing the occasional blog post

Clarifications: Before people start assuming some things that I am not implying in this post, I figured I should clarify a few of them. This post doesn’t mean that you can’t build a hugely successful tech company outside the Valley. There are numerous examples of those. It does imply that your odds of success may be better here. For investors, this post doesn’t imply that Valley investors are in any way better than investors who are not based in the Valley — but that they might just have better pickings in their backyard. In fact, some of my favorite investors to work with, and many of my advisors and mentors, are not in the Valley.

As an entrepreneur, your mission, should you choose to accept it, is to maximize the chance of success of your startup. Whether that is in Silicon Valley, or Timbuktu, or anywhere else, that is for you to decide.

You can follow me on Twitter at @ManuKumar or @K9Ventures for just the K9 Ventures related tweets. K9 Ventures is also on Facebook and Google+.

Over a decade ago, the big bottlenecks for web performance were server load and network bandwidth. Lots of companies sprung up in the Web 1.0 era to help resolve these problems. The most well known and most successful one of course being Akamai. With the creation of CDNs and the use of edge caching, and today with the cloud and especially the ability to scale the number of servers on demand, we solved these two big issues. Companies like Keynote and Gomez built out tools and networks that allowed sites to monitor the performance of their servers from all over the world. Web performance was a solved problem.

Or so we thought. The Web has changed. Performance is no longer a server side issue. It’s a client side issue! As our sites become richer, and especially as they become applications rather than pages, the time it takes for the code to parse, render, and execute the code in the browser has today become the dominant factor in web performance. The time it takes to lookup the domain, connect, transfer the data is now only a small fraction of the overall time it takes for a page to finish loading and be ready for the user to view and interact with.

Till today this was just a theory. It was a theory because all we had available were spot checks of client side performance with browser add-ons like YSlow. Today, that theory now has real data to support it because Torbit has launched Insight. Torbit Insight lets you identify if you have a performance problem on your site and it also lets you pinpoint where that problem may be coming from.

Check out this 1-minute video about Torbit Insight:

The best part is, Torbit does all of this without slowing down your site! A little javascript embed on your site collects the data on the client side. It is simple to install and you see the results come in in real-time. Make a change to your website and boom, you can see what impact that had on the load time for the visitors to your site right away.

If that wasn’t enough Torbit lets you tie in your site’s conversion rate to show what impact speed has on the bottom-line.

For most sites, getting their site completed and launched on time is hard enough. For the site developers (I use that word loosely, since site performance pervades different aspects of site development, including the graphics, CSS, HTML, Javascript and server side components) to focus on performance is generally an afterthought. It’s usually a case of functionality first, performance later — and ‘later’ may never happen.

Add to that the problem that site performance optimization needs to take into account the client (i.e. device, OS, and browser) that the optimization is being performed for. If your site is being viewed on a phone, tablet or desktop, you may need different types of optimizations. There is a fanning effect as a result of the proliferation of different devices, OSs, and browsers.

The Torbit team realized that optimizing web-performance is becoming a client side problem. And they recognized that optimizing sites for different clients is a hard problem that can take a lot of time and effort and cost a lot for an organization to undertake. Additionally, the people who are developing a site may not be experts at optimizing performance. So Torbit also created the Site Optimizer. The Site Optimizer will optimize your site on the fly, without any significant effort by the developers of the site.

With Insight and Site Optimizer, Torbit is providing the next generation of tools for both measuring, analyzing, and optimizing web performance. Kudos to the Torbit team and especially to founders Josh Fraser (@joshfraser) and Jon Fox (@jfox85) on identifying a real problem and building a suite of products to solve the performance problems of modern web sites.

Speed on.

You can follow me on Twitter at @ManuKumar or @K9Ventures for just the K9 Ventures related tweets. K9 Ventures is also on Facebook and Google+.

One of the downsides of being an investor is that you spend a lot of time in meetings. What’s worse is that most of these meetings need to be scheduled. And yes, in 2012, we all still mostly schedule meetings via email. Consequently, a fair number of emails that I exchange with people are about scheduling.

Whenever I’ve mentioned this problem to others, their response is usually “Manu, you need an assistant.” Well, I’ve never had an assistant, and I manage my calendar pretty tightly. It’s possible that with time to reverse engineer the complicated heuristics I use to optimize my calendar, a human assistant may indeed be able to relieve me of this work. However, as a technologist, my preference is to find scalable solutions to problems. Having a human assistant may solve the problem for me, but does that mean the millions of people out there who have the same problem should all have human assistants?

Over the years I’ve developed a fairly streamlined way of managing my calendar. When I’m on my desktop, I usually have two browser windows open side by side — one with GMail and the other with Google Calendar. On my laptop, there are still two windows, but in different spaces (virtual desktops). When I’m processing scheduling-related emails, I bounce back and forth between these two windows. I need to check if I’m free on certain days and times, often propose multiple time slots for meetings, and once we agree on a date/time/location, add it to my calendar. I make it a point to add it to the calendar before I respond to the email as otherwise I run the risk of confirming a meeting but not having it on my calendar. All of this isn’t rocket science, but it takes up so much time to be switching between email and calendar over and over again.

Email, calendar, contacts, and todo lists are the picks and shovels of information workers. Think about it, so many of us spend more of our waking hours in our email than with our family and friends.  It’s a sobering thought.

It baffles me that companies like Microsoft, Google, Yahoo, and, Apple haven’t done a better job of building tools that address this space better. There is stagnation of innovation in productivity tools — because they all ended up in big companies – where things don’t get done unless it’s a billion dollar business (hat tip to @hunterwalk).

Outlook… uh, don’t even get me started on that. In all fairness the front-end that Outlook provides is actually better designed and better integrated than all the other offerings out there. The real problem with Outlook is the backend: Exchange.

When Google released GMail (2004) and Google Calendar (2006) there was hope for a better future. But GMail and Google Calendar have stagnated. In fact, GMail has regressed — it looks and performs worse than it did in the past, but that’s a whole other blog post. It’s shocking to me that with all the location data that Google has access to, Google Calendar has zero location integration. It doesn’t remember places I frequent. It doesn’t even look up places in a location database. And most of all GMail and Google Calendar don’t really know much about each other. I’m sure everyone in Google uses GMail and Google Calendar, so they’re eating their own dog food, but alas it’s still just that — dog food.

Fortunately, the kick-ass (and I don’t use that term lightly) team at Baydin decided to take a fresh look at the problem of productivity. They started with Boomerang for GMail which helps you to schedule when you send and receive emails. (Yes, you can schedule when you want to an email to come back to your inbox — it’s awesome. Try it!).

Enter Boomerang Calendar. With Boomerang Calendar, GMail and Google Calendar users can streamline their workflow. Boomerang Calendar is kind of like the missing glue between GMail and Google Calendar.

Boomerang Calendar (BCal) detects potential meeting times in-line in your email. When you hover on the highlighted time, it shows you the agenda for that day. If you click, it  shows the calendar for the week. You can add the event to your calendar with a single click. It does a best effort attempt at guessing the right date and time of the event for you (BCal is currently in beta — its guesses will get a whole lot better yet!). If you’re offering times to someone you can do that on your calendar and it will create the email template for you. All right there in your inbox. Without ever having to switch windows over the the calendar. It’s all about intelligent use of contexts and defaults.

Scheduling a group event with Boomerang is somewhat mind-blowing. The email that is sent to the attendees updates as folks respond.
Check out this video about Boomerang Calendar:So when you open the email, you can already see all the times proposed by others, right there in your email, without opening up yet another tab. And you get to respond to the suggested time in a form in your email. Yes, I have a biased view since it’s one of  my portfolio companies, but I was amazed at how well they thought through the information flow here.

Check out this video about Boomerang Calendar:

The value of Baydin’s tools is in the fewer clicks, the lower cognitive load from keeping things in short term memory, the reduced context switching and most of all in the minutes and hours of your life that you get back every day and every week by just being a tad more productive than you were before.

The beauty of what Baydin does comes from better observation and understanding of how people work. It’s not about building better email, or better calendaring. It’s about making people more productive. Helping them to get the mundane stuff that we all need to do out of the way faster so that we can work more (if we choose to!), or have more fun.

What hundreds of people working at the Internet giants have not been able to improve for years, is finally being improved by a small team of four in Mountain View. Congrats Team Baydin: Alex Moore (@awmoore), Aye Moah (@ayemoah), Mike Chin (@mikejchin),  and Jeremy Long (@jeremyaaronlong).

You can follow me on Twitter at @ManuKumar or @K9Ventures for just the K9 Ventures related tweets. K9 Ventures is also on Facebook and Google+.

[I often end up repeating the same things to different founders. Some things I've said often enough that they are probably worth committing to writing in a blog post.]

One of the questions I get asked very often is “What does it take to get funded?” My answer is universally that it’s all about Hope and Numbers and some combination thereof. The seed round happens on hope. The Series A happens on a combination of hope and numbers. And the Series B and beyond, happen largely based on numbers.

Seed Round: the Hope Round

At the concept/seed stage, there isn’t a lot of concrete “stuff” (where stuff is a highly technical term) that early stage investors can look at to evaluate a company. In most cases it comes down to the team — whether they have the ability to execute and whether they have the right vision. The rest is hope. You hope that this founder/founding team will be able to figure things out. Will be able to recruit the right people around themselves. Will be able to build the product. And that the product will be something people love. And that it will be something they are willing to pay real dollars for. There’s LOT riding on hope, and there are very few numbers.

So getting funded at the seed stage is really about who you are, and about telling a credible story. Showing that you have 100 users, 1000 users, or even a million users may not matter much. It can help to show that at least someone is willing to use your product, but it doesn’t say anything about whether it will scale. More importantly users are not customers, and seed stage companies often have to spend  fair amount of their effort on what I like to call Revenue Development.

Seed stage funding it all about convincing investors to believe in you and have lots of hope.

Series A: the Hope+Numbers Round

When you’re ready to go out for a Series A, by this point investors expect you to have figured a few things out, and to have some level of what’s referred to as “product-market fit.” Or in other words, you’ve built something, figured out who’s going to pay for it, and things are starting to click. At this stage the numbers are not compelling, but they’re starting to emerge and are trending in the right direction. A Series A investor will look at these numbers and will hope that things will continue to trend in the right direction and in the best case scenario will start to hockey stick.

The Series A is about showing some credible numbers that can point towards a trend, and the rest is about convincing investors to have hope that those numbers point to something bigger.

Series B and beyond: the Numbers Rounds

When you get to a Series B, it’s almost all about numbers. Show that you have a compelling product, with lots of people using it, and willing to pay for it. At this stage the investment decision for most investors becomes a matter of crunching the numbers. There’s little room for hope and the numbers need to tell a convincing story.

Series B and beyond are raised on the strength of numbers.

This is not a prescriptive framework by any means, but it is a framework I find helpful to think about when founders are preparing to raise money at different stages. When you raise your seed round, think about what it will take for you to raise a Series A. When you raise a Series A, think about what it will take for you to raise a Series B.

You can follow me on Twitter at @ManuKumar or @K9Ventures for just the K9 Ventures related tweets. K9 Ventures is also on Facebook and Google+.

I’ve written before about how Capital Efficiency doesn’t exist and is an oxymoron. However, there is an important corollary to the non-existence of Capital Efficiency and that is The Curse of Over Capitalization.

Some days in Silicon Valley it feels like there are more investors than there are entrepreneurs. And there absolutely are more investors than there are good deals. There is simply too much capital chasing too few good deals. (Although it certainly doesn’t feel that way when you’re an entrepreneur trying to raise money for your own company. The question most entrepreneurs keep asking themselves is why isn’t that capital chasing me? While it it may not feel that way, the data suggest that there is indeed too much capital in the system — especially so at the seed stage, with more and more individuals and larger funds trying to invest in companies at this stage.)

Before we proceed, it is important to understand two important points about institutional venture capital. For most venture capital funds money is a commodity. It is a tool. They use that tool to buy ownership in a company. VCs care less about how much money they have to put in, and more about the amount of ownership they can get. VCs also operate in a limited time window that is determined by the duration of their funds. This time window is required by LPs (the folks providing the VCs the money to invest) as LPs are afraid to enter into an open-ended arrangement where they don’t know what the time horizon on the fund’s investments will be. This in turn gives VCs a short window of time (between 5-10 years depending on where in the life cycle of the fund they invest) to get a company to exit.

Now, combine those two motivations that venture investors have: 1) ownership, 2) quick growth, and what do you get? You get a situation whether investors are incentivized to put in more money into a company, not only to buy more equity, but also to fund the quick growth. In fact, it becomes a vicious circle. First, a company may get encouraged to raise more money that it really needs, just so that the venture fund can get to its desired level of ownership. Then the same company gets encouraged to spend that money to accelerate and to grow quickly, which in turn means it runs out of that money more quickly, and then needs to raise even more money.

This situation is not always in the best interest of founders. Founders typically get their equity in a company once — at the time of founding and then get diluted with each subsequent round of financing. For venture funds, they almost always have the ability to participate in future rounds to preserve their pro-rata and sometimes even increase their ownership position by investing more capital in future rounds.

For VCs working for funds that have a lot of money under management, the incentive is to encourage companies to grow quickly. Growing quickly is not a bad thing, but it forces the companies to spend more in order to try to accelerate that growth. This is when you start paying expensive recruiters for retained searches to fill out those open positions as quickly as possible with “experienced” people, this is when you hire that ridiculously expensive PR firm on a retained basis to get the company some attention, and this is also when companies begin to prioritize user-growth over figuring out what is the right revenue model for the company (see my post on Revenue Development).

The VC focus on quick growth is not without reason. Yes, sometimes it’s because the market opportunity demands moving quickly, but sometimes, VCs push growth on their companies more to push their own agenda, than what’s right for the company.

Whenever I’ve tried to describe this in the past, the next question is invariably: “Then why do founders raise more money than they need?” First, because any founder in his/her right mind knows that having a little bit of extra gas in the tank is probably a good thing. Having just a little more runway, so that in case things don’t go according to plan, they have a little cushion, a little buffer, and therefore a higher chance of survival. So that explains founders taking on a little bit more than they need, but why then do so many founders take on an excessive amount of capital? My answer to that is because every founder believes that they are different and smarter than the founders of other companies. Unlike all the other founders that went before them, they believe that they will have the will-power and the self-control to be able to spend the money wisely and to not waste it. But little do they know that they are human, just like everyone else.

Some founders like to think that if they raise a lot of money now, they will never need to raise money again. Baloney! Regardless of how much money you raise, you will be out raising money again in 12-18 months! This is because excessive capital becomes toxic for an early stage company. What’s another thousand dollars when you have a couple of million sitting in the bank?  Despite the best intentions even the most principled founders fall into this trap. They will invariably lose the financial sensibility that they had in their scrappy years. The company culture begins to morph and before you know it the company’s expenses balloon out of proportion. The same founders who a short while ago felt they would never need to raise money again, now start to justify why they need to raise another, and bigger, round to feed the monster that they’ve let loose.

Companies which end up raising monster Series A, Series B, or Series C rounds all seem to exhibit a similar pattern of problems, one that is akin to indigestion. The rush to hire results in a relaxation of “hire only A players rule.” The rush to get product built faster, results in a reliance on consultants, contractors, outsourced development and other faux pas, which invariably result in huge amounts of overhead costs, and often result in failed attempts at launching product. There are few cases where this can be the right approach, but it requires a very clear definition of what’s the core product, technology, and knowledge that needs to be built and retained within the company and what can indeed be done by an external team.

In some extreme cases over-capitalization and its supporting mantra of “growth first” often leads to the company subsidizing its product and offering it for free (see my post on The Case against FREE), and in the process failing to discover the right business model. Yes, there are some cases where growth makes sense, but companies need to be careful that in their attempt to achieve growth they don’t just give away the crown jewels. The example I use most often for this is Plaxo. Plaxo’s most valuable feature was that it backed up your contacts from Outlook. Outlook/Exchange were horribly unstable at the time and Outlook would often end up losing all your contacts in case of a file corruption. Plaxo saved my rear on multiple occasions because it had a copy of all my contacts that it would seamlessly sync back down to Outlook upon re-installation. But, Plaxo gave this feature away for free. What did they want to charge for? For removing duplicates from my contacts. I think I can live with some duplicates in my address book, but losing it altogether is something I couldn’t live with.

There are some venture funds (usually large funds) which seem to have over-capitalization as their m.o. I don’t believe they do it with any malicious intent, but they probably have lost the perspective that providing companies with the right amount of capital is more important than trying to achieve rocketship growth. Sometimes companies, the markets they operate in, and even the founders who start them all need time to mature, and no amount of capital is going to accelerate that. Nine women can’t make a baby in one month.

My advice to portfolio companies has been to raise the amount of capital that they can reasonably expect put to work in the next 18-24 months. Assuming they’re out raising again in 12-18 months, then that still gives them a buffer of 6 months. But if they claim that they will raise a mega round because they will never have to raise another round again, or worse yet, claim that they want to raise more because they “don’t like fundraising,” then all I can do is to call bullshit. If you really don’t want to raise another round, then prove that to me based on what really matters: Revenue. Or better yet, the ultimate measure: Profit.

You can follow me on Twitter at @ManuKumar or @K9Ventures for just the K9 Ventures related tweets. K9 Ventures is also on Facebook and Google+.

I am pleased to announce the formation of K9 Ventures II, L.P. – A $40M technology-focused micro-VC fund.

K9 Ventures started  investing in 2009 with our first fund, K9 Ventures, L.P., which was a $6.25M fund designed to be deployed over 3-4 years, making initial investments between $100K – $250K in concept and seed stage technology companies located in the San Francisco Bay Area. The objective for K9 was to invest only in a handful (4-6) of companies each year and to be actively engaged with those companies during their seed stage. Over the the course of three years, K9 Ventures has invested in 18 startups, including CrowdFlower, Twilio, DNAnexus, HighlightCam, CardMunch, Lytro, Zimride, IndexTank, BackType, EasyESI, card.io, Baydin, LucidChart, Torbit, Occipital, TapCanvas, and 3Gear Systems.

Four of the portfolio companies have had successful exits: CardMunch was acquired by LinkedIn, BackType was acquired by Twitter, IndexTank was acquired by LinkedIn, and just this week, card.io was acquired by PayPal. Several of the portfolio companies have gone on to do their Series A (HighlightCam, Zimride, Occipital), Series B (CrowdFlower, DNAnexus) and Series C (Twilio, Lytro) rounds led by top tier venture firms, and the seed-stage companies all continue to track well on building product, team, and/or, revenue (imagine that!).

With K9 Ventures II, for the most part everything remains the same as with the first fund, with just one major change: the initial investment amount. With the new fund K9 Ventures will be able to invest between $250K – $750K as an initial investment in the companies we back. This will allow us to potentially lead the seed round, while maintaining an active engagement with these companies (as with Fund I). K9 Ventures II will still be syndicating most investments with other seed and angel investors.

Most importantly, the investment criteria for K9 Ventures II remain the same as the investment criteria for K9 Ventures’ first fund. These criteria have been vetted and work well for filtering the types of companies K9 would consider investing in. The necessary, but not sufficient, criteria are:

1. Technical Founders: Founders with the ability to build their own product and have the potential/inclination to lead the business. The team must not only be technically able, but also have the utmost integrity and a willingness to consider the advice and feedback they receive.
2. New Technology or New Market: The product must involve some kind of new technology or a new market. Not interested in me-too businesses.
3. Direct Revenue: The company must have a way of getting direct revenue from its customers (“I deliver value to you, you pay me”). No three-way business models and no content, media, advertising-based companies.
4. Capital Appropriate: Companies whose capital needs over the life of the business make sense given the potential size of the opportunity/exit.
5. Hyper-local: The entire team should be located in the SF Bay Area. No distributed teams, no overseas teams, and definitely no companies that rely on “outsourcing” to build their core technology.

Note: These are qualifying criteria (necessary but not sufficient). Even if a startup meets all of these criteria that doesn’t mean that K9 will invest. These are the objective criteria; the rest is subjective and often comes down to a gut call. We reserve the right to have exceptions to these qualifying criteria, but for the most part follow them closely.

This new $40M fund is backed by several high quality institutional limited partners including university endowments, foundations, family offices and fund of funds and key individuals. I’d like to thank each of the new limited partners in K9 Ventures II for their support and for the confidence they have expressed in me and in K9 by making this commitment.

An even bigger thank you goes out to all the limited partners of the first K9 Ventures fund for taking the leap of faith before anyone else. The advisors for K9 Ventures (with a special mention for Liam Donohue of .406 Ventures and Brad Feld of Foundry Group) played a pivotal role in helping me and the fund get to this milestone. You all know who you are — thank you.

And most of all, I would like to thank the founders of all the portfolio companies for their outstanding work in building their respective companies. Their success is what drives K9’s success.

You can follow me on Twitter at @ManuKumar or @K9Ventures for just the K9 Ventures related tweets. K9 Ventures is also on Facebook and Google+.

I’m making a concerted effort to start blogging again on a more frequent basis. It’s not that I have suddenly discovered lots of free time. However, I’ve decided that it’s time to change priorities.

In my attempt to keep up with the demands of work and home I had mostly given up on blogging. Part of it was that my style of writing (blame it on writing academic papers and a thesis!) was such that I wanted to include references, provide background, explore things from different angles. However, that style of writing is not conducive to blogging. Blogging needs to be more stream of consciousness and quick bursts. Otherwise analysis paralysis sets in and you end up with a long list of things you would like to write about but don’t. That’s what happened to me.

I tried to supplant my blogging activity with tweets or Facebook status updates, but tweets and Facebook status updates tend to be terse and very ephemeral especially since neither Twitter, nor Facebook, have been able to implement a half decent search experience making posts unreferenceable for future conversation.

During my blogging hiatus, I also noticed something else: There is NO substitute for blogging and long-form. Tweets are great, but by their very nature, they are not a great avenue for discourse. Trying to hold an extended conversation on twitter quickly breaks down. Perhaps that may have something to do with why Evan Williams (@ev), co-founder of Blogger and then Twitter, is now doing another long-form publishing platform, Medium. (That said, Marc Andreessen (@pmarca) has recently taken to twitter with a vengeance, and has a rather unique style of using twitter where the tweets are often continuations of one another rather than bite sized morsels of 140 characters. I’m intrigued by his style.) Facebook does do better since all the interactions are in one long comments thread, but the expectation of privacy is different on Facebook and the fact that you can’t search your own posts and comments, just makes it less interesting for the long-term value of the content.

There are two types of people on social media. Those who produce content and those who consume content. The number of producers is far fewer than the number of consumers (I’m not going to hunt for stats, as then again I’d be off looking for references rather than making my point!). A more provocative nomenclature would be exhibitionists and voyeurs, but in the interest of not devolving the conversation, lets stick with Producers and Consumers. Also note that there is no hard line between Producers and Consumers, it is a continuum. Most people who produce content will also tend to consume content, but those that tend to err more on the side of consumption contribute far less content. You know whether you are a Producer or a Consumer.

Producers tend to publish information which shows them in the most positive light (positive bias of social media). It shows them having fun, visiting interesting places, amplifying articles and posts which resonate with their view of the world — political, social, technological, or business (guilty as charged). They, generally, avoid publishing things that show them in poor light, or show that they may not have their act together as much as it seems. The truth is often very different. There is a whole other part of their lives which often doesn’t make it on to social media at all (the social media blind spot). Apps like Path, Whisper, and Secret have attempted to suss out this social media blind spot by relying on smaller groups or anonymous posts.

Producers get a high, presumably an adrenaline rush (anyone have any research on this?), from watching how many people liked their post, commented on their post, retweeted their tweet or replied to it. Ultimately, Producers are not publishing content for Consumers, they are publishing content for the satisfaction they receive when others consume and react to their content.

The net result of this is that Producers end up opening up a selective part of themselves to the outside world, in exchange for the validation, reinforcement, reputation-boost and ego boost that comes from it. They take a risk, they contribute, and they benefit — generally speaking. The benefits can be subtle and personal, or they can be concrete and very public.

Consumers on the other hand tend to consume information voraciously, however, they often forget that what they are consuming suffers from the positive bias of social media. What they consume is that very thin sliver of the public persona that is exposed by the Producers. How Consumers react to that depends on their proclivity towards being either self-confident or self-conscious. A self-confident Consumer will generally be genuinely happy for the Producer of the content, and react in a positive way (even if it means expressing sympathy or kudos). A self-conscious Consumer however, typically reacts with feelings of inferiority, jealousy, loathing or lacking. (These words feel a lot stronger than what I want to express, but I couldn’t come up with words that would be softer and get the point across).

The self-conscious Consumer may often not engage in any interaction on social media, but does get impacted by in. Often that impact is a downward spiral, which over time can leave to feelings of isolation or sometimes even depression. I say this with a little bit of apprehension as this I purely a theory and I would like to see this studied more. If I were Facebook or Twitter, I would consider funding a no-strings-attached grant for some social science researchers to delve into this topic in more detail. Perhaps they already have and I’m not aware of it.

Of course, there is a third kind of person who is simply not on social media at all. Those that don’t engage on social media are missing the benefits that can come from it, but at the same time they are by corollary, also protected from the negative impacts of social media and of course don’t have to spend the time on it either.

Both Producers and Consumers are critical to the social media eco-system and are critical for the business models of the companies involved. Facebook and Twitter wouldn’t be anywhere close to as valuable as they are without the large numbers of people who come to their site to consume information, and a smaller fraction of people who are creating that information (UGC).

So enough with the sweeping generalizations, how does this apply to startups and founders?

In my opinion, it is critical for startups to engage in social media. But that engagement mustn’t be robotic, reactionary, or impersonal. Instead, it needs to be authentic, proactive, and real. It must have a voice that reflects the culture and the values of the company. Lyft (@lyft) and Twilio (@twilio) are two K9 portfolio companies that do a great job of this. Their engagement on Twitter and Facebook is a reflection of the culture of the company.

Founders are already over-worked and spread too thin as they try to get their company going. Few of them have the time to consider blogging., but I would go so far as to recommend that they must. Blogging establishes more credibility in your field than any other activity. You want to position yourself as a thought leader, and there is no better way to let people see why you are the thought leader in your domain.  So if you get a chance, spend 1 hour a week being a Producer, and write about something related to your business/domain of expertise. It will be worth 10x of the >5 hours you may spend being a Consumer of content in the same week.

Bottomline: Being a Producer in social media is way more valuable than being just a Consumer.

You can follow me on Twitter at @ManuKumar or @K9Ventures for just the K9 Ventures related tweets. K9 Ventures is also on Facebook and Google+.

The post Producers and Consumers on Social Media appeared first on K9 Ventures.

The following post was written by @TomioGeron for ExitRound based on an interview with me and was published on the ExitRound blog on January 9th, 2014. It is being reproduced in its entirety here with permission from the author…

Manu Kumar, founder of seed stage venture firm K9 Ventures, focuses on investments that have a hard science or new technology focus. He knows about acquisitions, having invested in BackType, which was acquired by Twitter; card.io, which was bought by PayPal; Torbit, which was acquired by WalMartLabs; and IndexTank and CardMunch, which were both bought by LinkedIn. Previously, he founded SneakerLabs, which was acquired in 2000 for more than $100 million, then he founded iMeet, which was merged then acquired in 2002.

In this piece Kumar, who is often actively involved in M&A negotiations for his startups, talks about how to build a startup for the long-term while also preparing for an exit; what information is important for startups to keep private from acquirers; and why he often meets with and negotiates with buyers on behalf of his startups.

What are your rules for startups when it comes to mergers and acquisitions?

1. Build A Real Company

When I was doing my first startup, my rule number one for M&A: Companies do not get sold, they get bought. It’s probably the single most important thing. It’s very difficult to take a company, dress it up and go sell it. Any good acquisition happens because buyers come looking to find the company being acquired.

2. Prepare For An Exit–Just In Case

The second thing is: it’s important to make sure the M&A process is not a one-time thing or an isolated incident. It’s something you have to be thinking about and working towards for the life of the company. For example, with CardMunch (which I invested in and which was acquired by LinkedIn). They pitched an idea (to me as an investor) that they wanted to work on. But I didn’t like the idea but I said, “Let me pitch you on another idea.” (It became an app to digitally capture business cards and integrate with your address book). I said to them, these are companies that could be interested to buy you: LinkedIn or Salesforce. So at the point of inception we’d already identified who could be potential M&A targets.

So you have a balancing act: on point 1, you’re building strictly to be a standalone company, not to sell, but at the same time, on point 2, you’re keeping those top acquirers in mind early on?

Right, you’re not building the company with the intention of selling it. If you do that that’s setting it up for failure. You have to build a company as if it’s ascendant and a self-sustaining company. But at the same time you can do things to attract potential suitors. That’s how CardMunch played out.

I get pretty deeply involved in product and talking about potential acquirers. But I don’t get involved in making a company attractive for an acquisition. It’s truly about: what do I need to do to build a product people love and are willing to pay for? If you achieve that, the rest will sort itself out. If I’m trying to build a product or company for an acquisition it rarely works. I haven’t ever seen that.

3. Manage Your Emotions

For founders, very often the startup is their baby. When you’re talking about selling their baby or someone comes along who wants to buy it, they tend to get very emotionally involved. That can often blow up a deal. It’s important to realize folks on the acquiring side in corporate development, they’re normal human beings. They want to be treated with respect. If you treat them with respect, only then will they treat you with respect.

Negotiating any deal is always an emotional roller-coaster. When founders get emotionally involved they tend to view the other party as an adversary. That’s not conducive to getting a deal done. After all it is supposed to be an acquisition — where the both sides have to work together once the deal is done. It’s important for founders to realize that both parties are generally trying to protect their own interests. So when a founder is upset by a certain ask from an acquirer, I generally recommend that they try and get to the reason/motivation for that ask. Quite often there are multiple ways of addressing the concerns at hand.

Another rule for M&A: you want to drive a very straightforward and honest conversation. If someone’s not meeting the terms, it’s nothing personal; you don’t have to take offense. You always have the option to walk away.

4. Be Ready To Walk Away

The last rule is you always have to be willing to walk away from a deal. You can never enter into a M&A situation without alternatives. Otherwise you have no leverage. The single strongest alternative to an acquisition is, “I don’t need to do a deal. I can continue doing what I’m doing and do it alone.”

For many tech companies in Silicon Valley, corp dev is like musical chairs. You look at who is working in corp dev, typically it’s the same people moving from one company to another. The Silicon Valley process for M&A becomes fairly streamlined. Almost all the big companies go through a similar process. That’s not the case outside the valley.

You said you want to keep potential acquirers in mind early on. How does a startup go about doing that and building those relationships?

Most  potential acquirers follow startups and it’s important to stay in touch with them. You want to have them know what you’re doing and have those channels open. This should be well before the startups get to any acquisition stage.

It’s better if investors are doing this. The founders shouldn’t be doing this. I’m doing this for my companies. I make a concerted effort to connect with corporate development executives at all the major tech companies. I make an effort to say, “I want to come and meet you and get to know you and tell you all about my portfolio.”

So you’re meeting the potential buyers, not the startups?

Yes, it can’t be founders doing that because they would feel like they’re trying to sell the company. For me I’m building relationships, essentially educating potential buyers. If buyers are out there choosing companies to acquire, I’d much rather have them choose a company I’m invested in. In this phase I don’t take it to the level of the acquirers meeting the startups. They know them and what do if they want to meet them.

How’s the acquisition market now?

It was a strong market a couple years ago: in 2009, 2010 and parts of 2011. Especially in the acquihire market, it was strong and healthy. These days (acquihires) often don’t end in any good returns for investors. If investors get their money back they’re lucky.

In 2009-10 a lot of angels had the mindset that, if a company doesn’t work it’ll get acquired by Google and we’ll still make money. That’s largely gone away. That reflects more of today’s mindset of: if you’re investing in a company you must truly invest in a company, not thinking that “oh yeah (if they fail), they’ll get acquired anyway.”

My pet peeve is when companies, many of them are sold in fire sales, that get reported as “they got acquired.” But nobody knows, only insiders know, whether it’s a good deal or not. There’s a very strong desire in the Valley to make everything look like a success even if it wasn’t. If they have the opportunity to get acquired for close to nothing, get a job and spin it as if they got acquired, most people will probably take it.

But can’t these smaller acquisitions still be meaningful for founders? 

Yes. But also I got into the venture business with the intention of doing it for the next 30 years. I’m not doing it for one or two deals. For a first time founder (with a smaller exit) this is a life-changing event for them. You want them to take that deal. For me, this guy or gal will probably start another company in the future. I’ll hopefully invest in that company. They’re not going to do just one company. If they have a life-changing event, I get to invest in the next company.

Is there any conflict of interest with you as an investor negotiating a deal since you may want certain things that founders don’t?

At the size I’m playing at, you can look at it as: I want to be fair. I do not want to take advantage of anybody and I don’t want to be taken advantage of. If somebody tries to screw me over they’ll see the worst side possible. But I also play fair.

Is the potential for conflict less with you than with a larger venture firm since as a smaller fund you are more likely to benefit from smaller exits?

That’s my understanding with founders. There will be things where investors’ interests and founders’ interests may diverge. That’s something to have an open and honest conversation about and reach a conclusion together about what to say to potential acquirers. You present a unified front. It doesn’t always happen and it can end up hurting both sides if you don’t have that united front.

What’s your role in these acquisition talks?

The role I take in these deals ends up being very different from most investors’ roles would be. I negotiated the sale of my first company (SneakerLabs) in 2000. At that time I learned first hand what M&A was like. Since then I’ve been involved in probably 6 or 7 deals. I tend to get pretty involved in M&A deals. The reason is founders are at a disadvantage when negotiating a deal.

That’s because they have to go work there after a deal (and it can be uncomfortable). It’s a lot easier for me as an investor to step in and negotiate the deal. If there’s anyone ruffling feathers, I’m the one doing it because I’m not the one they have work with. On a couple occasions I heard feedback that the level I was involved was unusual.

Is the strategy for startups to find multiple buyers?

You’re always going to do that. The timing of something like that needs be well orchestrated. You cannot get an offer then say, I’ll go down the line to company B, C, and D. The timing’s not going to work out. All these deals have a life of their own. It takes time for people to become familiar with the company or team and determine that they want to make an offer.

From that point of view it’s similar to the way venture capital fundraising works. Even if you’re fundraising, you want to make sure all offers drop on the same day to make it happen. Likewise with M&A you want to make sure all offers drop on the same day.

You have to know the potential buyers already. It’s a relationship thing. If you don’t know the acquirer at all you can’t start a relationship at that point. It’s too late.

What about your startup’s cap table?

Don’t share your cap table (with a buyer) until you actually have a signed term sheet. It’s a fairly standard move on the part of corp dev guys to say, “Send us your cap table.” As an investor my advice is: absolutely do not send the cap table. Once they have the cap table, they can reverse engineer things. At that point they’re not valuing you for what you’re worth. They can use a divide-and-conquer approach. They can split founders and investors. Essentially they can minimize the amount they pay as opposed to paying for the company as a whole.

What if the potential buyer says they really want it?

Tell them, “We want you to value this company for what it’s worth to you.” They don’t need to know what the cap table looks like to make an offer. I typically don’t even tell the buyer how much capital the company has raised.

How does the cap table affect the price?

Do you want to do cost-based pricing or value based pricing? The only reason you need the cap table is if you’re doing cost-based pricing. As a seller I want to do value-based pricing. In other words: the actual value of the company, not the lowest possible cost based on how much the company has raised.

What do buyers like startups to do during an acquisition process?

Have all your corporate documents in order. That’s just general corporate hygiene. Is the accounting done every month and are the books closed? A balance sheet, P&L: can you produce that, or will it take three weeks to get your books in order? Make sure all your documents are ready to go. If you’re trying to get multiple buyers interested, you want to make sure you have all your homework done and can move at the speed that others are moving at.

What do startups want from potential buyers in the M&A process?

On the startup side, the most important thing is making sure the person you’re dealing with (at the buying company) is empowered to actually do the deal. That’s very often an issue. Corp dev folks (at large companies) typically have certain parameters within which they can work (price, etc.). These individuals have to be empowered to negotiate the deal. It’s painful if you’re dealing with someone who’s not empowered and has to constantly things run up the flag pole (to superiors).

There’s often serendipity when it comes to M&A deals. The way the CardMunch deal came around was that I happened to go to an event and met one of the cofounders of Linkedin. I talked to him and told him about CardMunch. A few weeks later the CardMunch founders met other LinkedIn folks. They ended up talking. Then I met Ellen Levy from Stanford (where I did my Ph.D.), and she’s from LinkedIn. She called me and said are you involved with CardMunch?

These are the casual interactions — one or two minute conversations — that eventually may bubble into M&A discussions. Those kinds of conversations only happen when you’re local.  You can’t have them when you’re sitting in different geographies. That’s one of the strong reasons why I only invest in companies here (in Silicon Valley) — because that serendipity only exists when you play in that ecosystem.

Have you ever been burned in an acquisition process?

With one of the companies I was helping, they signed a term sheet with an east coast company and had already agreed to everything. The day before we expected to receive final documents the buyer came back and reneged on the offer. It was crazy. When we received the draft version of the documents the payment section was missing. How can you send us draft documents and the thing we care about most–when and how much we’re getting paid–that section is missing? That was a signal there was something wrong.

The post 4 Rules of M&A for Startup Founders appeared first on K9 Ventures.

There is a fundamental information imbalance in the startup world that stems from the fact that most  founders are raising money for the first time, but most investors are not investing for the first time. This used to be a much bigger issue ten or fifteen years ago, but these days, it is possible for a founder to learn enough about fundraising, term sheets, board structures, etc.

There is an increased amount of transparency in the startup eco-system today than when I was trying to raise money the first time back in 1998. Fortunately, I ended up with excellent angel investors who offered very founder friendly terms. I raised $1.15M on a $2M pre-money valuation (yes, really!). The most onerous term, was that as a solo founder they wanted to make sure that the key-person risk was covered. So at the ripe old age of 23, I was worth more dead than alive — since I had a $3M life insurance policy on my head to cover the key person risk. But, I was lucky because back then I had no idea what participating preferred meant, or what a full-ratchet meant.

Although there are probably other examples that pre-date this one, but what Nivi and Naval did with VentureHacks back in the day was one of the pivotal moments for me to realize that it doesn’t always have to be this way, and that entrepreneurs *can* empower themselves with the information they need in the fundraising process.

The challenge for most founders remains that they come in with an information disadvantage. The best founders will actively seek to learn as much as possible, as quickly as possible, to make sure that they can overcome that disadvantage in a timely manner.

Since I was never “trained” as a VC and instead transitioned over from being a founder to being an investor, I’m still learning some of the “VC tricks.” And I’ve decided that in the spirit of transparency, it’s something that needs to be written about more, so that first time founders can learn and know how to respond/react to some of these. It is with that in mid that I wrote the post Watch out for the board observer request.

I’m going to attempt to document all those little things that when I heard for the first time, I felt like, “well, now that’s an interesting little trick.” So watch out VCs, your secrets are slowly going to get exposed. For today’s version of my #VCTricks post, I’m going to talk about board composition.

When you’re raising money, one of the mot important things is to consider the composition of the board. Founders who haven’t yet learnt the ropes typically think that as long as they control >50% of the stock in the company, they are in control. That’s a very limited view and often not true.

A lot of the key decisions for a company often fall in the hands of the board of directors and so it is important to make sure that you have a board that is well-balanced. And here comes the trick — sometimes you may receive a term sheet, which on the surface looks like a balanced board. It’ll say something like: “The board shall consist of 5 members, 1 seat for Shylock Ventures, 1 seat for SPECTRE Capital, 1 for the common stock holders (typically Founder 2), one for Founder 1 as the CEO of the company, and one independent.“

At first glance this looks like a pretty well-balanced board. 2 investors, 2 founders, 1 independent — cool right? Not so fast. The key is in the phrase “as the CEO of the company.” Even though the board starts out with two founders, one of the founders is actually occupying what is really a seat that is designated for the CEO of the company. What can happen in the future is that if the board decides to bring on a new CEO (this happens often and I’ll address this in a future post), then Founder 1 is effectively off the board since he/she is no longer the CEO.

Now this is not all bad — after all, the CEO of the company *should* be on the board of the company. However, it does upset the balance on the board if and when that happens. When a founder sees this construct in a term sheet, they need to understand that what has been proposed is really a structure that consists of 2 VCs, 1 Common, 1 CEO, and, 1 independent. The founders then have to then determine whether they want to argue for a different structure (perhaps, 2 investors, 2 common and 1 independent) or whether they’re comfortable keeping it as is. Ultimately, it’s a discussion and a negotiation that the founders need to have with their lead investor.

The ask for a CEO seat can also be a signal to a founder that the investor may not have full confidence in the founder’s ability to lead the company as CEO, and so the investor is trying to keep their options open. Again, this isn’t all bad and can sometime be good for the company and the founders, but it is important for founders to be able to read between the lines and then have a discussion with their investor about at least giving the founding CEO a fair chance. IMHO it’s better to have these conversations up front before you sign a term sheet.

So that’s the VC Trick — give what looks like a common/founder seat, but is really a CEO seat.

Now let’s talk about the related startup mistake. If you look carefully at the board structures proposed above, each one contemplated an independent seat as well. Well, here’s the simple thing that founders screw up — they don’t get around to filling the open independent seat!

The *only* time the independent board seat can be filled is while the founders and the investors are still within their honeymoon period. I define the honeymoon period as the first 3 months, or 6 months if you’re really lucky, during which an investor will still be very excited about the investment. During that time, the founders and the investor can potentially agree on who should be the independent board member.

Once the honeymoon is over, i.e. when the investors start to realize that there is a lot more work to be done that they initially imagined, or that the company isn’t as far along as they really thought, or when the seeds of the first contentious discussion start to brew, then it becomes much harder, and sometimes impossible, for the founders and the investors to agree on an independent board member.

At that point, each side is going to introduce someone they know and the other side is going to worry about whether that person is truly independent or whether this is an attempt to stack the board.

This is *such* a common startup mistake. As soon as the round is done founders get back to focusing on recruiting, product, customers, and all that other stuff that they should be focusing on, and the independent board seat feels like a low priority item. But once you let the honeymoon period pass, and the independent seat remains vacant, then you’ve compromised the balance of the board.

Now let me play this out in a sinister example. 5 person board. 2 VCs. 1 Common. 1 CEO, 1 independent, but the independent seat is vacant. Now it comes time for the board to vote on who should be CEO. Founder 1, who is the current CEO, becomes an interested party and so can’t vote (would appreciate it some lawyers can verify this for me). So now the CEO vote becomes 2 VCs vs. 1 Common. You can guess who wins.

So please founders, do yourselves a favor. Don’t let that independent seat sit vacant. Don’t fall victim to this incredibly common startup mistake. Think about it carefully, find the right person, who can be truly independent and can have an opinion of their own and do what’s right for the company.

 You can follow me on Twitter at @ManuKumar or @K9Ventures for just the K9 Ventures related tweets. K9 Ventures is also on Facebook and Google+.

The post A VC trick and a related startup mistake appeared first on K9 Ventures.

If I had a hammer,
I’d hammer in the morning
I’d hammer in the evening,
All over this land.

So goes The Hammer Song by Pete Seeger and Lee Hays. Well, most VCs have just one tool in their toolbox. And yes, they use the tool to hammer in the morning and hammer in the evening. That tool is “Fire the CEO,” and it happens all too often.

I firmly believe that the founder and CEO of a company has a level of passion and commitment that typically cannot be matched by any outside CEO. And that for a startup to succeed, more than just “good management” and “experience” you need a level of passion and commitment that is so extreme that it can overcome everything else (by learning quickly on the job).

My definition of a founding CEOs job is “to make yourself redundant.” You do that by hiring people who are way better than yourself, and then by letting those people flourish. This is easier said than done. I struggled with this in my first company. I was a micro-manager CEO. Every decision had to go through me, every dollar spent had to be approved by me, every hire had to go through me. I became the bottleneck. There are only so many hours in the day, and you simply cannot do everything. That doesn’t mean that you don’t pay attention to important things, but it does mean that you need to hire people that you can begin to trust and slowly and steadily let them take stuff off of your shoulders.

Most startups, especially the ones I work with, are started by first time founders. And given my focus on technical founders, it inherently means that the founder has a learning curve ahead to transition from being a kick-ass engineering or product person, to becoming a kick-ass leader. There are founders who relish this part, and then there are those that take it on as something they have to do. The latter are setting themselves up for failure. In order to be a great founding CEO, you have to actually welcome the challenge of constantly having to learn something new. And what you’re learning is not technical skills any more, but people skills. You have to learn to hire, fire, pitch, sell, and most of all motivate and lead.

A good founding CEO is *not* a manager. He/she is a leader. The difference is in whether you have the gravity or the magnetism to attract people so that they are drawn in the direction you take them, or are you pushing them up the hill. I often describe this as Inception – based on the movie. To get someone to do something well, they have to take ownership of it – they have to believe it is their idea. The best founding CEO will be able to inspire his/her team to do exactly that. They are all part of the mission we have to collectively change the world and we’re going to make it happen.

One of the books I read a long time ago was The E-Myth Revisited by Michael Gerber. In a nutshell, the book says that most people start a business because they love to do something. Someone who loves to bake, may start a bakery. But over time, if that business is to be successful, the founder who loved to bake, will never bake again. They ultimately need to learn to run and learn to love the business of running a bakery. The two are very different. I referenced this thought in my previous post about how starting a company and running a company are two fundamentally different things. 

So a founding CEO also needs to realize that their role is constantly changing and evolving. As the company grows, how it needs to be run also changes. If he/she begins to love the challenge of growing a business, things will go well, But, if they find this to be a drag and they would much rather be writing code or doing something else, then he/she is not going to make for a great CEO. This is a level of self-awareness that founders need to have before they raise money, because once you raise money, you’re signing up for a different ballgame.

The three hardest things about a startup are: People, People, People. Ultimately, everything in a startup comes down to dealing with people. Whether it is employees, customers, partners, vendors, investors, board members, lawyers, competitors. At its core everything is about people. If you train yourself to realize that and to think about what people’s motivations are for doing certain things, you will be better equipped to handle and come up with creative solutions to problems.

Another book which is an excellent read and truly changed my perspective in how to manage situations was the classic How to Win Friends and Influence People by Dale Carnegie. I actually recommend reading it in its original version as it’s more authentic and somewhat more fun (at least for me) to read about how things were many decades ago. I’ve gifted this book to many of my founding CEOs — to help them learn how to deal with difficult situations.

Let me bring this back to the title — which wasn’t just intended to be provocative, but has a point attached to it. Most VCs really do have just one tool in their tool bag. If the company is not doing well, let’s fire the founding CEO and put someone “more experienced” in place. The worst though is even if the company *is* doing well, let’s fire the founding CEO and put someone “more experienced” in place. And yes, I’ve seen both happen before, right here in the Valley.

I detest this way of thinking. In my opinion the VCs need to understand that it is not sufficient for them to just be investors, they also have to be good coaches. A coach who will help a first time CEO learn what they need to learn in order to become a great leader. The problem is that being a coach requires time and patience, something that is in short supply in the fast-paced world of the Valley. As a result, most VCs try to take a short cut. They think that instead of waiting for the founder to come up to speed and learn what he/she needs to learn, why don’t we just bring in some one who has done it before. That would save time, and money, and be less risky. Right?

The thinking is logical, but IMHO flawed. It is flawed because of several reasons. First, bringing on a new CEO into an early stage company is like performing an organ transplant. In some cases it’s almost akin to doing a brain transplant (i.e. an incredibly high bar). Whenever there is an organ transplant, the body of the organism suffers extreme trauma. There are antibodies that can result in organ rejection. And even if the new organ is eventually accepted in to the body, it takes a long time for the body to heal and come back to the level that it used to be. And yes, it could ultimately be healthier, but only if everything lines up just right. In the context of a startup, this means that replacing a CEO is never as quick and effective as most VCs would like to think it can be. And during that time, the company is still burning cash.

Secondly, as I’ve mentioned in previous posts, “A startup is an agent of change.” If you are trying to do something that is a marginal improvement over the status quo (note: that is uninteresting to me as an investor), then sure you might be able to find someone who has “done this before.” However, if you are truly doing something that is different and unique, then there are very few analogs for what may or may not work. In that situation, my preference is to have the person in charge operate based on first principles, and not based on traditional ways of doing things. When you need to think out of the box, experience becomes equivalent to baggage.

Thirdly, any CEO joining a company from the outside is less likely to have the same degree of passion and conviction as the founders. For most it’s a job, not a mission or a crusade. There are exceptions here and if you can find someone who truly undergoes inception in the process of engaging with the company, then he/she may have the level of passion and conviction that is required, but that is a rare situation. An outside CEO would also typically have single digits of equity, a fairly hefty cash compensation, and the risk to them for joining a new company is modulated by the fact that in case things don’t work out they may have several other opportunities waiting for them.

Given this, it is my preference to give a founding CEO the opportunity, the time, and the coaching to help him/her develop into a great leader. Even if that means making a few mistakes along the way. If they’ve tried and themselves becomes frustrated with it, or if there’s simply no chance of it working, then of course there may be no option but to try the risky move of doing an organ replacement. But that should be an absolute last resort.

So I wish that VCs would put down their hammer, and stop looking at a founding CEO as a nail that’s just waiting to be whacked. Instead, look at a founding CEO as a sculpture that needs to be gently nudged and molded into shape and form of a great leader. VC shouldn’t be the executioners, they should be good coaches.

And now just for fun, here’s The Hammer Song…

You can follow me on Twitter at @ManuKumar or @K9Ventures for just the K9 Ventures related tweets. K9 Ventures is also on Facebook and Google+.

The post If I had a hammer… appeared first on K9 Ventures.

Shortly after wrapping up our PhDs from Stanford CS, my peer group had a running inside joke. Whenever we would meet at an event, we would greet each other with “Doctor, Doctor, Doctor.” It’s hard to describe in words, but you have to imagine a bunch of geeky guys standing in a circle and shaking each others hand and saying “Doctor,” as they nod their head. It was funny to us, and to date if a group of us end up together the tradition continues. The title of today’s post is a riff on that inside joke.

Every so often, I’ll meet with a founding team and they will tell me that they met with a “Partner” at a VC firm. I generally try to keep track of who the movers and shakers are in the VC world, and so I’ll ask “Oh, who are you talking to?” The response often surprises me, because I know that the person they named is not really a decision maker at the firm. However, the first time founders didn’t know that.

So it’s time to expose another VC trick. If I wasn’t riffing off of an inside joke that’s funny to me, I’d boringly call this post “Understanding the use of the Partner title in the VC industry.” Yikes, that almost sounds like an academic paper!

Understanding titles in the VC industry was hard enough to begin with. Fred Wilson has a nice post (What do VC titles mean?) from 2006 that did a good job of explaining how things used to be. Back then you had Managing Directors/General Partners, Venture Partners/Partners, and then Principal/Associates. It started to become a little more confusing when some firms started assigning banking-like ambiguous titles like “Vice President.” I’m guessing a “Vice President” at a VC firm is somewhere on the higher end of the Principal/Associate group, but quite honestly I don’t know the right pecking order either.

VCs and firms know that entrepreneurs often receive the advice that “they shouldn’t waste time talking to analysts or associates at VC firms.” (I’m not going to comment on that itself. You can find lots of other posts that already talk about it.) To make things even more confusing these days several of the larger firms have started calling almost everyone in their firm “Partner!” I’m not kidding, ask for a business card from someone you know who just graduated high school (okay I’m exaggerating, it’s probably someone who just dropped out of college ) and their business card will say “Partner.”

It sounds silly, but there’s now been enough occasions when I’ve chatted with founders who thought they were further in the process than they actually were because of the confusion around the persons title. In some cases they hadn’t even cleared the gatekeeper to get to a decision maker.

If you’re a founder, you need to make sure you understand whether the person you are talking to at a VC firm has the authority and the decision-making power to drive an investment decision. That person is the real partner in the firm. This is something that is often very hard to determine from titles. Please don’t get duped by titles. Titles are only one bit of information to factor in.

When you are in a  meeting, or better yet when you’re setting up a meeting, feel free to ask a person to explain how the process works in their firm. By asking the question that way, you’re not disrespecting anyone, and yet at the same time you’re arming yourself with a better understanding of what are the hoops you need to jump through to get to an investment decision.

Different firms have different team and partner dynamics. In some firms, even though someone may be a general partner, the internal dynamics of the firm may be such that only a handful of senior partners really call the shots. Your best bet to understanding this dynamic is to use the backchannel to reference check the person you are speaking with. Sometimes checking who serves on the boards of some of the most visible portfolio companies of the firm can also be a good signal as to who is really driving decisions.

In my view the firms that use the title “Partner” loosely and almost promiscuously are doing a disservice to entrepreneurs. They should be more transparent about how the process works in their firm and if part of that process is to get through some gatekeepers, then that’s okay too.

N.B. At K9 I’ve decided that I do not want any gatekeepers between me and founders. No associates, no principles, no junior partners, and certainly no faux-partners. If I choose to engage with a company, they engage directly with me. The corollary is that I have to limit how many teams I can engage with. To help manage that I publish my investment criteria, so that the founders can self-select whether or not K9 will be a good fit for them.

 You can follow me on Twitter at @ManuKumar or @K9Ventures for just the K9 Ventures related tweets. K9 Ventures is also on Facebook and Google+.

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In May 2011, I wrote the post: Investor Nomenclature and the Venture Spiral. That post got a lot of attention because back then all the buzz was about “Super Angels.” The venture landscape was evolving and had reached a point where Super Angels were an important part of the ecosystem. Well, now in 2014, almost 3 years to the date, things have changed again. The funding landscape has shifted and is now even more confusing than ever. Here’s what’s changed in my opinion:

The Super Angels are now Micro-VCs.
Yes, almost everyone who was operating as a Super Angel, went on to raise a venture fund. Most of these funds are <$100M, with the majority of them being clustered around the $40M mark (that’s the point where the fund economics start to work in terms of management fee and ability to take a meaningful stake in portfolio companies).

In keeping with the thesis of the Venture Spiral, as the Super Angels matured into Micro-VCs, the style of investing changed because now the Micro-VCs had more dollars to put to work, and became sensitive to ownership. The party rounds, which were the range in late 2010 and early 2011, became less common and we started to see the smaller funds begin to lead rounds.

Significant tightening for follow on rounds
We heard about this in the press as the Series A crunch, but it wasn’t really a Series A crunch. Instead, it was more of a result of over-funding at the seed stage. There was simply too much money coming in to the seed stage, which increased the supply of companies at the seed stage. The Series A investors could therefore be a lot more picky. Even if they did the same number of deals as they did before, it felt like a crunch because of the increased supply of funded seed stage companies.

Massive late stage rounds
The late stage (Series B and Series C) investors are hunting for breakout companies that have serious traction. But there are few companies that breakout, and there is a high supply of capital looking to invest in the companies. The low supply and high demand is driving up the valuations and deal sizes. The companies that get to traction have a lot of capital chasing them. But scaling is hard, and these companies can suffer from The Curse of Over Capitalization. However, the bet that these investors are making is that it will be a winner takes all market.

Threshold for an IPO is higher
Ten years ago, if you had $20M in revenue you were ready to go public. Today, you need almost 5x or 10x that number to even be eligible. If you have <$100M in revenue, you’re probably going to stay private. These companies now end up raising more capital in private rounds than they raised in public offerings 10-15 years ago. And the players for these massive rounds basically decided that they can’t wait for these companies  to go public and so the hedge funds that used to take positions in companies once they IPO’d are now taking those positions before the companies go public in these mega rounds.

Hiring costs are up dramatically
The cost of hiring top quality talent in the bay area has gone up dramatically. Top engineering talent today has a bimodal distribution. You will find top engineers either being founders or working at super early stage startups where they can expect a big outcome based on their equity if the company succeeds, or, you will find the top engineers at companies that can pay top dollar, sometimes with pay packages (salary+benefits+equity) that approach low to mid hundreds of thousands of dollars and sometimes even hitting the million dollars a year mark for select super stars.

 Now what are the implications of all this? Well…

It hard out there for a Startup
Companies that are just starting out have it really tough for getting to the next round. They can probably cobble together an initial round of funding because a) there’s a lot of money in the early stage ecosystem right now (both individual money and institutional money), and, b) they’re raising the initial round on hope (see Hope and Numbers). But in order to get to a “Series A” they need to show a lot more traction than they did before (because the supply is higher and the Series A investors will pick the best companies).

At the same time, since the hiring costs are much higher, the companies need to spend more money on recruiting and retaining top talent. Remember all the rhetoric about how it’s so much cheaper to start a company these days? It’s not true in my opinion. Yes, the CapEx is significantly lower and has been replaced mostly by variable costs, but the people costs are a lot higher than they used to be. Also it’s becoming harder for companies to break out of the noise and so the marketing costs are a lot higher than they used to be.

The traction bar is higher, which means the companies need to survive longer in order to cross that threshold. And the hiring costs are higher. Taken together, it means an early stage company needs to survive longer, with higher expenses. Startups have realized this and investors have realized this, which is why these days a “seed round” is usually closer to $2M! Yes, a $2M “seed round.”

Re-jiggering of deal stages and sizes
Two years ago, a seed round used to be $500K, now it is $2M+. A Series A round used to be $3M – $4M, now it’s $6M – $15M. A Series B round used to be $10M-$15M, now it’s… well, you get the picture. The deal stage and sizes have changed dramatically.

Seed is not the first round of financing any more. In fact after noticing this trend last year, I have transitioned to calling most of my initial investments “pre-seed” rounds, where the company raises close to $500K, before raising a full seed round. The Seed round is larger — closer to and sometimes upwards of $2M. The Series A is now the fourth round of funding for a company — the first is usually friends and family, or an incubator (~$50K), then pre-seed (~$500K), then seed (~$2M), then Series A (~$6M-$15M).

Note that I’m describing  what I’m seeing these days as a typical fundraising pattern and it is somewhat simplified. Some companies may be able to “skip stages,” others may end up raising money on a rolling basis. In fact, I’ve seen companies use a convertible notes to do an add-on or “seed-extension” round as well. Sometimes the seed-extension round can be done to just provide more cushion for hitting the Series A traction mark, in other cases it is because the company mis-executed, or didn’t achieve product-market fit and wants to get another shot at the Series A goal.

The new normal and new nomenclature
The institutionalization of the early stage means that it has now matured (Super Angels are now Micro-VCs). They’re starting to use similar metrics and structures as what the old Series A folks used to. For example, doing equity rounds only, no convertible notes, leading rounds and taking on board seats. The seed round is bigger. The Series A is bigger too, and the Series C/D are even bigger yet. Effectively, we’re approaching a new normal in the venture landscape, where the criteria for and the size of the round has shifted up a level, but we simply forgot to adjust the nomenclature (yet again).

Here is how I think about it today:

 Pre-Seed is the new Seed. (~$500K used for building team and initial product/prototype)
Seed is the new Series A. (~$2M used get for building product, establishing  product-market fit and early revenue)
Series A is the new Series B. (~6M-$15M used to scale customer acquisition and revenue)
Series B is the new Series C. 
Series C/D is the new Mezzanine

Welcome to the new venture landscape!

(When I was starting K9 Ventures, I used to describe it as a “seed stage fund”. I’m now adapting to this new nomenclature by coining the “pre-seed” phrase for the stage at which K9 likes to invest. The goal for K9 is to be the first significant round of funding for a company regardless of the nomenclature.)

You can follow me on Twitter at @ManuKumar or @K9Ventures for just the K9 Ventures related tweets. K9 Ventures is also on Facebook and Google+.

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For all the stuff we hear in the press about Venture Capital, one thing that you don’t hear about as much is that operating a (small) venture fund is really similar to operating a “small business.” Yes, while we strive to fund the next big business, our own business is a small business.

Venture funds tend to have relatively small, close-knit teams and generally do not need a lot of infrastructure. At its core you need a place to meet people, and that’s about it. Ultimately the business of venture capital is all about people.

When I was getting started with K9 Ventures, University Cafe, Coupa Cafe, and Monique’s Chocolates were my favorite meeting spots for a while. In fact, I’m guessing that some of the best micro-VCs today got their start in cafes.

Back in 2009, it was a conscious decision to be an “off-Sand Hill Road firm.” Some of the best firms in the business are on Sand Hill and it’s always been a curious oddity to me as to how Sand Hill Road became the epicenter of the venture business. My choice to be off-Sand Hill was driven by the brand I wanted to portray for K9 — part of that brand is to Be different, to not just think different, but act different.

Being in downtown Palo Alto was great. I love downtown Palo Alto. It has a great vibe and energy too it and also has great options for food. I’ve thoroughly enjoyed being in downtown Palo Alto for the past 5 years.

But change is afoot. There’s been a lot of talk about the changes in San Francisco, but there are changes happening in downtown Palo Alto as well. Here’s what I’ve observed:

High retail turnover
The retail business is tough — there’s no doubt about that. But just take a walk down University Ave in Palo Alto and you’ll notice how many stores are new. If you do the same walk long enough, you’ll also start to see how the turnover in retail stores is extremely high. Some spots change hands almost within 6 months to a year. Then there are some that seem to be doing brilliantly (Oren’s Hummus and Cream being two that are at the top of mind for that). And there are those which are staples and have a regular clientele (Jing Jing, Mandarin Gourmet and Thaiphoon being the one’s I frequent).

High Demand for Office Space
It feels like all the big companies in tech have decided that they all need an office in Palo Alto. Downtown office space availability is close to record lows based on what I’ve been told by numerous commercial real-estate agents. The high demand of course leads to soaring rents. Class A space in downtown Palo Alto is now going for $7-$8/sq ft per month (For anyone reading this from outside the Bay Area, yes, that’s per month – rents are quoted per month in the Bay Area) once you add in the NNN expenses.

High concentration of VC funds
New VC funds all tend to be either in San Francisco, or in downtown Palo Alto. Although I don’t think the landlords on Sand Hill Road have anything to worry about, since it’s just a gradual shifting of the landscape, not a massive upheaval, but there’s a clear trend towards there being more and more venture funds in SF and PA.

Watching these changes and thinking about what I want to K9 to be when it grows up has made me think long and hard about something as simple as the working environment. My fear is to end up going too deep into the “financial services” end of the spectrum rather than the “technology R&D” end of the spectrum.

With that in mind I’ve decided that it’s time for K9 Ventures to take the next step and move to a larger, industrial space, where it can continue to be focused on technology R&D. Unlike a traditional “office” space, I want this to be a space that is focused on fostering creativity and technology innovation – where new technologies, new ideas, and new ways for startup teams to work together can take form (note: almost a quarter of K9’s portfolio companies are hardware companies: Lytro, Occipital, Coin, Tangible Play, 3Gear Systems).

The new space will be nick-named “The Kennel.” It will still be in Palo Alto, but not in downtown. I look forward to inviting some of you to come visit The Kennel in the near future.

You can follow me on Twitter at @ManuKumar or @K9Ventures for just the K9 Ventures related tweets. K9 Ventures is also on Facebook and Google+.

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Ingenuity. Ingenuity is a beautiful thing. It’s a beautiful word. It is at the heart of engineering. It is also something I strive to have in every company that K9 Ventures invests in. A lot startup ideas are an incremental or marginal improvement over something that already exists in another form. But, once in a while you come across something that make you have that “Aha! experience.” I’ve been fortunate to have had the chance to work with several companies which deliver that experience and today I’m so excited to be able to talk about one that delivers on the “Aha! experience” in spades.

Kids love the iPad. It’s a fact. And I know that first hand because every time my 2.5yr old son gets his hands on one, it’s almost impossible to separate them and it inevitably leads to a tantrum. My son started using the iPad (much to my wife’s chagrin) and the ripe old age of 13 months (thanks to some of the prior work by Sooinn Lee, co-founder of LocoMotive Labs).

But for a child using the iPad, the interaction is often what I like to describe as “hold and poke” interaction. And it’s also often a solitary experience, creating an invisible tunnel between the child and the device. As a result, parents are often concerned about how much “screen-time” their kids get vs. “play time”.

At the same time, kids these days are not satisfied with the “play time” experience. Simple building blocks, or drawing is fun, but only for a few minutes, before the child gets bored. They’ve tasted the level of engagement and interaction they get from screens and that’s the level of engagement they crave.

This is where Osmo comes in. First, watch this video:

The best work I can think of to describe Osmo is ingenious. It’s ingenious in so many ways.

It is ingenious in how it blends screen-time with play-time — where you can now have objects and interactions (like drawing) in the physical world that are recognized by and can influence what happens in the on-screen world. It’s a blended-play experience.

It is ingenious in how extending the play area from the screen to the surface of the table, now makes it possible for it to be a social experience with multiple people playing together (or against) each other. No more of the invisible tunnel that disconnects you from the world, instead, you’re engaging and connecting with the people around you.

It is ingenious in the simplicity of how it works — by using a simple mirror to enable the camera on the iPad to look at the surface of the table. And then the magic happens in software — with state of the art computer vision and object recognition techniques pioneered by the team that are designed to be super responsive and performant.

I first met Pramod Sharma, the co-founder of Tangible Play, the company behind Osmo, while we were both at Stanford. After Stanford Pramod went to Google, and helped to build the Google Book Scanner, that was used to digitize millions of books. Pramod and I reconnected after almost a decade when he brought a home-made prototype of what is now Osmo to show me. It was love at first sight. The simplicity of the mirror, couple with the enormous potential of what could be done in software was evident.

Pramod and Jerome (also a co-founder of Tangible Play) met at Google. Prior to that Jerome worked at Ubisoft and Lucas Arts. Jerome is one of the most creative people I have met. The breadth of his expertise combined with the attention to design and every detail is remarkable.

I’m honored to work with such brilliant and creative founders. The Tangible Play team has built Osmo into a truly awe inspiring “Aha experience!” The video gives you a sense of that, but you really do need to experience it yourself while playing with your own friends and family. It’s the human connection that Osmo creates that makes it so wonderful.

Join the play movement at playosmo.com

You can follow me on Twitter at @ManuKumar or @K9Ventures for just the K9 Ventures related tweets. K9 Ventures is also on Facebook and Google+.

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When I was an undergraduate at Carnegie Mellon, I took a class in Linear Algebra. The class was taught by a visiting graduate student, not by a Carnegie Mellon professor. The instructor of this class was *so* bad that ever since taking that class, I have always had a mental block against linear algebra and anything matrices. That mental block has come back to bite me in the rear several times. When I was taking a graphics class or when I was working on my PhD and needed to do 3-D transforms — there were multiple occasions when I felt the pangs of stress, which all find their roots back to one pathetic learning experience with a under-qualified and under-experienced teacher.

So it didn’t come as a surprise to me to learn that if  child falls behind in learning some of the fundamental mathematical concepts that simple little mis-step can end up changing the course of their life. The child may believe that he/she is not good at math or or worse yet get branded as being someone who isn’t good at math. That in turn can impact their choices as a student, which in turn determines their choice of a career.

Laying down strong mathematical foundations is one of the critical steps in preparing kids for a solid STEM education. That is why I am especially proud to be an investor and supporter of LocoMotive Labs. LocoMotive Lab’s new app Todo Math (pronounced To-Doh Math, not Too-Doo Math) starts by teaching kids how to count, write numbers, add, subtract, tell time and much much more. The secret sauce for Todo Math is at the LocoMotive Labs teams designs apps with special attention towards struggling learners. Ever activity and every level of the app ( and there are 18 different activities in the app!) had been carefully designed to ensure that the child not only can recognize or write numbers, but also understands conceptually what those numbers mean.

If you have a young child who is either starting to learn to count or one that’s struggling with basic arithmetic and numbers, Todo Math is the amazing app that can help them to start with a slid foundation or reinforce that foundation so that they’re able to build upon it. It is a brilliantly designed app that literally can teach your child math and do it in a way that kids actually enjoy doing the activities. To them it’s a game, but in reality it’s teaching them fundamental math skills.

“It is not the beauty of a building you should look at; its the construction of the foundation that will stand the test of time.”
: David Allan Coe (from BrainyQuote)

If you know of any one who has young kids (between the ages of 4-8), do them and their kids a favor and tell them about Todo Math. It could very well change the very course of their lives — we hope.

Congratulations to Sooinn Lee and Gunho Lee, co-founders of LocoMotive Labs, on the launch of Todo Math. And a big thank you to my co-investors New Schools Ventures Fund, Wayee Chu and Ethan Beard, Allison Bhusri, 500 Startups, Mitch Kapor from Kapor Capital on funding LocoMotive Labs’ mission to ensure that all kids have the best chance to learn math at an early age.

You can follow me on Twitter at @ManuKumar or @K9Ventures for just the K9 Ventures related tweets. K9 Ventures is also on Facebook and Google+.

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No, not that kind of non-verbal gesture.

I believe this was in April 2010 and if memory serves me correct it was an event hosted at the Hiller Aviation Museum in San Carlos by Sand Hill Angels, where Vinod Khosla gave a talk. I was relatively new to the investing world at the time having started K9 Ventures just a year before in April 2009.

In his talk Vinod walked through some examples of different companies he had invested in through Khosla Ventures. I was quite blown way by the variety of different companies he presented and so I mustered up the courage to ask Vinod a question. My question was “How do you diligence or satisfy yourself that the science or the technology behind these companies is real?”

Vinod’s answer was a non-verbal. He held up his right hand and used it to pat his tummy with it, symbolizing “gut — it’s all about trusting your gut.”

Vinod may not recall our brief interaction, but that non-verbal answer from him was one of the most important lessons in becoming a micro-VC. Especially for the stage at which K9 operates — the frighteningly early stage, there is very little information to go on, and one has to decide whether or not to invest in a team just on the basis of the team, the idea, and if you’re really lucky, sometimes a prototype.

Recognizing and trusting your gut is important in the venture business. And the number of times a day you need to do that gut check can take a toll on you; by the end of the day you really don’t want to be making any decisions any more.

This is probably even more so for anyone operating as a solo-GP, but I also wonder whether it’s easier to listen to your gut when you’re relying on yourself and if the opinion of partners can influence your ability to listen to and trust your gut? Although I haven’t experienced this myself, I would imagine that in a partnership that operates well, the discussions between the partners go something like this: “Well, if you have a strong gut feel about it, then go ahead.”

I was at an Alpha event yesterday (my first) and I had two independent conversations with people about trusting your gut. One was with Lee Jacobs and I’ve forgotten the name of the second person. On my drive back while reflecting on those conversations it reminded me of the interaction with Vinod, which taught me the valuable lesson of trusting my gut.

So I wanted to take a moment to just say Thank You to Vinod for that important lesson.

You can follow me on Twitter at @ManuKumar or @K9Ventures for just the K9 Ventures related tweets. K9 Ventures is also on Facebook and Google+.

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