Last fall,  Joe Beninato interviewed K9 Ventures founder and Chief Firestarter, Manu Kumar, on his weekly webcast FounderLine

Manu talks about the history of K9 Ventures including the origin of the firm’s name. Joe and Manu also talk about K9 Ventures’  investment focus (hint: new technology/new market), investment stage (hint: frighteningly early), teams (hint: need a builder and a CEO),  direct revenue (hint: customers pay you), location (hint: 30-miles around the Stanford Oval).

He also gives his insight to the mini-earthquakes in the Startup ecosystem created by large technology companies like Apple and Google.

Manu answers call-in/tweeted-in/emailed questions  from entrepreneurs with Joe Beninato of FounderLine including; Persistence and Irrationality as keys to successful entrepreneurship.

Watch the full  interview  below:

The post Manu Kumar in discussion with Joe Beninato appeared first on K9 Ventures.

When we started in the PhD program in Computer Science at Stanford, Prof. Rajeev Motwani, who was the “default PhD advisor” for all incoming PhD students told us that our only priority should be to find a research topic that we care about.  In fact, Prof. Motwani was so adamant that this was the only thing that mattered, that he said that we shouldn’t worry about the myriad of other requirements for the PhD. He explained that rarely had he seen anyone not complete their PhD for any other reason.

Rajeev taught me that getting a PhD is as much about “finding a problem as “solving the problem.” The first and often the most time-consuming part of the PhD is finding a problem that you care deeply enough about to spend several years of your life researching. Ultimately the goal of a PhD should be to “make an incremental contribution to human knowledge.” Sounds simple enough doesn’t it?

There are many things about doing a PhD that have helped me to better understand how things work or should work in a startup environment. But one of the most important has been finding a problem worth solving.

Doing a startup is hard. It is often lonely and super difficult — an emotional roller coaster with high highs and low lows. And it’s a roller coaster that lasts for what may well be some of the best years of your life. To survive this roller coaster you must have an intense amount of passion for the problem you are working on. But finding that problem is not simple and it can often be an involved process.

Beware of the Wantrepreneur

Doing a startup is cool and hip these days (especially in the Valley), but there are too many people who start a company not because they care deeply about a problem, but because they want to ‘do a startup’.  There is no wrong time to start a company. It doesn’t matter if the economy is good or bad. The best time to start a company  is when you are so passionate about solving a problem that you can’t think of, or bear to be doing anything else. If you start a company first and then plan on finding “the idea” it probably won’t work because you’re then hunting for an idea rather than working on a problem that annoys you and that you are deeply passionate about solving.

As a corollary, starting a company because you want to make money is almost always doomed. A founder who’s in it to make money will take too many shortcuts. There are no shortcuts. To win you have to put in the hard work to succeed.

Start with a Mission You Care About

If you’re going to spend the best years of your life working on something, you better make it something you care about. The mission is not the exact problem you’re going to solve, but it’s the North Star. It’s telling you the direction in which you should go.

Not many folks know this, but Lyft‘s co-founder Logan Green has been passionate about transportation for a long time. Logan grew up in LA. He always hated traffic and wanted to find a way to eliminate it. When he was studying at UC Santa Barbara, he was the youngest member on the municipal Board of Transportation. It sounds cool now in retrospect, but do you really think being on the Board of Transportation sounds like a cool thing to do when you’re twenty-something? But it was something Logan was passionate about from the start.

Logan’s co-founder John Zimmer studied hospitality at Cornell. He was always interested in improving the use of existing infrastructure and in crafting experiences.

Both John and Logan had deep rooted passion for transportation. It was on a trip to Zimbabwe that Logan saw carpooling being used extensively. And that became the spark and the idea for Zimride. Zimride’s goal was to help improve transportation and make it easier for people to get from A to B by sharing the ride. Their motto was: “Life is better when you share the ride.” It was beautiful.

Refining the Problem (aka How Lyft was born)

Logan and John built a real business with Zimride. Their focus was on long distance travel. From SF to LA. From SF to Tahoe. The company was generating revenue, and was close to being break-even. However, the business wasn’t exploding, and instead it was slow steady growth.

In one of the board meetings for Zimride, I suggested to Logan and John that the e problem they were solving didn’t stack up well along the axes of Frequency, Density, and Pain. How frequently does someone need to go from SF to LA? Not that often. How many people need to travel from SF to LA? Not that many when you consider the population of the two cities. How painful is it to get from SF to LA? Well, you can fly from San Francisco, from San Jose, from Oakland. You can take United, Southwest, Virgin America, Alaska and probably more airlines. You can drive. You can take a train. You can take a bus. Bottomline is that there are lots of options.

In contrast, if I need to get from Moscone Center to Golden Gate park? Well, a lot more people have that problem. And they also have that problem more frequently. And there aren’t a lot of options. You either walk, drive, or take a taxi.

Compared to Zimride, the problem Lyft is solving has a higher frequency, a higher density and a higher degree of pain.

Frequency, Density and Pain

Frequency, Density, and Pain have become three variables that I now look at to analyze almost any problem. They tend to be good measuring sticks to see how the problem you’re solving stacks up.

Frequency: Does the problem you’re solving occur often?

Density: Do a lot of people face this problem?

Pain: Is the problem just an annoyance, or something you absolutely must resolve?

Put another way asking the Frequency, Density and Pain question can help you to identify how often people have this problem?  How many people have this problem? Do they care?

If your business is stuck at a plateau and you can’t figure out why you’re not making headway, it might be worth thinking about these variables to determine whether you’re solving the right problem, a big enough problem, or a frequently occurring problem.

Friction

Great, you’ve thought about Frequency, Density, and Pain, and you’ve uncovered a massive problem, that everyone cares about and it happens to a lot of people, every day. The next thing to think about is the Friction in the solution. How hard  is it for a user to access, understand, or use the solution you’re providing? How hard  is it for them to pay you?

Lyft  removed friction and made it easy.. If your problem is to get from point A to point B, what could be easier than taking out your phone and pressing a button and magically a car shows up and takes you where you want to go! Problem solved. And the payment is handled in the app so it’s super easy for Lyft riders to pay Lyft drivers.

The effectiveness of the solution, the ease of delivery, and payment all come down to removing friction. You found a problem that people care about, you’ve built a solution for them that works and you’ve made it easy for them to use and pay for that solution. Now that to me is beautiful.

I hope this framework of thinking about Frequency, Density and Pain of the Problem and the Friction of the Solution will help founders to think about what they’re doing. Solve a problem that matters. Something that makes the world a better place. Something that has an impact. And do it in a way that is simple, elegant, and beautiful. Easier said than done, but definitely something to aspire to.

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 Finding a Problem Worth Solving appeared first on K9 Ventures.

I’ve often repeated that the definition of entrepreneurship is “Insane perseverance in the face of complete resistance” (something I learned from my professor and mentor the late Jack Thorne). Put differently, there are some founders for whom failure simply isn’t an option. They’re on a mission and they’re not going to let anything stand in their way.

I am so proud and honored to recognize one such founder from the K9 portfolio today. Sooinn Lee is the founder and CEO of LocoMotive Labs. I’ve already written about what the company does in my previous post on Strong (Math) Foundations. Today, I don’t want to talk about the company, but I want to talk about the founders — Sooinn Lee and her husband and co-founder Gunho Lee.

Sooinn and Gunho have a son who was born with multiple special needs spanning hearing, speech, and learning. Sooinn had over a decade of experience working in the game industry in South Korea. Gunho also worked in the game industry and did a PhD in Computer Science at UC Berkeley. When I referenced Gunho, the feedback I got from his advisor was “I don’t know when he sleeps.” Together Sooinn and Gunho are a power couple — not the kind that walks down the red carpet, but the kinds that gets shit done and don’t let anything stand in their way.

Shortly after their son was born they knew that they were going do something to help him and to help all children learn in a better way. They didn’t start Locomotive Labs because they wanted to start a company or because it’s cool to do a startup. They started LocoMotive Labs (with some encouragement from yours truly) because they are on a mission. A mission that is very personal and one where failure is simply not an option.

Sooinn is one of the most driven and determined entrepreneurs that I have had the pleasure of working with. Yet she doesn’t fit the Silicon Valley stereotype of an entrepreneur. She’s not a 20-something, white male who is walking out of Stanford, or Google, or Facebook to start a company. Instead she is a mother. She is Asian (South Korean). English is not her first language. And to top it all she’s petite. But don’t under-estimate her as she is a force to reckon with. Sooinn has an unwavering focus on helping kids learn — and not just any kids, but *all* kids — including those with special needs. She is sometimes strong-headed, but her motivation is pure and her commitment is unfaltering.

Sooinn and Gunho work tirelessly, pulling long hours, often working through the night, while at the same time caring for their son. I have the utmost respect and admiration for both of them.

Being in the “Learning” space (note: I distinguish between Education and Learning — Education is the institution of learning. Learning is something we all do innately, whereas education is a process) presents an additional hurdle for fundraising, as there are few (but thankfully a growing number of) investors who will invest in that sector. Add to that Sooinn is a non-native English speaker who is female and of short stature. All of this made it harder for Sooinn to get traction with investors in Silicon Valley. While no one said so directly, I suspect that part of the problem was that Sooinn didn’t ‘match the pattern.’ Not only is she an immigrant woman founder and CEO, but Sooinn and Gunho are a husband and wife team — another red flag for investors.

However, there is a different pattern that they do match. The pattern of a founder who is so passionate about their mission that they will succeed no matter what obstacles they encounter. Sooinn has insane perseverance.

So I am especially honored to extend a hearty and warm congratulations to Sooinn Lee and Gunho Lee on successfully closing a $4M Series A round of financing led by Softbank Ventures Korea and TAL Education Group, with continued participation from K9 Ventures, Kapor Capital, New Schools Venture Fund and others. And I would like to welcome Softbank Ventures Korea and TAL Education group on board this journey and mission.

As a mother and as a founder, Sooinn is on a mission to transform how all children all over the world learn. I’m confident that LocoMotive Lab’s flagship application, Todo Math, is going to become the new standard and a right of passage for every child in their quest for being fluent in and comfortable with mathematical concepts. Sooinn and Gunho design their learning tools from compassion, empathy, love, and determination. They have decoded learning from the lens of their son, and all children who deserve to learn successfully.

​Todo Math already has over 1M downloads all over the world with almost 50% of the usage coming from Asia (China, Japan, Korea, Philippines).

If you start a business with the right motivation and an immense degree of passion, the road to success may be bumpy, but you will get there. ​I’m honored to continue backing Sooinn and Gunho in their mission. I *know* that they will be massively successful and continue to make a difference in the lives of kids and parents worldwide.

Update 2/26/2015: To get a better sense and understanding of how and why Sooinn is a Founder on a Mission watch this talk that she gave at TEDxBayArea

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 Founders on a Mission appeared first on K9 Ventures.

I still remember pleading with my elder sister to help me draw the diagrams for my Biology class. She could draw the leaf with perfect proportions and beautiful veins. Her microscope and her digestive system looked so much better than mine! Over the years, I finally just resigned myself to thinking “I suck at drawing.” And that feeling has persisted ever since… till now.

It was a Stanford, when I was TAing CS247 at Stanford with Bill Verplank (Note: Bill was recently inducted into the SIGCHI Academy, Congrats Bill!), when I realized that it didn’t have to be so. Bill is the master at drawing. I’ve never seen anyone express themselves as fluidly while sketching and drawing at the same time in real-time (watch the video for Chapter 2 of Designing Interactions). Bill explained that drawing can be learned and it takes practice.

Drawing is not a natural ability that some have and others don’t have. It is a learned skill. It requires learning to translate what we see in 3-dimensions into a 2-dimensional representation which can be expressed on paper. In order to do this translation correctly one has to understand perspective, proportions, lighting and more. These are things that I simply didn’t spend enough time on as a kid and I have always felt handicapped by my ability to express myself visually.

I’ve written before about Osmo — one of my portfolio companies that is changing the way kids interact at the cusp of the digital world and the physical world (See: The Ingenious Osmo). Today Osmo is introducing Masterpiece.

Masterpiece is a drawing tool that helps you to learn how to draw and sketch. It shows you how to translate something your eyes see into something your hand can draw. It’s magical. And you can take any picture from anywhere — something you capture in the real-world using the camera, or an image you pull from the Web of your favorite character or artwork, or one that you choose from its built in library. It’s an endless drawing book that also allows you to adjust to your level of expertise (or lack thereof in my case!) and even scale, rotate and compose images to create your own ‘Masterpiece.’

Here is the Osmo Masterpiece intro video…

Osmo’s Masterpiece is a free app that is available for download in the AppStore (iPad only). It works with your existing Osmo Base and any number of drawing implements. You can use pens, pencils, paint brush, crayons, or even charcoal to draw on paper, newsprint, card stock, tile — and of course even on the table (as I’m sure some kids will, much to their parents’ dismay!).

Congrats to Osmo founders Pramod Sharma and Jerome Scholler and to the whole Osmo team on once again creating something that is trunly innovative and novel — nothing like thi has existed before.

If you don’t already have an Osmo, you can order one at PlayOsmo.com or on Amazon.com. Or if you absolutely can’t wait walk over to your closest Apple store and pick one up there.

Update 03/13/2015 12:07 AM: I had my 5yr old daughter try Osmo Masterpiece earlier this evening and here is what she created….

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 Osmo Masterpiece: No more fear of drawing appeared first on K9 Ventures.

The title of this post is an oxymoron — but it is intentional as it most succinctly captures the essence of this post.

Conventional wisdom in the startup world dictates that two founders are ideal for a startup. There are lots of famous pairs of duo co-founders: Larry Page and Sergey Brin, Jerry Yang and David Filo, Hewlett and Packard, Bill Gates and Paul Allen. Three co-founders is acceptable, but anything beyond that the chances of success of the company may actually decrease.

Having the right co-founder is perhaps the single most valuable thing in a startup. But it sometimes comes with the uncertainty of two people getting married often before they even get a chance to date. The right co-founding team can make or break the company and radically change its chances of success or failure, the latter being the default outcome.  However, it is also important to realize that bringing on a co-founder is often the single most dilutive event for a founder (almost often worth it, but still true).

Investors, particularly in Silicon Valley investors tend to shun solo founders. They prefer teams of two or three over a solo founder. In some cases I’ve heard investors say that “if you can’t convince someone to be your co-founder, how will you convince investors or employees” — or something like that. Others prefer teams of three — the hacker, hustler, designer trio. The thinking is that co-founders will complement each others skills, help to share the workload, and balance each other out in ways such that the sum of the parts is greater than the whole.

When I started my first company, I tried to convince some of my friends in the same Masters program at Carnegie Mellon to join me in the startup adventure. But it was difficult to take a social relationship and convert that into a professional relationship. I was bummed when I couldn’t convince them to join me, but my conviction for doing a startup was strong enough that I decided to go it alone. Being a solo founder was indeed hard. The hardest part was not just the the literal amount of work or the number of balls one has to juggle, but it was the emotional ups and downs that are inherent in running a startup. That emotional burden of being a founder is not to be taken lightly.

It is widely expected that co-founders equally share the emotional and cognitive load required to build a company. But I’m going to claim that this equitable divide is a RARE occurrence. Co-founders who truly share the emotional load of doing a startup with each other are incredibly lucky. They should take a moment to appreciate  their fortune and express their gratitude for their partnership and support. (A shout out to Logan Green and John Zimmer, co-founders of Lyft here. From everything that I have seen they have had one of the best co-founder relationships that has been forged through years of working together through good times and tough times.)

More often than not a startup starts with one person’s idea and others join in. Sometimes these are long-time friends, but more commonly they just met or worked together in a previous job. In some cases the “co-founder” title is used to attract people to join the company in an increasingly competitive hiring environment.

Frequently, even though a startup may have “co-founders”, the emotional burden may be borne disproportionately  by the founding CEO (note: I’m using the phrase founding CEO to distinguish between the main co-founder and the other co-founders in a company, but it doesn’t always have to be the CEO). The other co-founders are certainly helpful as they (hopefully) take on part of the workload and help with certain functional roles. But the key hiring, firing, strategy, fundraising, and customer issues often fall in the lap of the founding CEO. I’ve often said that the three hardest things about a startup are: People, People, People. It’s the emotional toll of dealing with people which increases the stress on the founding CEO.

Therein lies the origin of the oxymoronic title of this post. A “solo co-founder” is someone who bears a disproportionate amount of the the emotional burden of doing a startup.

Being in such a position is often lonely and stressful and you’re reminded of it everyone someone asks you the question: “How are things going?” I hate that question (although I’m guilty of asking it myself!). It’s a meaningless question that people ask in order to make small talk, but the answer to it more often that not should really be “Do you really want to know?”

So what can a solo co-founder do to navigate these lonely waters?

1. Have the conversation.  The emotional burden of a startup cannot be ‘assigned’ to someone who doesn’t want it. If you try to do that it will only build resentment amongst the founding team as they will begin to feel that the other person is not carrying their own weight. Having the conversation at a minimum ensures that there is an awareness and a shared understanding of the this load. Co-founders should be honest with themselves and with each other on how much each person is willing to take on.

2. Have an outlet. Find one or two people outside your startup who you trust with whom you can talk about what is on your mind and what’s keeping you awake at night. This needs to be someone you chat with on a regular basis as it takes too long to provide context to someone new or someone you’re not interacting with often enough. You want someone who pushes your limits and makes you think critically, and who will kick you in the ass when you need it. The ideal person will not tell you what to do, but will ask the right questions to come to the decision that is right for you. This could very well be a friend, a spouse, a significant other, a mentor, an advisor, and in rare cases an investor.

If you can find two people that’s even better, so that you are not unduly influenced by any one persons point of view — even they can be having a bad day sometimes. And in fact this way you get two inputs that you can balance with you own thinking. In some cases you may have to tell people “I heard your advice, I understand it, and I am not following it, and here is why…”

3. Hire to offload.Make hiring a priority in areas you need help in. After you’ve had the conversation with your co-founders you should be able to identify what areas cause you or your team the most angst. For example, maybe no one on the team really wants to do the book-keeping. Well, it’s a necessary function for a company to be solvent and if no-one wants to do it, then you better hire someone who can come in and take care of that ASAP. Or if you don’t really get marketing, or finance, or something else, make it a priority to hire people in those areas so that someone who is more experienced or even just better suited for doing that task is taking care of it.

4. Build a peer group. The one thing you can count on when you’re doing a startup is that if you’re having a tough time with something, someone else has either been in your shoes before, or is in your shoes right now. You may think you’re alone but you’re not. You just need to find the other people who have been there and can help or are facing the same troubles and then if nothing else the two of you can commiserate. For this I recommend that founders should have a social peer group. Once a month meet up for dinner, beers, tea, racquetball or whatever your preference may be. So you can chat with other people and help each other out.

5. Remember Nietzsche. “That which does not kill you makes you stronger.” : Friedrich Nietzsche. And remember that “this too shall pass.” You will learn and will be stronger for it. And the next time you face the same challenge, you will know how to handle it.

So here’s to all the “solo co-founders” out there. You know who you are. Wishing you all the best in your startup adventure. Stay strong.

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 Solo Co-founders appeared first on K9 Ventures.

I’ve been on the receiving end of many many pitches by this point both via email and in person. One of the patterns that I have seen is that for pre-seed and seed stage companies (could be for later stages like Series A and B as well, but once a company is mature, some CFOs can handle the pitching as well if not better than the CEO) if the CEO is not the primary person pitching the company, then that’s a bad signal. If the primary pitch person is someone other than the person holding the role and title of the CEO, it can indicate a couple of different things:

First, it is a signal that the CEO doesn’t believe that the fundraising is an important enough activity to do herself. Fundraising is an integral part of being a founder and especially of being a CEO. Too many founders believe that fundraising is a waste of their time and that they want to get back to building the product or building the business. I’m sorry to say that that is a myth and utter nonsense (that is also unfortunately propagated into popularity by some accelerators as well).

If you’re planning on building a venture scale business, you will most likely have to raise capital for it. The process of raising capital is essential for the growth of a CEO. It forces the CEO to think about their business strategically. To articulate the company’s vision concisely and clearly. To communicate with others about how the company is going to become a big business. A CEO who can tell the story of the company well to investors will then be able to tell the story credibly to current and future employees, to customers, to partners and more.

If you’re going to fundraise, then spend the time to prepare for it and execute it as if you would execute on building a product. Have a plan. Have a timeline. Work the network. Do at least 2-3 pitch meetings a day. Listen. Learn. Iterate. Do it right. Doing a half-assed attempt at fundraising is not going to get your anywhere and just wastes everyone’s time in the process.

Choosing who you raise money from is an important part of fundraising. While it’s true that money is a commodity and everyone’s money is green, CEOs should personally take the time to do references on potential investors. The references shouldn’t include only the references you’re given, but even calling companies that didn’t work out as it’s only in times of adversity that the true colors show through.

While the process of fundraising can often be frustrating as many investors don’t clearly articulate their reasons for passing. That is an industry wide issue and not one that’s easy to address — and not one I intend to address in this post. However, the process of fundraising can also be instructive and enlightening. Founders get bombarded by a range of questions and while some of them may feel like a waste of time, every once in a while someone will ask a question that can truly change your way of thinking or make you realize that there is a whole other market or different positioning for your product that you may not have even explored.

Second, if the founding CEO is not the person who is fundraising, then it can also signal some friction amongst the founding team around who should and who wants to be CEO. Having two people in a company who want to be CEO can lead to founders disagreeing with each other and butting heads. As an investor dealing with founder fights is a pain in the rear (been there, done that). So who takes the lead on a pitch is a good signal for investors to look at to understand the founder dynamics.

Of course if a seed stage company is relying on a intermediary like a consultant or an investment bank to do their fundraising for them, that’s a clear signal that the company is not worth spending time on. Believe it or not this does happen on a fairly regular basis.

Bottomline: If you’re a founding CEO accept and embrace that fundraising is a part of your job. It may not be fun, but it’s a necessary evil and you have to spend the time on it. If you do it well and do it right, then it can prove to be an immensely valuable process not only for actually bringing capital into the company, but also for helping to set the vision and future direction of the company.

The post Fundraising is for CEOs appeared first on K9 Ventures.

At K9 we invest in companies which have a clear/direct revenue model and typically don’t invest in companies that follow the Ubiquity first Revenue Later (URL) revenue model made famous by Eric Schmidt in 2007. In my discussions with K9 portfolio founders about scaling revenue, I very often end up drawing the same picture:

$0/month

When a startup is just getting started it first needs to build its product/service. Often before that it needs to build the team that will then help to build the product/service. And in order to do that they need to either raise capital to be able to hire a team by paying them real dollars or recruit co-founders who are willing to share the journey based on the equity stake and bootstrap the company.

Once a startup has its initial product, or even a minimum viable product, it needs to start iterating on its revenue model the same way that it iterates on its product. I call this Revenue Development and have written about it before. The purpose of this post is to provide some clear milestones for process of revenue development. If you haven’t already read the post on Revenue Development, I’d recommend you read that first and then come back and continue reading from here.

Note: The dollar numbers I’m using in this post are for illustrative purposes only. You should know what numbers make sense for your business. If you’re selling a product that costs six figures or seven figures, then obviously your thresholds may be very different. For the purposes of this example, I’m assuming a company where the price point for the product or service is in tens or hundreds of dollars.

>$0/month

For most startups going from no revenue to their first paying customer is a major milestone. At this point you’ve convinced at least one person that you’re doing something that provides them value and therefore they are willing to pay for it. While this is a key milestone it is only the base step of a much longer inductive process. Once you have one customer, you have to then try and find another person who thinks just like the previous one and is willing to become your second customer.

Once you have a handful of customers you need to then figure out what’s the pattern that makes the process repeatable. Why did the customers buy your product? How much would they have paid for it? Was price an issue? Would they have bought it more quickly if it was priced lower? Would they have bought it even if it was priced higher? Are your customers happy? Will they continue using your product? Would they refer other people to you or at least serve as a reference?

$1K/month

The first meaningful revenue milestone is for a company to get to $1,000 per month in revenue. By this point the company should have built a product that people want and are willing to pay for. But they may not have figured out the sales model just yet. At this point you’ve started to see the tip of the iceberg of product market fit.

$10K/month

The next major milestone that a startup should try to hit is to get to $10,000 per month in revenue. The $10K per month in revenue milestone means that you’re well on your way to product market fit and you’re just beginning to figure out what the sales process looks like. At $10K/month, it’s also a meaningful number as now you’re at least covering the cost of 1 full-time person. If you were a one-man-band then heck you may already be cashflow positive and profitable, but that’s rarely the case in most startups.

$100K/month

One of my favorite people to work with as a co-investor is Ann Miura-Ko from Floodgate. Ann and I had the pleasure of working with Lyft in its early days and one of the questions that Ann would ask Logan and John often was: “When do you get to $100K/month in revenue?”

Getting to the $100K/month in revenue is a big event in a startup’s life. That’s real money. And it’s real money to cover not just a 1 person team, but maybe a 10 person team! And it means that you definitely have good product market fit. It also means that you’ve figured out how to acquire customers. Congrats. You made it. Right?

Not so fast. I refer to the $100K/month level of revenue as the Plateau of Complacency.  Getting to this point was hard freaking work. You busted your ass to get here and you deserve all the credit for it.

The danger, however, is that you’re now a company with real revenue. You’re past the stage of potentially an existential crisis. By carefully managing your burn rate and steadily growing revenue, you can now survive — almost forever. But there-in lies the rub. When a company reaches this level, the founders are often tired and want and need a well deserved break.

Growing revenue to a multiple beyond $100K requires a *lot* more potential energy than almost at any other stage of the company. At the beginning, when you have no revenue, you’re driven by an existential crisis and are fighting for survival. But when you have $100K+/month in revenue, you’re almost afraid of breaking something that’s working and that you’ve worked very hard to build.

I’ve seen too many company fall victim to the plateau of complacency. It’s easy for the founders to give in to this because they can see a steady but linear increase in the revenue each month. Last month we did $100K, this month we did $105K, next month we did $110K. So it feels like they’re steadily increasing their revenue, keeping the operations running and things are going well. However, they’ve now fallen into the plateau of complacency, because unless they do something radical they won’t be able to get to the next level.

My advice to founders when they’re at this stage is to stop looking at the absolute growth in revenue and start looking at the first derivative of the revenue — what the rate of change of the revenue. and also look at the second derivative to see if that rate of change of the revenue is accelerating or decelerating. The mathematical analogy hopefully works well for technical founders, but the concept is pretty simple:  If you start looking at the rate of change, then you’re more likely to realize that you need to do something radical — almost a leap of faith to take you to the next level.

$250–500K/month

In my example so far, I’ve talked about 10X-ing revenue to get to each milestone from $1K/month to $10K/month to $100K/mo. Since leveling up from the $100K/month level is so difficult, it’s highly unlikely for a startup to go from $100K/month to $1M/month in revenue. Instead the company needs an intermediate goal of getting to $250K/month in revenue or getting to $500K/month in revenue.

The stage of getting from $100K/month to $500K/month is probably one of the toughest phases in the life of company. At this point it is not big enough to hire experienced (read expensive) people and turn up it’s burn rate to where it can then crater. You have to find the right mindset of people who may not have direct experience but have the right DNA and the desire to learn, the desire to execute and prove themselves — they themselves want to level up.

It is only possible to get to $250K/month or $500K/month in revenue once you absolutely have product market fit nailed. You have developed a clear and repeatable sales process. And you’ve figure out how to make your customers fans by delivering a quality of product or service that is awesome. Additionally, internally your team needs to scale and not fall victim to internal politics and finger pointing. You need to be paying attention to recruiting, technology / product, manufacturing, operations, finance, marketing, sales, customer support and more. Note that the first item on that list for me is recruiting. If you’re going to grow different areas of the company you need to be able to hire scalably, while maintaining the quality of the people you’re hiring.

$1M/month

Once you cross the hurdle of $100K/month and start getting to $500K/month in revenue, then growing from there $1M/month in revenue is simpler. As by this point you’ve most likely figured out what works and you probably have a team that’s gelling well. Now you need to just do more of it to get to $1M/month in revenue.

If you’re a founding CEO, think about where your company is along this spectrum of startup revenue milestones and think about what you need to do to get to the next level. And don’t forget to look at the first and second derivative of your revenue growth. Good luck!

You can follow me on @Twitter at @ManuKumar, and for all things @K9Ventures K9 Ventures is also on Facebook and Google+.

The post Startup Revenue Milestones appeared first on K9 Ventures.

Note: This is a long post and it’s based on reflecting on a couple of years of observations in the venture industry. It’s a work-in-progress and I expect to update (last update 10 June) and refine the content, especially in the next week as I prepare for a talk I’m giving at the PreMoney conference in SF next week. It is published here in relatively raw form. Comments and feedback are welcome.

Prologue

In June of 2013, as I was putting together my thoughts for the K9 Ventures annual meeting, I took a step back and reflected on what I saw happening in “Venture Land”. Almost two years ago, in a private/closed meeting with K9 Ventures’ LPs, I claimed that:

• What was being referred to in the press as the “Series A Crunch” was not due to fewer Series A deals, but too many Seed deals. This over-funding at the seed-stage created an increased supply of companies looking for Series A. The Series A investors could afford to be more picky. So although the symptom was that it felt tougher to raise Series A, the cause was a little deeper than most people realized.
• There were massive late stage rounds as all the big funds wanted companies which already had traction. Low supply of companies with traction drove the valuations and deal sizes up. The risk here is what I refer to as the ‘Curse of Over-Capitalization’.
• Seed stage was super tough. Increased competition for Series A meant a company needed more traction. More traction meant more time. and therefore more capital.Additionally, the competition for and the cost of hiring people, especially in the San Francisco Bay Area, went up dramatically. While the infrastructure cost and startup costs may have declined, the operating costs increased. Together this means that Seed stage companies needed to run longer and at a higher expense structure, meaning they need to raise a lot more capital.
• A re-jiggering of deal stages and sizes had begun in 2013. In that presentation, I said that Seed is not the first round of financing any more and that K9’s investments were now primarily “pre-seed”.
• As it happens almost every few years, there was a new normal developing. The Venture Capital industry as a whole does a terrible job of properly naming so we end up keeping the same name, but changing the meaning. In 2013, when I wrote these slides (excerpt above) for my annual meeting, it was still early to tell whether my analysis of these early signals was going to be right or not. Mostly, I kept my opinion within a small closed group and let my LPs know that K9’s strategy was to *not* change our strategy despite the pressures of the market. I still wanted K9 to be the first institutional money in and work with “frighteningly early-stage” companies.

Over the next few months, I saw more and more signals that this shift was really happening. Another thing I noticed was that I was now referring companies that I had invested in at a “pre-seed” (capitalization intentional) stage over to folks who would previously be considered my peer venture funds doing Seed-stage investments. It was time to express my point of view publicly, so one afternoon in April 2014, I spent two hours in between meetings writing:

The New Venture Landscape. Please read it, If you haven’t already, as it lays the foundation for everything that follows herewith.

Fast-forward to June 2015, two years later, and now I feel that the change that I started to notice back in 2013, is here, and it’s here to stay. So in this post, I present the epilogue to The New Venture Landscape that highlights my take on what I think the venture landscape looks like today and what the implications are for founders, for GPs and for LPs.

The Epilogue

Seed is the New A

The seed round has ballooned. It’s now typically close to $2M and in some cases even approaching $3M. Valuations are rising to match. A typical seed round valuation may be $6M pre, raising $2M for an $8M post, or even as high as an $8M pre, raising $2M for a $10M post.

But here’s the kicker, the expectations of the Micro-VCs who were doing these seed rounds have changed as well!

As the check size increases, investors tend to look for more traction, established revenue models, proven unit-economics, and other metrics that were previously associated with later stage companies. Several of these Micro-VCs have almost slipped into this form of thinking, often without even realizing it. Almost like boiling a frog, the Micro-VCs who started out as “Super Angels” (See Investor Nomenclature, 2011 and Venture Spiral, 2008) writing $25K — $100K checks with personal money, are now managing funds which are $40M — $140M in size, some with multiple partners and are writing checks which are $750K — $1.5M. The change in thinking is natural and logical. The catch however is that some of these funds and their GPs haven’t admitted to themselves, to founders, and to LPs that their thinking and investing thesis has indeed changed (as it should). They are either in a state of denial or haven’t had the time to adjust their messaging yet.

With the increase in the size of the seed round and the change in expectations for that seed round, the Seed round is effectively what used to be the Series A.

Pre-Seed is the New Seed

If the Micro-VCs are looking for Series A-like metrics, what does a company do when it’s just getting started? If it doesn’t have the product fully baked yet? Or if the traction is not yet interesting enough to attract a full Seed round? Well, enter the Pre-Seed round, where the startup raises closer to $500K.

When I first started using the term ‘pre-seed’ in 2013, it was almost as a joke since I wanted to make a point that K9 was investing super early. At the time of writing the New Venture Landscape, I started to capitalize “Pre-Seed”. Over the course of the two years since, it’s been interesting to note how “Pre-Seed” has entered the vocabulary in venture. There are a now a handful of funds, K9 included, that are Pre-Seed funds in name and practice.

As more of the Micro-VCs and traditional VCs move further upstream, I wouldn’t be surprised if some partners from these funds venture out on their own to fill the gap they see at the Pre-Seed stage.

Implications for Founders

Raising a Seed round (new A) is harder because of the change in expectation for a round of this size. The good news for founders is that there is *so* much capital flooding in at the Seed stage and there are many new funds trying to play at this stage. The bad news is that once GPs have more money, they want to write a bigger check and for that bigger check they want to see things further along and somewhat de-risked.

Seed is not the first round of funding any more. Too many founders are still operating as such. They read the press about how Company X and Company Y raised $2M in their Seed round and start to think that that’s the amount that they should raise too. On far too many occasions I end up counseling founders that they’re not yet ready for raising $2M, but they may well be able to raise $500K now, use that to build the team and the initial product/prototype and then be able to raise a Seed round.

But don’t all investors say that they’re investing “early”? Well, yes they do. But as Andrew Carnegie said: “As I grow older, I pay less attention to what men say. I just watch what they do.” Founders should heed the advice from Andrew Carnegie, and also watch what investors do, not what they say. Look at the companies they’ve funded, how much they invested, and what stage the company was at. It’s not always easy to make sense of this, but it’s a better signal than relying on what investors say on their websites!

Implications for GPs

Stop living in denial. Spiraling up is a natural evolution of a venture fund, especially as you get more money and more partners. I refer to this as ‘The Venture Spiral’. Reflect on the stage you’re investing at and be sure that you’re staying within the bands of your competency (and ergo not riding the spiral up to a level of incompetency).

Reflect on what you’re doing and revisit your messaging to founders and to LPs accordingly.

Implications for LPs

Your early stage investment portfolio may no longer really be early stage. This is especially true if LPs have been long-time investors in Traditional VC funds. The Traditional VC funds have decidedly moved upstream (in general, although there are a few pointed examples of VCs doing early stage deals, even Pre-Seed deals). This in turn impacts the return profile that can be expected. That’s not to say that some firms won’t have great returns in the right deals, but overall across the industry, the Traditional VC returns will decline as a result of them moving upstream. My guess is that getting 2x-3x from a Traditional VC fund would be a great outcome. And it will be the Pre-Seed and Seed (new A) funds that will be more likely to have outsized returns on winners.

Micro-VCs are the new Series A investors. Several LPs have already recognized this and have made commitments to Micro-VC funds. For those LPs who haven’t entered this stage yet, they may well have missed the boat as the best funds that were going to emerge may have already been established.

The early-stage vacuum that existed in 2006–2007 led to the formation of “Seed” funds, is oddly enough re-emerging as the Micro-VCs who once dominated this space move upstream. Yes, history is repeating itself!). This means that there will still be a new crop of Pre-Seed funds that will emerge. There is an opportunity for LPs to pick the right Pre-Seed stage funds, but I certainly don’t envy their job as it’s not going to be an easy task.

Scaling venture capital breaks it. Venture capital is, and should remain, a boutique industry (read ‘The Venture Boutique,’ 2008). LPs who like to complain about the return from the venture asset class have no one to blame but themselves for it. As the assets under management increase, LPs want to make larger commitments to their best funds and managers and the smaller amounts don’t move the needle, but that is precisely what leads to the Venture Spiral.

The management fee structure provides a perverse incentive to GPs to increase the size of their funds. The founders of these funds are entrepreneurs in their own right and every entrepreneur has an innate desire to make things grow. Adding partners and staff, starts to give a false sense of scale. It all culminates in the fund move upstream and making larger initial investments than where they started (i.e. the Venture Spiral).

Too Much Capital

We’re in a very strange kind of environment in the venture world these days. There is too much capital coming into tech investing. A lot of this capital is coming from non-traditional geographies like China, Russia, Middle East, India. Tech companies generate a lot of buzz. In fact I’d argue that other than Hollywood, sports, and politics, tech and business probably garner more widespread interest around the world. This means that there is interest in tech-investing globally, especially focused on Silicon Valley startups. (I can attest to at least one incident of being told that there are people in India who want to invest in tech companies so they can go to cocktail parties and claim that they’re investors in some hot-tech company in Silicon Valley. Knowing the culture well, I find this entirely believable.)

Since access to investing in tech companies is limited, a lot of this capital is finding it’s way into new funds and, I’m going to guess, that it’s also working it’s way through direct investments in companies coming out of accelerator demo days and AngelList.

Another major factor at play here, which was well articulated by Mark Suster in The Changing Structure of the Venture Industry is that value creation today happens predominantly in private markets and not so much in public markets. In the 80s and 90s a company would go public when it hit $20M in revenue. Today, companies are going public with billions of dollars in revenue and in some cases staying private even when they have billions in revenue. The Wall Street investors have recognized this and have realized that they can not wait for a company to go public. They need to get positions in these companies much earlier. This is clearly evident in the large number of hedge funds and banks that we see participating in the growth stage rounds of tech companies.

For reasons I cannot explain (input welcome), the Wall Street money appears as if it is insensitive to valuations. The thinking is that since these companies will always be valued higher than the liquidation preference of the investment, therefore there is downside protection, and so they’re only playing for the upside. Worst case they get their money back, best case they hit a home run. There is an erosion of valuation discipline across all stages of venture capital right now.

Corporate investors that are also participating in late stage rounds. Interestingly these are mostly large Asian companies, but also some large US companies. For most new-age corporate investors if they don’t lose money, they’re in good shape. If they make money, then that’s just the icing on the cake. It’s a different way of thinking than how a VC would think. VCs are in the business to make money on their investments and doing that requires VCs to remember the importance of valuation discipline and understanding their entry point.

There is an influx of capital into Venture, and Venture as we know it is changing. It is effectively broadening. On one hand we’re still doing early stage (now Pre-Seed), but on the other hand since companies remain private longer and grow to sizes that are sometimes even beyond what we used to see in public markets, the venture capital has flexed and expanded.

Impact of Public Markets

Marc Andreessen (@pmarca) tweeted this recently…

… which made me think about this even more. Are we in a situation where it’s a case of a rising tide floats all boats? If the public markets do hit a road bump or worse a sinkhole, what will happen? For starters all the excess capital that is flushing into the venture market will dry up almost instantaneously. The ginormous valuations will crater and there will be a return to fundamentals and a correction, which I think is long over due.

As my kids would attest, I’m a self-proclaimed expert in bubbles, but only of the soapy kind. Bubbles are awesome. They’re so much fun to play with, fun to watch, but ultimately they pop. That’s true of soap bubbles and of economic bubbles. I don’t claim to profess any deep knowledge of the latter, but I will note that we’ve had an incredible run over the past 7 years since the doldrums of 2008.

If a correction does happen, several of the new funds that have been formed based on the “new capital” will find themselves in a precarious position for future funds. That will perhaps cause a rejiggering of deal sizes once again, but it’s clear that several of the micro-VC funds have now become franchises that will survive any such downturn. We’re living in a brave new world and we need to acknowledge that things have changed. The New Venture Landscape is here and it’s probably here to stay.

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

The post The Seeds Have Changed: An Epilogue appeared first on K9 Ventures.

Here is the video recording of the talk I gave at  500 Startups‘ PreMoney Conference in San Francisco on 12 June. 

Seed Is The New A: What The Seed-Stage Explosion Means For Founders, GPs & LPs

And the deck from my talk

As always I welcome your thoughts and feedback.

You may also follow me on @Twitter at @ManuKumar, and for all things @K9Ventures K9 Ventures is also on Facebook and Google+.

The post Seed Is The New A – #PreMoney 2015 Talk appeared first on K9 Ventures.

We have a problem. The first step to solving that problem is acknowledging it exists. And the second step to solving that problem is start using Auth0.

Twenty years ago, most of us had maybe one password, and most often a single identity. Today, it’s almost impossible to manage without a password manager and we have multiple sources of identity and authentication. Managing our digital personas and our digital identities has become something that most humans in the connected world need to do.

As a corollary, if you are a company, and I mean *any* kind of company, not just a technology company, you have to manage digital identity and authentication for not only your own employees, but for your customers, partners, service providers and more. And even today in 2015, every single company tends to roll their own solution for managing login and authentication. Think about that for a second.

It sounds archaic today to recall that the first step in starting a company at one point was ordering servers and equipment. We don’t do that any more. We spin up instances on AWS or if you’re even hipper then perhaps you’re using Docker containers. Likewise you don’t get phone lines from AT&T and connect them to dialogic board anymore, you make an API call on Twilio.

Then why is it that so many developers are still rolling their own code for login, identity, authentication, password recovery and more? It simply doesn’t make any sense. This is why I am so excited to formally announce K9 Ventures’ investment in Auth0.

Auth0 is an identity-as-a-service platform for developers that makes strong authentication and authorization simple to implement for developers and IT administrators by augmenting and extending existing or new identity environments. With Auth0, developers do not need to become experts in authorization, authentication, identity management and security. Instead, then drop in Auth0’s cloud service and and leverage decades of expertise in each of these areas with just a few lines of code.

Information hacks are becoming increasingly common. In most cases hackers are looking for either credit card/payment credentials or they are looking for personally identifying information. By using services like Stripe, companies can limit their exposure to being vulnerable to payment information hacks, but they still remain vulnerable to personally identifying information hacks. Using a platform like Auth0 for storing personally identifying information can make it possible for even an individual developer to take advantage of the best-in-class information security practices, without having to re-invent the vault each time.

I’ve had the pleasure of knowing Jon Gelsey, the CEO of Auth0, for many years. The co-founders of Auth0, Eugenio Pace and Matias Woloski literally wrote the book on identity and access control (A Guide to Claims-Based Identity and Access Control). And the product that Auth0 has built blew me away with how well thought through and engineered it is. Auth0 is headquartered in Bellevue, WA, but having known Jon for many years and the incredible strength of the product became the driving factors for me to make a rare exception to K9’s geography constraints for investing in Auth0.

Auth0 is the Twilio for identity, login and authentication — that is how I think about it. They’ve developed interfaces for almost any language or platform you can imagine using and have APIs which are elegantly and cleanly designed to make it possible to integrate Auth0 within minutes, yet have the flexibility to make it do complex things. It is both low threshold and high ceiling.

K9 Ventures is proud to co-invest along-side Bessemer Venture Partners in the Seed and Series A for Auth0. If you’re a developer building a product or service that requires login and authentication (and which product doesn’t!?) then you should be using Auth0. You can start by visiting them on the web at http://auth0.com.

You may also follow me on @Twitter at @ManuKumar, and for all things @K9Ventures K9 Ventures is also on Facebook and Google+.

The post Auth0: Solving the Identity Crisis appeared first on K9 Ventures.

 

Q: What did Pink Panther say when he stepped on an ant?
A: “Dead Ant! Dead Ant! Dead Ant Dead Ant Dead Ant!”

Q: What did Pink Panther do when he saw a live ant?
A: He first stepped on it, and then said:
     “Dead Ant! Dead Ant! Dead Ant Dead Ant Dead Ant!”

Every so often, I get pitched a really cool idea for a mobile app. In fact, sometimes I really like the idea, but still end up passing on investing or sometimes passing even on taking a meeting. My explanation of  why I’m passing, goes something like this…

Mobile is a key area of focus for Apple and Google. You can also add Microsoft, Samsung, Xiaomi, HTC, Facebook and Twitter to that list. These are the Elephants.

When you look at the mobile ecosystem, there is hardware, operating systems and apps. As the hardware becomes increasingly commoditized, it’s becoming clear that the operating system and the apps are what keep consumers on one platform versus another.

Apple and Google are going head to head with each other on mobile and are investing billions of dollars in order to one-up each other in an attempt to gain and maintain competitive advantage.

To be the best mobile platform the Elephants need to be constantly innovating and adding new features. The best way for them to do this is often to look at what apps are providing core utility to their user base and then build that in as a feature of the operating system.

There are several example of this, probably the simplest one is that of the Flashlight app. The flashlight app was very simple, all it did was turn your phone on maximum brightness or turn on the LED flash so you could use it to illuminate a dark area. Well, the flashlight function is now part of iOS and is accessible in one swipe and one click from Control Center. I’m sure some people may still be buying the numerous Flashlight apps, but for the majority of users, the feature that is built in to the OS is sufficient.

It ultimately comes down to the power of the default and minimal friction. Downloading a special app from the App Store adds more friction. By contrast, a feature built-in to the OS that’s readily accessible, is  practically frictionless.

If you’re a startup that’s building something that’s a very cool, widely used and a nice to have feature on a mobile device, one of your biggest risks is that one of these Elephants, in an attempt to compete with each other may just end up making your sole product a feature of their OS and end up stomping all over you and your startup. You become collateral damage.

As an investor I don’t want to invest in a startup, that could get stomped upon by Elephants as they duke it out with each other.  In other words, I don’t want to invest in companies where they could have the rug pulled out from under them if the value they’re delivering becomes part of the platform in the future.

Don’t interpret this as a fear of large companies. Quite to the contrary, I am of the opinion that most big companies cannot compete with a startup in general. However, if you try to compete with a big company in an area that the majority of their effort and focused is on, that’s very different. And for mobile, Google and Apple are definitely pretty focused on improving their mobile platforms. Don’t play in an elephant arena.

A few years ago Fred Wilson published a post about “filling holes” in the Twitter product. The post was instrumental in helping to shape my thinking about investing in the mobile ecosystem. So a big shoutout to Fred for this early education and for helping me to deftly avoid investing in many mobile companies whose apps have since become features.

You may also follow me on @Twitter at @ManuKumar, and for all things @K9Ventures K9 Ventures is also on Facebook and Google+.

The post Dead Ant Dead Ant! appeared first on K9 Ventures.

Most days I love what I do, but some days are rough; filled with tough decisions (good ones and bad ones) that are often time sensitive in nature, and involve conflicting interests.

The most difficult part however is that as an investor I can’t really talk about or share details with anyone without violating portfolio company or fund confidentiality.

I hate it when people ask me how things are going and all I can do is give them a vacuous response. Most of the time I can’t really talk about anything that isn’t already announced or publicly known. And that most definitely means that I cannot talk about what’s at the top of my mind.

I’m not very good at making up stuff, so if I ever give you a response that feels empty, know that it’s not because of you, but a function of trying to do right by the founders, portfolio companies, and LPs.

The post Being an investor, in four paragraphs appeared first on K9 Ventures.

The following interview by Steven Loeb was published in Vator.tv  on 5 September 2015 and is reproduced below in its entirety.

There has been a big debate over the last few years over whether the Series A crunch is real or not.

What everyone can agree on, though, is that there are definitely more seed and early stage funds now than ever before, and more people willing to give money to young companies looking to make it big.

But just who are these funds and venture capitalists that run them? What kinds of investments do they like making, and how do they see themselves in the VC landscape?

We’re highlighting key members of the community to find out.

Manu Kumar is Founder and Chief Firestarter at K9 Ventures.

Kumar was the Founder, President and CEO of SneakerLabs, a company which developed software and services for web-based customer interaction. After the acquisition of SneakerLabs, he served as the Vice-President of Interactive Technologies for E.piphany. He then served as the Chairman and CEO of iMeet, a provider of web-conferencing services.

He holds a Bachelors in Electrical and Computer Engineering with University Honors and a Masters in Software Engineering from Carnegie Mellon University; and a Ph.D. in Computer Science with a Distinction in Teaching from Stanford University.

VatorNews: What do you like to invest in? What are your categories of interest?

Manu Kumar: At K9 Ventures we do not follow a sector strategy. Instead we focus on first principles and look for each company to have something new and unique. . There are three forms in which a company can have something new and unique: 1) New technology (the most common form, examples are Twilio, Coin, Occipital). 2) New market (less common form, examples are Lyft and eShares) and 3) New business model (least common, non-K9 portfolio examples are PriceLine and SolarCity).

At K9 we focus on the first two, either core new technologies and technology platforms or new markets.

We don’t have categories of interest. VCs don’t see the future in a crystal ball (and if they tell you that they do, then they’re either fooling you or worse fooling themselves). Founders create the future — not on the basis of what area is going to be interesting, but based on solving a problem and fulfilling a need. If I know of a problem that needs to be solved, then I would start a company to do it, as I did with CardMunch and eShares.

VN: What would you say are the top investments you have been a part of? What stood out about those investments in particular?

MK: My best performing investments have been Lyft and Twilio. What stood about those investments is that the founders did an amazing job of growing with and staying ahead of what the company needs.

Another company which is going to have widespread impact is eShares, eShares is going to change the way the private companies manage their equity.

VN: What do you look for in companies that you put money in? What are the most important qualities?

MK: I use five qualifying filters, which are necessary but not sufficient for me to consider an investment.

• Technical founders, or founders who are capable of building their own product, with at least one founder who is capable of leading and building the team.
• New Technology or New Market, meaning no “me too” ideas. Each company must have something unique and different about what it is doing.
• Direct Revenue, meaning no three-way business models and no advertising, media, or content.
• Hyper-Local, meaning the entire team should be based in the San Francisco Bay Area.
• Frighteningly Early. K9 likes to be the first institutional money invested in a company.

Assuming a company meets these filters, then I can engage and explore further. One unspoken, but very real filter is “Can I get excited about what the company is building?” Sometimes it’s just not something that I can personally get interested in and that’s a damn good reason to not invest.

VN: Tell me a bit about your background. Where did you go to school? What led you to the venture capital world?

MK: I attended Carnegie Mellon for my undergraduate and masters. I started my first company when I was 20. We grew it to just under 20 people and were acquired at the height of the bubble in 2000.  In late 2000, early 2001 I started my second company to test whether I can build a successful company again.

That company merged with another company in Boston and grew to about 80 people and was acquired in 2005. Shortly thereafter, while working on my PhD in Computer Science at Stanford, I started helping the founder of Lytro with getting that company going.

We went up and down Sand Hill together in 2007 and it struck me then that: a) Most VC firms were writing a check between $3 million and $4 million, b) They were not taking technology risk, and c) most of the new blood on Sand Hill at the time didn’t have startup experience and instead came from a finance/consulting background. Those three things made me realize that there is an opportunity to start a new kind of firm, that can write a sub-$1M check, and work with companies in the “frighteningly early” stages. That’s what K9 does.

VN: What do you like best about being a VC? What makes you excited?

MK: I get to work with some of the smartest people who build the future (founders), on the coolest new technologies that I sometimes get to see and experience years before the rest of the world. On top of that we get to figure out how to turn this technology into a real business. Along the way I get to teach/coach founders based on what I’ve learned, and get to learn something new every day. I love to do all of those things and I’m excited that I get to do that every day.

VN: What is the size of your current fund?

MK: I am currently investing out of K9 Ventures II, which is an institutionally-backed $40 million fund.

VN: What is the investment range? How much do you put into each startup?

MK: Initial investments are typically around $400,000 to $500,000, typically part of a Pre-Seed round of financing. K9 will follow-on in the Seed, the Series A, and the Series B rounds, so the total investment per company can be as high as $4 million.

VN: Is there a typical percent that you want of a round? For instance, do you need to get 20% or 30% of a round?

MK: There is no typical and it varies on a deal by deal basis.

VN: Where is the firm currently in the investing cycle of its current fund?

MK: About half way. K9 Ventures II has invested in about 10 companies so far and I expect the final portfolio to be closer to about 20 companies.

VN: What percentage of your fund is set aside for follow-on capital?

MK: It’s simple to calculate: my initial investments average $500,000 and the portfolio is ~20 companies, so that’s about $10 million and the remainder goes towards follow-on investments.

VN: What series do you typically invest in? Are they typically Seed or Post Seed or Series A?

MK: Typically Pre-Seed and then following on in the Seed, Series A and Series B.

VN: In a typical year how many startups do you invest in?

MK: 4 to 6 new investments in a year, but that’s an average, not a quota.

VN: Is there anything else you think I should know about you or the firm?

MK: I chose the name K9 for two reasons. The politically correct reason is that I happen to love dogs. The non-politically correct reason is that most VCs are sheep.

In closing I’ll add that K9 follows a disciplined approach to investing based on the criteria described above. We want founders to do their homework, and self-select whether or not K9 would be a good match for them. The best way to contact us is through a referral from a trusted connection.

The post Meet Manu Kumar, Chief Firestarter at K9 Ventures appeared first on K9 Ventures.

In April 2014, in the post Making Moves, I wrote about K9’s impending move to a new space and outlined my reasons for leaving downtown Palo Alto. I loved being in downtown Palo Alto, but it was simply becoming too expensive to be able to consider staying there long term. I deliberated for a long time before ultimately pulling the trigger on the move.

Now, almost 18 months later, I look upon that decision with absolutely no regrets. As I wrote in the previous post: “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.” While there is always room for improvement, and no project is ever really finished, I’m pleased to report that K9’s new long-term home, ‘The Kennel’ has become just that.

The Kennel is a specially designed and curated space for K9 Ventures and for select K9 portfolio companies and special guests. The design for The Kennel provides for flexible use, so that the space can adjust and accommodate as our needs change over time, or even from time to time.

The Kennel is located in perhaps the only remaining pocket of Palo Alto that still retains its industrial roots (on Industrial Ave!) and I hope it continues to for a long time. Being located in an industrial neighborhood was a conscious choice as I wanted K9 to be nestled between people who create, make, and build things. The Kennel itself is intended as an R&D space for creators, makers, and builders. Among the current residents of The Kennel are two hardware companies and two software companies.

Architects

Two of my friends from high school are incredibly talented designers. The husband and wife team of Apurva Pande and Chinmaya Misra are the force behind CHA:COL in Los Angeles. Apurva began his career in the offices of Frank Gehry. Chinmaya was a Senior Designer at Gensler. I’d seen some of their work shortly after they decided to venture out on their own and absolutely loved what they do.

Even before I had found the future home of The Kennel, I remember driving Apurva around and showing him the neighborhood. It was an obvious choice to work with CHA:COL for the design of The Kennel.

Ethos

As I wrote in the project brief for CHA:COL I was looking an ‘industrial cool’ look. Not swanky or posh, but thoughtfully designed and considered. In addition, I told them that I like the idea of “economical design,” where things don’t have to be expensive and over the top in order to be cool. It’s part of the ethos of K9 and one that I want to convey to to the companies I work with and to anyone that visits The Kennel.

The key guiding tenet of the design of the space is that thoughtfulness, good planning, creative ideas and execution can result in awesome design without the awesome price. The overall ethos of the space can be summed up in “hack design,” where the goal is to achieve designer-level form and functionality, but on a startup budget.

Concept

CHA:COL created a concept for the space that was absolutely brilliant and their attention to detail was impeccable. The concept retained the existing building structures, but re-purposed the space in creative ways in order to achieve the goals of the original project brief.

The centerpiece of The Kennel is a shipping container that has been repurposed as a conference room and coupled with a custom bleachers that provides for event seating and copious amounts of storage. The container is placed along the axis that connects the center of the front door of the building to the center of the rear garage door, thereby creating a clear line of sight from the entrance of the building to the rear of the building. The container also serves to define four different spaces around it: the event space, the lounge space, the kitchen area and the “dog run”; all while being the center of attention from all four spaces. The windows of the container were designed such that there was a clear line of sight looking through the container, therefore maintaining an open feel, while still achieving the goal of defining spaces for different uses.

We especially wanted the space to be flexible, where it can be used by K9 for day-to-day operations, by select portfolio companies who are building both hardware and software, and also be used for hosting events. With the container as the centerpiece, the space can now be used for different purposes (lounge, event, recreation) or can also be combined together as a large contiguous space.

Execution

An added benefit of an industrial neighborhood is industrial neighbors. Our next door neighbors at the Kennel happen to be a construction company: Lerch Construction, operated by another husband and wife team: John Lerch and Cathi Lerch. John and Cathi have been a pleasure to work with.

While I loved every little detail that CHA:COL specified in their concept and plan, I did also have to consider the budget. In keeping with the hacking mentality and ethos described above, I undertook it upon myself to oversee the execution of the plan with the goal being to maintain the spirit and the intent of the design, but to implement it using creative hacks to control cost. (There are too many good hacks to list here and that may well be the subject of a future blog post, but one of my favorite is the glass whiteboards created by repurposing IKEA glass table-tops and mounting them on the wall with mirror clips.)

A special thank you to my wife Hana Kumar who in addition to being super-patient and helpful throughout this whole project also provided essential and key design input and often prevented me from committing design faux pas and helped to make sure the space looks clean and modern. Several of the finishing touches in the space are her ideas and execution.

So without further ado, here is a description of what you will find at The Kennel followed by a visual tour of the space with photo credits photographer extraordinaire Jasper Sanidad.

The Kennel has also been featured in several design blogs/sites:

• dezeen magazine
• OfficeLovin’
• Uncubed

(Note: The articles incorrectly refer to K9 as a ‘tech incubator.’ K9 is NOT an incubator. K9 invests at the Pre-Seed stage when it’s generally just the founders in the company. It doesn’t make sense for a 2 person team to be spending time looking for office space. So we invite the companies that K9 invests in to work from The Kennel for 3-6 months (at no cost to them). Once the teams grow to 4 or more people, we encourage them to start looking for their own space. The quality of the journalism notwithstanding, we still appreciate that these publications liked our space and wrote about it!)

Space Overview

The Kennel is designed as a creative/open space, with specific use areas.

• The front office area is primarily for K9 Ventures’ use. This includes the one private office and one semi-private office.
• The lobby is setup as a waiting area. Although we try not to keep people waiting, sometimes they just show up early.
• The front servery includes the coffee/tea bar and beverage refrigerator.
• There are two unisex restrooms in the front of the building (one with a special feature courtesy of the previous tenants of the building!).
• There is one large conference room (seats 6). The Container doubles as our second conference room (also seats 6).
• The workspaces are setup with 3 pods of 4 desks each but can be reconfigured as needed.
• The lounge area is intended for occasional and day use by visitors and Kennel residents alike.
• The event space is designed as flexible use space that can be configured to comfortably hold events up to 20-60 people.
• There is outdoor seating in the backyard, complete with our own “Pebble Beach.”
• The artificial turf area is primarily intended for canine-use (note, different from K9-use)

The lobby and private offices in the front of the building.

The main conference room with the cool acoustic foam ceiling.

The container forms the centerpiece of The Kennel.

The line of sight along the left edge of the container leads directly into the event space.

The container cargo doors are usually closed, but can be opened when needed.

Light permeates the space via the roll up glass garage doors in the rear.

The interior of the container conference room.

View from the whiteboard wall in the lounge space.

The main entrance to the container is a sliding glass door.

The container and the bleachers as viewed from the lounge space.

The bleachers tie in with the event space to provide for additional seating.

The homey lounge area can double as an interactive work area.

Ping-pong challenge in the recreation space.

Next week we will be opening The Kennel for the first time to K9’s extended network of friends in our annual #FriendsOfK9 event. We look forward to having several of you over to visit The Kennel is person and hope that you love our new space as much as we do!

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 Space Matters: Unveiling The Kennel appeared first on K9 Ventures.

One of my reasons for going back to school for a PhD after doing my own startups was that I love the academic environment. I either TA’d or taught for 9 out of my 16 quarters at Stanford. It’s refreshing to be surrounded by smart people, and no matter how smart people may be in various tech corporations, there is a sense of independence of thought in academia that is hard to find elsewhere. The best way to learn something, and I mean really master it, is to start teaching it. The act of explaining something to someone else helps to understand things at a different level altogether.

Stanford has had a rich history and tradition of bringing in outside speakers to come in and speak at the University. There are some phenomenal seminar series/talks at Stanford that I thoroughly enjoyed and learned so much from while I was a student. I genuinely miss not having the time to be able to continue to attend or watch some of these seminars online (some of these are open to the public):

• HCI Seminar (Seminar on People, Computers, and Design) in Computer Science
• ETL: Entrepreneurial Thought Leaders Series in Management Science and Engineering
• VFTT: View From The Top at the Graduate School of Business
• Social Seminar in the Department of Psychology
• Speakers Bureau organized by the Stanford ASSU

In Human Computer Interaction, one of the things we’re taught is to conduct Contextual Inquiry (From: Wikipedia: A contextual inquiry interview is usually structured as an approximately two-hour, one-on-one interaction in which the researcher watches the user do their normal activities and discusses what they see with the user.) Having attended all these great talks, got me wondering about whether it is possible to apply contextual inquiry to learning from smart people. Steve Blank has also said many a time that in order for a startup to do customer development they need to get out of the building and talk to people.

So taking these two points to heart, I wanted to see whether I can craft a learning experience for students where we get them out of the classroom? And would doing that lead to an interesting form of learning?

Of course organizing such a class is no easy task; first with identifying people who the students should hear from, making arrangements with their company to host a class at their locations, coordinating transportation, and doing all of that within a time slot that is officially “class-time.”

In Spring Quarter 2014, I taught a special topics class at Stanford called CS549: HCI in the Real World as an experiment. It was an experiment in taking academic learning and bridging and mapping that learning into how things actually work in the real world. I limited the class size to under 20 and it was a blast. I learned a lot, the students learned a lot.

The class was unique as instead of inviting speakers in to come in and speak to students we instead took the students out of the classroom to visit a different company each week. We would meet at the Stanford Oval, jump into cars and drive to the company we were visiting. There, we would start by getting a tour of the company and getting a sense of the vibe of the company culture, and then proceed to meet engineers, designers, product managers, and other HCI practitioners who were working at these companies in different roles. The students would hear about how these people got to their position, which skills that they learned as part of their academic training were most useful to them, what advice these practitioners had for students. They would also get a chance to ask questions and have conversations with people in different roles.

Although it’s almost a year and a half later, here is the presentation from my talk in the HCI lunch meetings about the class:

For Fall Quarter 2015, I will be teaching the same class again (sometimes you have to make time to do the things you want to do, even when you don’t have the time for it!). It still remains an experiment as what we will all learn really depends on the make up of the class as well as the companies and the people we get to visit.

If you’re a student at Stanford, with an active interest in HCI, I would welcome and invite you to participate in the class for the fall quarter. Sign up on Axess for CS549 and come by to the first class this Wednesday, September 23rd, 2015.

The post Learning outside the classroom: HCI in the Real World appeared first on K9 Ventures.

It’s Sunday. I could have stayed home and worked from home for a couple of hours (while the kids are in language school), but instead I chose to come in to the office and work here instead. There were two driving factors for me to come in to work rather than sit on the couch or at the kitchen counter working on my laptop:

1) Big monitor: I like working with two browser windows side by side. On my big monitor that works fine, but in order to get the same configuration on my laptop, I work at a ridiculously high resolution with tiny pixels and fonts. Luckily my eyes allow me to do this for now. But it’s certainly more comfortable to be working on the big monitor.

2) My walking desk: Yup, I drove from home to the office, so that I can walk while I’m working.

I’ve been thinking about a walking desk for many years now, but never got a chance to do one since I didn’t have a permanent office space before moving to The Kennel. (Hat tip to Jeff Clavier who has been doing the walking desk thing for a while now). In the new space part of my original design brief included having a walking desk.

Why a Walking Desk?

I’m not a gym-person. Far from it. (Guess that shows!). I used to spend some time on an elliptical machine at home, but found it to be a bit too cumbersome for keeping the iPad in place. Plus, on an iPad, I would be wasting time on social media (Flipboard works real well on an iPad to browse through Facebook and Twitter content while using the elliptical). So although that got me to exercise, it still didn’t feel very productive.

With a walking desk, I can actually be working while walking. And I love it. It feels like I’m getting a lot more out of my time. I’m working, reading and responding to emails, writing this blog post, and a whole lot more, all while at the same time walking… it’s brilliant.

Design Considerations

When thinking through the design and the setup of the walking desk, there were several constraints:

• My office needs to function both as a desk as well as a meeting room. I end up doing most of my meetings in my office rather than using up a conference room while my room sits unused. It’s higher utilization for space, plus I like having my computer handy during meetings to be able to quickly do a search of reference something.
• I couldn’t do a walking desk only. It’s unlikely that I would walk all day long. I actually rigged up a IKEA-hack standing desk (A good experiment for $19 if you’re considering a standing desk! I used white plastic shelf brackets from IKEA, as they matched my design aesthetic a little better and also happened to be even cheaper than the one Colin recommends in his article) before getting my walking desk to try standing all day and it wasn’t for me. My feet would get too tired from standing. In fact, it’s easier to walk than to stand all day.IKEA-hack standing desk
• So I needed a setup that could easily transform from a walking desk to a sitting desk in seconds, with minimal friction in going between the two states. The more friction between the states, the less likely you are to switch over.
• In both a walking/standing configuration or in a sitting configuration, the monitor is almost always at the wrong height if you place it directly on the desk. I don’t understand why Apple hasn’t realized this and fixed it in the design of their monitors for this. Ergonomically the ideal height of the monitor for both sitting and standing ends up being higher than what a normal Mac monitor sitting on the desk would be. At The Kennel, most people end up using reams of paper to elevate their monitor higher on the desk. (The reams of paper work great as you can adjust the height up or down as needed just by adding or removing paper )

Siting/Standing desk ergonomics

Design

My solution for the standing desk was to get the white IKEA Bekant Sit/Stand Underframe (waited for over a year for this to come back in stock at IKEA!) and pair it with a custom-sized plywood topper for the desk. This way the desk is long enough so that I effectively have two positions at the desk, one for standing and one for sitting.

In addition, I also added a wooden monitor stand that matches the design of the desk surface and raises the monitor to the correct height for me relative to the surface of the desk. It also provides a self-contained storage area for my laptop and other stuff. I lined the bottom of the monitor stand with some felt pads so that it can easily slide on the surface of the desk. This way I can easily switch between walking/standing or sitting simply by just sliding the stand over with everything in/on it.

The cable management had to be done carefully to allow for movement between the two different configurations. It wasn’t hard to do, but just required figuring out which cables need to move and which don’t.

I paired the height adjustable desk with a LifeSpan TR1200-DT3 Standing Desk Treadmill underneath. In addition, I added another fixed height table with a custom-sized plywood topper to complement my working desk as a meeting table.

The finishing touch between the two tables comes from adding a drop-leaf side to the height adjustable table, so that event when the table is in a walking/standing position, the drop leaf helps in maintaining clean visual lines between the two tables. Hat tip to Chinmaya Misra and Apurva Pande @ CHA:COL for training me to be completely paranoid about such details!

Here are the pictures of my setup in both configurations:

Standing configuration

Walking treadmill (close to wall for support)

Monitor stand with sliding base

Sitting configuration

Sitting configuration (table leg ends up right in the center, which is not ideal, but not too bad either)

I’ve been using this setup for a few weeks now and it’s been working out great. In fact, this post was composed entirely while walking at a leisurely pace of 2.0 mph during which I’ve walked almost 3 miles and burned almost 400 calories. I’m becoming a fan of working to walk. My personal record to date is 7.75 miles in one day.

Personal day record of 7.75 miles

You may also follow me on @Twitter at @ManuKumar, and for all things @K9Ventures K9 Ventures is also on Facebook and Google+.

The post Working to Walk: Designing my Walking Desk appeared first on K9 Ventures.

Pictures from the #FriendsOfK9 event on Thursday, September 17th are in!

Check them out by clicking through to the album on Facebook…

#FriendsOfK9 2015

The post Pictures from #FriendsOfK9 2015 appeared first on K9 Ventures.

Earlier today I tweeted:

Calling #PeakVC. Right here, right now. Done.

— Manu Kumar (@ManuKumar) October 13, 2015

But I realized shortly after tweeting this that there is so much nuance packed into that one term #PeakVC that it requires a lot more than 140 characters.

So here are some of the things I was thinking about when I tweeted this:

Peak Oil is defined as the point in time when the maximum rate of extraction of petroleum is reached, after which the rate of production is expected to enter terminal decline. It doesn’t matter whether you believe in the Peak Oil theory or not. I’m simply borrowing the term to coin #PeakVC. I define #PeakVC as the point in time when the maximum amount of $$s are entering the Venture Capital industry. There are simply too many LPs stuffing the VC goose! There are new accelerators, new VC funds, SPVs and more popping up left, right, and center.

Unlike Peak Oil, which will probably occur once in our lifetimes (next time it happens perhaps we will be the oil!), #PeakVC will happen many times in our lifetime. That is because the venture capital industry operates in cycles. When the perception of returns in the venture capital industry goes up (for examples when new paper unicorns are being minted every other day) then everyone and their mother feels like they should be investing in venture capital.

That increases the overall money supply coming in to venture. Most recently the influx that been from what I like to call non-traditional sources of capital. This includes, but is not limited to money from China, India, Middle-East and also from “retail” investors (or otherwise unsophisticated investors who are attracted to a market simply because of the amount of press/media attention it gets).

The catch however, is that venture capital does not scale linearly with the amount of capital entering the industry. In fact, quite to the contrary, if the amount of capital entering the venture capital space as a whole increases, the overall returns from the industry as a whole are likely to decline. This is because as more capital enters the market that means that more $$s are chasing the same high quality companies. That increases the competition for deals and drives up the prices (valuation) of these deals.

A lot of people ask me what’ the difference whether you invest at $3M premoney or $6 premoney? (Examples are tailored to the stage at which I/K9 play, but there is no difference even if you add a couple of zeros to those numbers). Well the difference is that by doubling the entry valuation you half your return multiple. A 20x return becomes a 10x return and a 1x return could easily become a 0.5x return.

As valuations increase, VC returns go down. Not to mention that in later stages, high valuations can almost be fatal for some companies that don’t have the operating metrics to justify those valuations once the market turns.

I’ve often said in private that I blame LPs for the cyclical nature of the venture industry. As other asset classes become less interesting than venture capital, they start to direct more dollars into venture capital. That in turn causes the venture industry returns to stumble, which in turns leads LPs to pull back out of venture. As the money leaves venture, companies are forced to build real businesses instead of living a venture-subsidized existence and the returns for the industry improve. And then the cycle repeats itself.

The catch this time around is that the increase in venture capital dollars is coming from “new LPs.” And some of these new LPs will be very fickle and will run out of the market just as quickly as they’ve come in. In fact, one big jolt to the eco-system and I wouldn’t be surprised if you start to see “new LPs” reneging on their capital commitments to new funds.

The traditional LPs who have been in this business for a long time know that they have to stay in the market in order to see returns as the best investments will often happen in down markets. The sad part however is that they have little control over the overall money flowing into venture and therefore are susceptible to the cycles. It’s tough job… I don’t envy the LPs who have to make calls in such situations.

What does all this mean for founders? Well, if we’re at #PeakVC, that means that there is more money in the system right now than ever before. The cycle that leads to the decline of the venture capital returns takes time as the dollars flow through the system. So in the near future, it’s likely that more companies will still be able to raise capital. This is probably especially true of the early stage (pre-seed and seed) stages of financing since so much of the “new LP” money coming into the system is directed at these stages of companies.

This means more noise in the system for seed stage investors. More companies get funded at the early stages. Middle stage (Series A/Series B) investors will get to pick the best companies from an increased supply of companies to look at. However, the competition for these companies will also be intense.

Over time, I expect to see a lot more pre-seed and seed stage companies that are unable to raise follow-on financing. I wouldn’t call this one a Series A Crunch, as that was a misnomer to begin with. Instead, I’d call it a Seed Explosion.

I don’t claim to have a crystal ball to see how this will all play out. But if we are at #PeakVC as I suspect we are based on the ridiculous amounts of dollars flooding in to the VC ecosystem, then there’s only one way things could head from there.

If you’re a founder, make hay while the sun shines. Raise as much capital as you can, but watch your burn rate like a hawk. You may need that capital to last a while.

If you’re a new GP, chose your LPs wisely (if you have the luxury to of course). Long-term, patient capital is what you want to be able to build a franchise.

If you’re a sophisticated LP, you already know that the industry operates in cycles and you have to maintain consistency through good times and bad.

So that’s what I was thinking when I tweeted #PeakVC. Yup, it was a loaded tweet.

Update 10/13/2015 4:25 PM: Mark Suster and Chris Dovous both pointed out to me that it is unfair for me to blame the cyclical nature solely on LPs and they are correct. GPs and founders are just as guilty for raising bigger and bigger funds and for raising massive financing rounds respectively.

You may also follow me on @Twitter at @ManuKumar, and for all things @K9Ventures K9 Ventures is also on Facebook and Google+.

The post #PeakVC appeared first on K9 Ventures.

Note: If you’re a founder, stop reading this post now. Your job is to build your company and listening to VCs pontificate about their industry doesn’t do you any good. If you build a good company, investors will hunt you down. If you don’t, no amount of reading this stuff will help you get funded. So move on, recruit awesome people, build product, make your customers happy by delivering value to them and build your company by making them pay you for it. Really, that’s all you need to know.

I know very little about public markets and in fact, actively try to avoid most things in public markets. It’s not my thing. I like to focus on ideas, people, products. I believe that if you get those three things right the rest will figure itself out.

Last night a tweet from @Baris caught my attention:

“unusually perceptive, unconventional or early.. successful investors r said to spend a lot of time alone” reminds me single-GP @ManuKumar

— Baris Aksoy (@Baris) October 19, 2015

So I tweeted back at @Baris and asked him what he was reading and he was kind enough to send me a pointer to it: Howard Mark‘s most recent Memo to Clients: It’s Not Easy (pdf).

What followed was a complete derailing of my Monday schedule as once I started reading Mr. Marks’ memo it almost made my brain go bonkers. So much of what he says in the memo rang true to me. I almost wanted to send it to all of my LPs, but then I also wanted to several GPs. So I figured its best if I just post my thoughts openly and let others take what they want from it.

If you’re even remotely connected to the “industry” of Venture Capital, you need to read Howard Marks’ It’s Not Easy memo. In fact, I hope that reading this memo will jolt us back into realizing that it’s important for us to be contrarian and daring as an industry.

I’ve extracted some of my favorite quotes from this memo and am going to translate them into how I think they apply to private markets/venture capital:

On investing, Marks quotes Charlie Munger: “It’s not supposed to be easy. Anyone who finds it easy is stupid”. Marks continues to provide a great explanation why this is so. Worth reading on Page 1.

Second-level thinking: when I first started reading this, I felt this was kind of obvious and almost reminded me of how engineers think through things. I like to think of it as looking at the derivative (in a mathematical sense, not a financial sense) is often more revealing than looking at the raw change in a metric. In fact it also reminded me of this awesome clip from one of my favorite movies The Princess Bride:

But as I continued to read through the various examples in the memo, it just made me realize the point that I under-estimated is the involvement of human players in the market. As Marks points out about what he calls first-level thinkers: “They don’t understand their setting as a marketplace where asset prices reflect and depend on the expectations of the participants. They ignore the part that others play in how prices change. And they fail to understand the implications of all this for the route to success.”

One of the examples Marks cites is that of the ‘”Nifty Fifty”: the stocks of America’s best, fastest growing companies. Since these were companies where nothing could go wrong…’. Well, if I draw the analogy to private markets, the nifty fifty of private markets is probably the Unicorn Club of the 130 or so companies that are valued at over $1B in private markets. Although a lot of VCs including the Jedi Masters of the art like Bill Gurley and Sir Michael Mortiz have sounded alarm bells about some of the unicorns, Marks point is that “it didn’t matter much what price you paid.” That is precisely how things seems to be operating in late stage private markets. And it isn’t the venture capital firms that are paying these exorbitant prices in private markets it is the hedge funds, corporate funds, and sometimes sovereign wealth funds.

Another comment by Marks: “Following the trends that are popular at a point in time certainly isn’t a formula for investment success, since popularity is likely to lead investors on a path that is comfortable but pointed in the wrong direction.” When I read this I can’t help but think of al the Uber/Lyft for X companies that have/are being funded. Pattern matching in venture capital may work for figuring out how to build companies, but it is less likely to work for ideas.

Marks points out that: “In short, there are two primary elements in superior investing:

• seeing some quality that others don’t see or appreciate (and that isn’t reflected in the price), and

• having it turn out to be true (or at least accepted by the market).​”​ 

          It should be clear from the first element that the process has to begin with investors who are unusually perceptive, unconventional, iconoclastic or early. That’s why successful investors are said to spend a lot of their time being lonely.”

Seeing something others don’t see is critical to early stage investing. As an investor you have to believe in a future that will be different because of what you are investing in. That’s the conviction that it takes to be able to believe a founder (or two) who walk in and claim that they’re going to change the world.

And the part about successful investors being lonely… I guess that’s the part @Baris tweeted to me. I would argue that it’s less about being lonely, but more about a willingness to choose, sometimes create, and then to follow you own path. When you come to a fork in the road remember that one option is to create a whole new path; because founders simply don’t take no for an answer, they find a way to make it work.

Marks also says that: “The truth is, the best buys are usually found in the things most people don’t understand or believe in.​” I couldn’t agree more and the best example I can think of is the 7 Rejections post by Brian Chesky of Airbnb, where he states that: “for $150,000 you could have bought 10% of Airbnb.” I saw Airbnb pitch in its early days and I didn’t believe that people would let strangers into their house at scale. I was wrong. I didn’t understand and I didn’t believe and likewise for a lot of other people and investors. (Luckily when it came to Lyft, I believed that people will let strangers into their car and give them a ride and that’s how K9 became an early investor in Lyft.)

Continuing, Marks states that: “The truth is, the herd is wrong about risk at least as often as it is about return.” and that “When everyone believes something is risky, their unwillingness to buy usually reduces its price to the point where it’s not risky at all.” That right there summarizes how I/K9 got into investing in hardware early. The Valley was all about software and few investors at the early stage would take on hardware or devices. This essentially meant that since hardware was “out of  fashion” there was better investing opportunities in hardware. Yes, it’s complicated (a lot more than software!), but if you know some of those challenges then you also have an edge over other investors.

As I’ve pointed out in previous blog posts, one of the reasons the late stage investors are comfortable with investing at lofty valuation is because all their investments come with liquidation preferences. I imagine that that’s almost like a new thing for several of the wall-street type investors since they typically only invested in common stock in liquid markets. These investors are often looking for non-venture returns. (Venture is looking for 10x-100x and a 30% increase is just not interesting to venture). If the late stage investors can satisfy themselves that the company is worth at least more than the liquidation preferences, then you effectively have their basis covered and are willing to play at ridiculously high prices (sometimes just for access before IPO). But, as Marks points out: “And, of course, as demonstrated by the experience of Nifty Fifty investors, when everyone believes something embodies no risk, they usually bid it up to the point where it’s enormously risky.” 

Marks sagely states that: “The riskiest thing in the world is the widespread belief that there’s no risk.” I’ve been hesitant to outright call a bubble, but Mark Suster‘s recent talk on Mourning in VC made a pretty good case for it. Hopefully, posts like Mark Suster’s and cautionary words from Bill Gurley, Mike Moritz and others will help to temper the environment.

​I’m a stickler for walking away from deals which I think are over-priced or ill-structured (read as Convertible-anything rounds). Marks provides a reprieve from thinking that I’m crazy by reminding us that “What has to be remembered is the defining role of price.” Josh Kopelman from First Round Capital also noted the importance of price when he highlighted that entry valuations matter in their First Round Capital Q1 Letter to LPs.

3/ The simple math of venture investing says that only two numbers determine an investment’s return: the entry price and the exit price. — Josh Kopelman (@joshk) June 29, 2015

Another great quote in the Marks memo: “An absence of losses can give you a great start toward a good outcome.”​ This was one of the fundamental points that I told LPs when I was raising the fund for K9 — that I want an incredibly low mortality rate for my portfolio even though it is at the seed stage. And the way to do that is not by investing in 100s of companies, but carefully trying to pick ones you have strong conviction on. However, conviction isn’t enough, sometimes bad execution, or the market, or other externalities will still kill a company. But the key point is that for my style of investing I prefer a concentrated portfolio rather than a diversified one.

However, Marks comment on absence of losses must be taken with a grain of salt when applied to private markets because the winners out-perform the losers by SO much. I think it was Howard Hartenbaum at August Capital who cited to me that “the maximum you can lose in venture capital is 1x,” but you could end up with a 20xer or a 100xer in the portfolio that makes up for all the losses and then some. Therefore, I translate Marks comment into the importance of being more picky about what you invest in in private markets. It’s still a good rule to start with especially because the losers tend to suck up all of your time as an investor.

​”It’s easy for investors to get into trouble if they fail to understand the difference between cheapness and value.” — a good caution from Marks for not doing investments simply because you think you’re getting a good deal.​

“Momentum investing works until it stops.” Hear hear! Marks comment on momentum investing should be a caution to the VCs investing in late stage companies at high valuations. The music will stop. You can keep running till it doesn’t. It’s the game of musical chairs, and the tough call is knowing when the music will stop.

Being contrarian is often celebrated in the world of venture capital, even though the majority of investors are anything but and are instead momentum investors. Marks cautions thought to not err too much on the side of being contrarian with: “But doing the opposite of what the crowd does isn’t a sure thing either.” The key is to be contrarian and right. If you’re contrarian and wrong, then you’re simply wrong.

​“Most great investments begin in discomfort.” Do they ever! And in venture capital, they don’t just begin there, sometimes the journey is just as discomforting — it’s a bumpy ride even as an investor (more so for founders). As Jack Welch from GE pointed out to John Chambers that every company must have a near death experience. As an investor I’ve seen so many of these near death experiences — sometimes more than one. But then again Neitszche said that “That which doesn’t kill you makes you stronger” — and yup that applies to startups too.

​“If you let the investing herd – which determines market movements – tell you what to do, how can you expect to outperform?” I loved this comment from Marks, but probably because he refers to the investing herd and it reminded me of why I chose to call my firm K9 Ventures

​”But something about which I feel strongly is that it’s not the things you buy and sell that make you money; it’s the things you hold.​” Holding is really a form of expressing your conviction. ​Alas in private companies you may have conviction till the cows come home, but what matters is being able to make others believe in that conviction and find someone willing to think differently from the rest of the herd (to get the company capitalized). The good thing is it usually only takes only one to tip things over.

A few other excerpts from this absolutely brilliant memo that highlight why investing is not easy:

“

• If you invest, you will lose money if the market declines.
• If you don’t invest, you will miss out on gains if the market rises.
• Market timing will add value if it can be done right.
• Buy-and-hold will produce better results if timing can’t be done right.
• Aggressiveness will help when the market rises but hurt when it falls.
• Defensiveness will help when the market falls but hurt when it rises.
• If you concentrate your portfolio, your mistakes will kill you.
• If you diversify, the payoff from your successes will be diminished.
• If you employ leverage, your successes will be magnified.
• If you employ leverage, your mistakes will be magnified.

“

And the final quote I excerpted from Marks’ memo is about fund performance: “It is mathematically irrefutable that (a) the average investor will produce before-fee performance in line with the market average and (b) active management fees will pull the average investor’s return below the market average. This has to be considered in light of the fact that average performance can generally be obtained through passive investing, with tiny fees and almost no risk of falling short.” A good reminder for everyone who plays this game.

So thank you Howard Marks for an absolutely brilliant memo. It was so full of good stuff that I had to read it twice to make sure I didn’t miss anything, and I probably still did.

Now I can return to trying my best to do the stuff that I now know is not supposed to be easy. Phew!

You may also follow me on @Twitter at @ManuKumar, and for all things @K9Ventures K9 Ventures is also on Facebook and Google+.

The post It’s Not Easy applied to Venture Capital appeared first on K9 Ventures.

We’re becoming and increasingly data driven culture. Whether it is my children’s school, my bank, the last hotel stay, a car service, a visit to the doctor’s office — everyone thinks and believes (rightly so) that they need to collect data on customer satisfaction. And now we have the tools to be able to do this easily.

Medallia is a relatively recently minted Unicorn in this space. For the longest time I didn’t know what the company did and just knew them from their presence on the first floor of the AOL building. I only realized what the company does when after a recent hotel stay I received a long and involved survey request — powered by Medallia.

SurveyMonkey is probably the most common name that comes up in this area. It’s become synonymous with surveys due to it’s eponymous and fun name. It’s also another unicorn having raised over $250M at a valuation of $2B according to press articles.

At the same time companies which allow other companies to instrument and collect data are also doing well. The big difference however is where/how the data collection happens. Automated data collection is awesome. It typically happens behind the scene, without any user intervention required. However, it comes with the risk of collecting too much data and sometimes data that is tied to an individual’s identity thereby creating privacy and ethics concerns. Automated data collection however, fails to capture one thing and that is user sentiment. It’s hard to gather how someone feels about your product them telling you about it. This means that asking users for feedback is critical.

Survey design is an art and a science. In psychology and in HCI we were taught how to carefully construct questions to ask the same question in a positive way, and a negative way and to also insert in some additional questions to try and level set for the user and try to provide some way of normalizing data across users. These surveys are intentionally designed to extract specific data from users in user studies.

However, in the case of most surveys today, I think we may have gone too far and tried to put too much of the onus of entering data on the user. It’s no wonder that survey response rates are generally pretty low and most users ignore the survey request.

Just in the past week, I’ve probably received four or five requests for filling out a survey, where each survey takes between 7-8 minutes on the low end and as much as 15-20 minutes on the high end. Without fail, these surveys include the usual assortment of questions asking you to rate every single facet on a scale of 1-5 or 1-7. The survey itself begins to look like a digital imitation of a Scantron sheet.

I didn’t want to take pictures of the actual surveys I’ve received (to protect the guilty!) but here are just some images showing what they could very well look like:

Really? Is this what we really want to subject users to? I think we don’t need a survey to tell what the users reaction to the survey itself is. THIS SUCKS. It’s terrible. And it’s ridiculous for companies to expect consumers to respond to shit like this. We’re not here to help classify all your data so you can in one click get pretty pictures and graphs for the questions you’re trying to answer about your product or service delivery.

I used to try and respond to surveys because I felt that people deserve feedback. I guess the academic in me feels strongly that if you don’t take the time to give feedback, then you can’t expect things to improve. But I think I’m quite done with ridiculously designed surveys truly designed by monkeys (pun fully intended).

If you really want people to give you feedback, then there are much better ways of doing it: Ask them for 1 data point at a time and given them the option to provide free form feedback with it. In fact, if you want to ask about different features, then ask a different question the next time. And *always* provide room for free form feedback as you never know what the user will say.

If you feel your sample set is too large to be able to process the free form feedback, then use a service like CrowdFlower* to help do the classification/sentiment analysis on your survey responses.

One of the best implementations of a feedback tool that I’ve seen is on eShares*, where the feedback widget is built in to the product, asks for one number and then optional text feedback. And they activate this periodically to get a sense of how things are going with new product features.

You may also follow me on @Twitter at @ManuKumar, and for all things @K9Ventures K9 Ventures is also on Facebook and Google+.

* CrowdFlower and eShares are K9 Ventures portfolio companies

The post Asking for Feedback appeared first on K9 Ventures.