20VC K9's Manu Kumar on His Approach To Risk, Valuation & Believing What Other People Don't



In this episode of the 20 minutes VC, host Harry Stebbings interviews Manu Kumar, the founder of K9 Ventures, a micro VC fund known for investing "frighteningly early" in startups like Lyft and Twilio. Manu shares insights from his entrepreneurial journey, emphasizing the importance of insane perseverance and his unique approach to venture capital by investing in radically new technology or markets. He advocates for fair valuations and aligning interests with founders, aiming to minimize mortality rates in his portfolio by actively supporting fewer companies. Manu also discusses his investment in GradeScope, an AI for grading, highlighting the potential for technology to revolutionize educational assessment. Throughout the conversation, Manu's philosophy of company building over company picking, and his strategic focus on future follow-on funding, are evident.

Summary Notes

Introduction to Manu Kumar and Canine Ventures

  • Manu Kumar is the founder and chief fire starter at Canine Ventures.
  • Canine Ventures is a micro VC fund focusing on pre-seed and seed-stage investments.
  • They invest "frighteningly early" and often provide the first institutional capital to startups.
  • Canine Ventures has invested in companies like Lyft, Twilio, Occipital, and eshares.
  • Many of Canine's investments have been acquired by major companies such as LinkedIn, Facebook, Dropbox, and PayPal.
  • Manu Kumar has a track record of founding companies, with three successful exits and the fourth being eshares.

"Now, Manu is the founder and chief fire starter at Canine Ventures, a pre-seed and seed stage micro VC fund based in Palo Alto, though, and according to Canine themselves, they invest frighteningly early and like to be the first institutional capital invested in a startup."

This quote introduces Manu Kumar and Canine Ventures, highlighting their investment strategy and success in the venture capital industry.

Manu Kumar's Definition of Entrepreneurship

  • Entrepreneurship is defined as "insane perseverance in the face of complete resistance."
  • This definition was taught to Manu Kumar by one of his professors and mentors.
  • Manu Kumar experienced this firsthand when he was initially unable to enroll in a desired class but demonstrated perseverance by attending anyway.

"So, it's actually not my definition of entrepreneurship, but definition of entrepreneurship that I was taught by one of my professors and mentors, and he describes it as insane perseverance in the face of complete resistance."

This quote captures the essence of entrepreneurship as taught to Manu Kumar, emphasizing the need for unwavering determination in the face of obstacles.

Manu Kumar's Journey into Venture Capital

  • Manu Kumar's interest in VC began during his PhD at Stanford while assisting Ren Ng, founder of Lightro.
  • He noticed a gap in the VC industry where funds were not taking on technology risk and were generally larger investments.
  • Kumar saw an opportunity to invest smaller amounts, take on technology risk, and leverage his technical and entrepreneurial background.
  • Canine Ventures started with a "demonstration fund" of about $6.25 million, which was considered small for VC funds.
  • The first fund was initiated with Kumar's own money, which then encouraged others to invest.

"So that's kind of what got me thinking about it and got me started in 2009 is kind of how I started with the first fund, which I describe as a demonstration fund."

This quote explains how Manu Kumar identified an opportunity in the venture capital market and started Canine Ventures with a unique investment approach.

Howard Marks' Influence on Manu Kumar

  • Manu Kumar and the show's host align with the views of Howard Marks, a notable figure in investing.
  • A quote from Howard Marks is mentioned to set the stage for the discussion on investment philosophy and decision-making.

"And today I want to focus on an article that we both really felt aligned to. And this was a piece by Howard Marks, so we're going to start with a quote from him."

This quote introduces Howard Marks as an influential thinker whose ideas resonate with both Manu Kumar and the host, leading into a conversation about investment strategies.

Investment Strategy and Unconventional Thinking

  • Manu Kumar seeks investments that are either radically new technology or a radically new market.
  • Pattern matching is not applicable to radically new ideas, requiring out-of-the-box thinking.
  • Investment decisions are based on whether Manu believes in the founder's vision of the future.

"I look for something that is either radically new technology or a radically new market." This quote highlights Manu's focus on pioneering ideas that deviate from the norm, forming the basis of his investment strategy.

"When you can't apply pattern matching, that means that you have to think outside the box." Manu emphasizes the need for original thought when traditional investment patterns don't apply, which is central to his approach.

"So it really comes down to founders come in and kind of pitch a vision of the future that they believe in. And then I have to make the call of do I actually believe in them? And do I believe in the same future that they're describing?" The quote explains that Manu's investment decisions are deeply rooted in the shared belief in a future vision between him and the founders.

Challenges with Follow-On Funding

  • Manu acknowledges the difficulty in securing follow-on funding for unconventional investments.
  • He describes himself as the "eharmony for follow on financing," connecting founders with like-minded investors.
  • Most of Manu's time with portfolio companies is spent ensuring they can secure subsequent rounds of funding.

"And that's probably the hardest part of my investment strategy, is that not only do I have to believe in a world that looks different, but then I also need to find other people who are going to follow on and also believe in that same vision." This quote highlights the challenge Manu faces in finding follow-on investors who share his belief in unconventional visions.

"I need other people who are going to resonate with this idea and this person and then connect them together and make sure that the follow on financing can happen." Manu's role involves matchmaking between his portfolio companies and potential follow-on investors, ensuring the continuity of funding.

Partnering with Co-Investors

  • Manu values co-investors who are hands-on and willing to support companies, especially during challenging times.
  • He believes that true character is revealed in adversity and values partners who can work in the trenches.

"I like working with people who are willing to roll their sleeves up and actually dig in and help the company where help is needed." The quote reflects Manu's preference for proactive and supportive co-investors who engage directly with portfolio companies.

Risk Assessment in Early-Stage Investing

  • Manu does not focus on risk assessment due to the early stage of his investments.
  • He is more concerned with the team's ability to execute and the validity of their vision for the future.
  • Manu coined the term "pre-seed" to describe an earlier round of funding as the seed market evolved.

"The biggest risk at that stage is, does this team have the ability to execute on what they are saying they want to do?" Manu identifies the execution capability of the team as the primary risk factor at the pre-seed investment stage.

"I actually try to avoid looking at it from a risk perspective and think about it more. Is this a team that I want to work with, and do I believe in the future that they want to build?" This quote shows that Manu prioritizes belief in the team and their vision over traditional risk assessment.

Funding Economics for Hard Science Startups

  • Hardware startups require significantly more funding than software due to the nature of their products.
  • Manu has experience with hardware companies, making up a significant portion of his portfolio at one time.

"In the case of hardware, it definitely does." This quote confirms that hardware startups have different funding requirements compared to software startups.

Investment Sizes and Follow-On Funding

  • Manu's initial investment size typically ranges from $400,000 to $500,000, with potential follow-on investments up to $4 million.
  • He considers potential follow-on investors even while making his initial investment decision.

"So my sweet spot is usually around 400 to 500,000 as an initial investment, but then I will go as high as about $4 million into each company." The quote specifies Manu's investment range, highlighting his commitment to supporting companies through various funding stages.

The Role of Valuation in Investment Decisions

  • Valuation is an extremely important factor in Manu's investment decision-making process.
  • He believes that valuation affects the potential return on investment and the company's ability to raise future funds.

"It's actually an extremely important factor in my investment making decision making process." This quote underscores the significance of valuation in Manu's approach to investing.

Importance of Initial Valuation

  • The initial valuation at which an investor gets into a company is critical.
  • Manu Kumar emphasizes that a high entry valuation can significantly reduce potential returns.
  • He is willing to walk away from deals if the price or structure is not favorable.
  • Manu Kumar prefers to be a company builder rather than just a company picker.

"No matter what the outcome is on that company, you've halved your return." This quote highlights the direct impact of the entry valuation on the return of investment. A higher initial valuation can halve the potential returns.

"I walk away from deals all day long based on price, based on price and structure." Manu Kumar is stating his willingness to forego investments if the valuation or the deal structure is not aligned with his investment strategy.

"I'm not investing in a company as a lottery ticket... I'm investing in the company to actually help build the company." This quote underlines Manu Kumar's investment philosophy, which is focused on actively contributing to the growth and success of the company, rather than passively hoping for a high return.

Negotiating Valuations with Founders

  • Manu Kumar attempts to negotiate valuations if they are significantly higher than he believes to be reasonable.
  • He advises gently and is prepared to walk away quickly if the founders do not adjust their expectations.

"I will definitely try, but I will try very gently and I will very quickly back away and usually walk away if I see that they're not kind of getting message." Manu Kumar is open to negotiation but also respects the founder's perspective and chooses to back off if they are not receptive to his valuation concerns.

Advising Portfolio Companies on Follow-On Funding Valuations

  • Manu Kumar actively advises his portfolio companies to aim for slightly lower valuations during follow-on funding.
  • He believes that setting a reasonable valuation can facilitate future funding rounds and potential exit scenarios.
  • Overvaluation can be more detrimental than undervaluation in the long run.

"Whatever valuation they take is setting the bar for their next round of financing, and it's also setting the bar for what kind of exit they can have." This quote explains how the valuation at one funding round sets expectations for future rounds and exits, making it crucial to strike the right balance.

Approach to Inevitable Losses in Seed Funding

  • Manu Kumar's thesis on investment losses is evolving.
  • He believes it is important for his interests to align with the founders', aiming for the success of their companies.
  • By investing in fewer companies and dedicating more time to each, he seeks to reduce the mortality rate of his investments.

"I don't care if your company dies... That just doesn't feel fair to me as something to do to a founder." Manu Kumar expresses his commitment to the success of the companies he invests in, rather than accepting a high mortality rate as part of the investment strategy.

"Investing in fewer companies, spending more time with those companies, and literally kind of helping them to kind of make it to the next level." This quote details Manu Kumar's approach to investment, which involves a focused portfolio and hands-on assistance to improve the chances of success for the companies he invests in.

Time Allocation in Venture Capital

  • Manu Kumar acknowledges the challenge of allocating time effectively among portfolio companies.
  • He has experienced the tendency to spend too much time on struggling companies and is working to balance his attention more effectively.

"The squeaky wheel gets the most grease... if the wheel keeps squeaking, it also gets replaced." Manu Kumar uses this metaphor to describe how he allocates his time and attention to portfolio companies, indicating that while struggling companies may require more attention, there is a limit to the resources he will invest in them.

Momentum Investing and Late Stage Investments

  • Manu Kumar believes that by the time a company has gained significant momentum, it may be too late for early-stage investors to get involved.
  • He looks for unique, novel investments with a specific thesis that predicts success.

"Momentum investing is like, by the time something has already gained momentum, at least for someone investing at my stage, it's already too late." This quote reflects Manu Kumar's view that early-stage investors should seek opportunities before they become popular or widely recognized.

Thesis Construction and Identifying Investment Opportunities

  • Manu Kumar sometimes identifies investment opportunities in unconventional ways.
  • He co-founded a company, eshares, by pitching a concept to a founder he admired after the founder's initial idea did not gain traction.

"And in the case of that company, I was talking with Henry Ward... And I just really liked Henry and I wanted to work with him, but the initial idea he had wasn't getting traction." Manu Kumar illustrates an example of how personal connections and belief in an individual's potential led to the creation of a successful investment opportunity.

Company Building and Founder Dynamics

  • Manu Kumar enjoys being a company builder and working with founders to develop their ideas.
  • He co-founded a company with Henry that transformed how private companies manage equity and related infrastructure.
  • Manu finds pleasure in identifying the potential in founders' ideas, even if it requires refining the direction slightly to uncover something truly interesting.

And that infrastructure simply didn't exist before. That's an example of where I had an idea in my head, and it was just a kernel of an idea at that point. And Henry and I came together around that kernel of an idea to essentially co-found a company.

This quote highlights the process of taking a nascent idea and turning it into a company, emphasizing the collaborative aspect of company building with a partner like Henry.

Other cases in which founders come to me and kind of pitch their vision of the future, sometimes it takes a little bit of back and forth to kind of extract, like, oh, that may not be interesting, but if you just do a slight directional change, that could be super interesting.

Manu Kumar explains his role in refining and adjusting founders' pitches to ensure their ideas have the potential to become interesting and successful business ventures.

Personal Preferences and Inspirations

  • Manu's favorite book is "The Cuckoo's Egg" by Clifford Stoll, which inspired his interest in computing and hacking.
  • He is committed to his venture firm, K9, for the long term, aiming to build companies with massive global impact.
  • Manu does not follow a sector strategy but is interested in radically new technologies and markets.
  • He prefers Stanford slightly over Carnegie Mellon due to the surrounding startup ecosystem, despite both universities being academically excellent.
  • His favorite newsletters are Strictly VC and Dan Primack's Term Sheet for staying updated on industry news.

I'm actually going to pick the cuckoo's egg by Clifford stole, which is an old book. That book was instrumental in me getting into computing and hacking.

This quote reveals the significant influence the book "The Cuckoo's Egg" had on Manu's career path, sparking his interest in technology.

Absolutely. I think when I got into it, I got into it with a 30-year timeline. And the best vision for me is like building companies that have massive impact.

Manu Kumar expresses his long-term commitment to K9 and his goal to create companies that significantly affect people worldwide.

I actually don't use a sector strategy. For me, it's really about like give me radically new technology and radically new market and then let's talk about it.

Here, Manu Kumar explains his approach to investment, which is not limited to specific sectors but is focused on innovative technologies and markets.

Daily Routine and Productivity

  • Manu's morning routine revolves around his children, and he avoids checking emails to start the day without work-related stress.
  • His productivity tip is setting his Mac to announce the time every half hour to stay on schedule.
  • Manu's latest public investment was in GradeScope, a company using AI for grading, which he believes can revolutionize concept-level assessment in education.

My morning routine is mostly around kids, so I actually actively avoid trying to look at my email in the morning, as difficult as that might be.

Manu Kumar describes his deliberate choice to focus on family in the morning rather than being immediately drawn into work-related tasks.

My favorite productivity hack is that I've set up my Mac to announce the time every half hour and so literally like every half hour on the clock.

This quote shares a specific productivity strategy Manu uses to manage his time effectively throughout the day.

The most recent public one is a company by the name of grade scope. And this is a company that's in the. They're doing AI for grading, so AI and machine learning for doing grading.

Manu Kumar discusses his investment in GradeScope, highlighting his belief in the potential of AI to improve educational assessment methods.

Conclusion and Sign-off

  • Harry Stebbings thanks Manu Kumar for his insights and for sharing his journey in building the venture fund K9.
  • The podcast episode concludes with a promotion for Lisa mattresses and a teaser for upcoming shows.

Manu, it's been an absolute pleasure having you on the show. Thank you so much for joining me today.

Harry Stebbings expresses his gratitude to Manu Kumar for participating in the podcast and sharing his experiences.

Thank you, Harry. This has been a lot of fun.

Manu Kumar reciprocates the sentiment, indicating his enjoyment of the conversation with Harry Stebbings.

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