20VC MultiStage Funds Investing At Seed Are Option Value Investing, Why The Biggest Enemy For Venture Firms Is Group Think and How Running Companies Changes Your Investment Mentality with Manu Kumar, Founder @ K9 Ventures

In a dynamic conversation on "20 Minutes VC," Harry Stebbings interviews seed funding pioneer Manu Kumar, founder of K9 Ventures, discussing venture capital's evolution and the intricacies of founding and investing. Manu shares insights from his extensive experience, including the shift in value creation to private markets and the challenges of compressed fundraising timelines. He also touches on the rise of operator funds and the impact of multi-stage funds on early-stage investing. Manu's unique approach as a solo GP is highlighted, emphasizing the importance of avoiding groupthink and making independent decisions. Furthermore, he discusses the dual role of operating and investing, revealing how being a founder influences his investment strategy, such as embracing remote teams and leveraging cross-functional learning. Manu's latest venture, HiHello, exemplifies his passion for addressing personal frustrations by creating solutions, showcasing his hands-on involvement in both building and backing innovative companies.

• Harry Stebbings is the host of the 20 minutes VC podcast.
• Manu Kumar, the founder of Canine Ventures, is introduced as a guest.
• Canine Ventures has a portfolio including Check this Out, Carter, Lyft, Twilio, Zero, and Lucidchart.
• Manu Kumar has founded or co-founded four companies, with three successful exits.
• Manu is also the founder and CEO of Hi Hello, which provides digital business cards.
• Thanks are given to Michael Kimmer at Sendana and Henry Ward at Carter for question suggestions.

"You are listening to the 20 minutes VC with me, Harry Stebbings, and with self isolation. There is more to see on Instagram and so you can see all things behind the scenes there at H. Debbings 90 96 with two B's. And I always love to see you there, but to the show today and I'm so excited to welcome back to the show one of the ogs of seed funding, Manu Kumar, founder at Canine Ventures, one of the leading seed firms of the last decade."

The quote introduces the podcast and the guest, Manu Kumar, highlighting his significance in the seed funding space and his firm, Canine Ventures.

• HelloSign is highlighted as a user-friendly eSignature solution, which raised $16 million and was acquired by Dropbox for $230 million.
• Pendo is mentioned for its product cloud company and free product performance benchmarks microsite, which allows founders to compare their products to competitors.
• Pilot is promoted for bookkeeping services, emphasizing the freedom it gives business owners to focus on their products.

"Before we move into the show today, though, I wanted to take a moment to mention Hellosign, a great example of a company that found success in building a product focused on user experience."

The quote emphasizes the importance of building products with a focus on user experience, as demonstrated by the success of HelloSign.

• Manu Kumar started his first company at the age of 20 and has co-founded around six or seven companies.
• He found his passion in working with companies from the earliest stages.
• In 2007, while graduating from Stanford with his PhD, he noticed a gap in the venture ecosystem and decided to start Canine Ventures.

"Sure. So for me, the journey has really been about starting companies more than even venture. I started my first company when I was 20. To date, I've probably started about six or seven companies that I've co founded."

The quote summarizes Manu Kumar's entrepreneurial journey, emphasizing his experience in founding companies and his transition into venture capital.

• Manu Kumar coined the term "pre-seed" in his AGM deck in 2013.
• The early-stage market has seen a shift in value creation to private markets, with companies adding more value while private than after going public.
• There has been an influx of capital into the private market ecosystem, leading to companies staying private longer and raising larger rounds of financing.
• Seed rounds have grown from $500,000 to $2-3 million or more over the years.
• Pre-seed is defined as the first institutional capital raised, mostly used to build the team and product.

"I think the market has changed very radically in the last seven years. It's changed not only at the earliest stages and kind of the precede emerging as a whole new category is one change, but it's also changed very dramatically at the later stages."

The quote discusses the significant changes in the venture capital market over the past seven years, highlighting the emergence of the pre-seed category and the evolution of later stages.

• Manu Kumar supports former founders becoming investors, as they have experience in a founder's shoes.
• He has not had much experience with scout programs and few of his portfolio companies have received capital from scouts.

"I am a big fan of previous founders becoming investors and that's effectively me, right? Like, I've founded a lot of companies and I feel like if I want investors, I want investors who've actually walked in a founder's shoes."

The quote expresses Manu Kumar's approval of founders transitioning into investors, valuing their firsthand experience.

• Founders may be taking multi-stage money at seed due to it being the easiest capital to access.
• Manu Kumar notes that while founders are taking money from multi-stage firms, this can sometimes lead to negative outcomes.
• For many multi-stage firms, early-stage investments are simply option values, which can be problematic if the firm does not support the company beyond the early stages.

"I think, yeah, founders may be voting with their feet, but what they're really voting for is the easiest capital they can get their hands on."

The quote reflects on the trend of founders accepting capital from multi-stage firms, suggesting that the ease of obtaining funding is a significant factor in their decision.

• Founders tend to be optimists and may not always be prepared for difficulties.
• Being practical about potential challenges is essential for company survival.
• The advice to founders is to raise appropriate amounts at reasonable valuations to ensure company longevity.

"If things don't go well, that company is going to have an incredibly difficult time at raising capital."

This quote emphasizes the importance of foresight in fundraising, as over-optimism can lead to challenges in securing future capital if things do not go as planned.

"You want another shot at goal. That's the advice and the caution that I give to founders who are raising larger rounds than they should at higher valuations."

Manu Kumar advises founders to be cautious with the size and valuation of their funding rounds to avoid jeopardizing their company's future opportunities.

• Larger firms may participate in early-stage investing as a way for new partners to gain experience.
• This trend might not be a calculated long-term strategy but rather a temporary phase.
• The presence of multistage firms at the seed stage could be seen as providing a safe learning environment for new investors.

"A lot of the bigger firms have added new people to their ranks, and what better way for a new person to kind of get started than to actually do a few small investments to get the ball rolling?"

Manu Kumar suggests that larger firms might use early-stage investments as a practical training ground for their new partners.

"Some of the multistage firms coming in and investing at the seed stage is not a function of a calculated strategy, but more of essentially providing a safe playground and training wheels for some of the new folks who are there."

This quote further explains the idea that larger firms' involvement in early-stage investing may be more about internal training than strategic positioning.

• Fundraising rounds are moving rapidly due to excess capital in the market, leading to highly competitive scenarios.
• Manu Kumar maintains a disciplined investment approach, preferring to spend time with teams before committing to invest.
• He focuses on making a few high-quality investments per year rather than chasing deals.

"I still have the luxury of actually spending some time with the teams and getting to know them before making a decision to invest."

Manu Kumar values the relationship-building aspect of investing and uses this approach to make more informed investment decisions.

"Fundraising rounds are actually moving very quickly. They tend to be highly competitive, and it's a tough time to be an investor is how I would put it."

This quote reflects the current investment climate, where the abundance of capital leads to rapid and competitive fundraising rounds.

• Canine Ventures operates on a five-year investment period, resulting in a concentrated portfolio of 15-20 companies per fund.
• Manu Kumar's LPs (Limited Partners) prefer a concentrated portfolio approach, encouraging significant ownership in fewer companies for potentially larger outcomes.
• The goal is to create massive outcomes with fewer, high-quality investments.

"My investment period is five years, so I only go out to market with a new fund every five years and not every two to three years."

Manu Kumar explains Canine Ventures' unique approach to investment cycles, which differs from the more common two to three-year cycles.

"My LPs tend to prefer a concentrated portfolio, and so most of my LPs are kind of pushing me in the other direction, which is like, go ahead and take as much ownership as you can in a company, do fewer companies."

This quote highlights the preference of Canine Ventures' LPs for a strategy that focuses on deeper investment in a smaller number of companies.

• Check sizes at the pre-seed level have increased slightly, but Manu Kumar maintains a disciplined investment range.
• He avoids the fear of missing out and does not chase deals with multiple term sheets or inflated valuations.
• The investment process is seen as a mutual selection between the founder and the investor.

"My initial range used to be between 400 to 600k. As an initial investment, I would say I'm probably closer to the higher end of that range today than I was earlier, but I've still tried to keep it very stable and disciplined."

Manu Kumar discusses how he has managed the slight increase in initial check sizes while maintaining a disciplined approach.

"I take the opposite effect. I have no formal, I have absolutely zero fear of missing out."

This quote underlines Manu Kumar's confidence in his investment strategy and his disregard for the pressure to conform to market trends or competition.

• Adverse selection is a real issue for pre-seed funds, with some founders skipping pre-seed rounds for larger ones.
• Canine Ventures avoids adverse selection through a highly selective investment process and by focusing on founders who are a good match for their investment thesis and personal working style.
• Manu Kumar looks for "diamond in the rough" founders who can benefit from his guidance and support.

"Just the number of investments, right? So if I'm only making three or four new investments in a year, it's an incredibly tight filter to begin with."

Manu Kumar explains how a limited number of investments allows for a more stringent selection process, reducing the risk of adverse selection.

"I'm looking for people who are that diamond in the rough. And my job as a pre-seed stage investor is to actually help them show that they are a diamond by actually doing the cutting and the polishing that's required."

This quote metaphorically describes Manu Kumar's role in identifying and nurturing founders with potential, likening it to revealing a diamond's true value.

• The five-year investment cycle at Canine Ventures may inadvertently provide temporal diversification.
• This approach is not primarily driven by macroeconomic concerns but offers a buffer against market fluctuations.

"The five-year investment period is probably adding some level of temporal diversification to the Canine portfolio."

Manu Kumar acknowledges that the extended investment period could have the benefit of spreading risk over time, though it was not the initial intention.

• Manu Kumar prefers a five-year investment period.
• He enjoys building companies more than picking them.
• Fundraising is time-consuming, and he prefers to do it less frequently.

The reason why I chose a five year investment period is because the thing I enjoy doing most is actually building companies. And I truly think of myself as a company builder rather than a company picker.

Manu Kumar explains his preference for a longer investment period is due to his passion for actively building companies rather than just selecting them for investment.

• Manu Kumar has experience as a solo founder which helps him as a solo GP.
• He trusts his gut in decision-making, especially when data is incomplete.
• Being a solo GP means full accountability for successes and mistakes.

First thing is, I have the benefit of having been a solo founder before... And I have to be comfortable in making a judgment call, effectively trusting my gut in a lot of cases... The benefits of being a solo GP are that you are also 100% accountable and 100% responsible.

Manu Kumar discusses the parallels between his past experience as a solo founder and his current role as a solo GP, emphasizing the importance of self-reliance and accountability in decision-making.

• Groupthink is considered the biggest enemy of venture firms.
• While partnerships in venture firms can provide checks and balances, they can also lead to consensus-driven decision-making.
• Diverse opinions and the ability to act without consensus are vital for venture funds.

The most interesting companies are typically doing something that is unusual and different, and you just have to have a gut and conviction on do you think this can work?

Manu Kumar highlights the danger of groupthink in venture capital, stressing the need for conviction and the ability to back unconventional companies.

• Founding companies is driven by Manu Kumar's passion and frustration with existing problems.
• He believes in solving problems that he is repeatedly confronted with.
• Operating and investing simultaneously is challenging due to time constraints.

And I found companies because that's what I'm inherently passionate about... It is incredibly difficult to be operating and investing at the same time, mostly because of a function of time.

Manu Kumar explains his motivation for founding companies and acknowledges the difficulty in balancing the roles of operator and investor.

• Carta was founded out of frustration with the paper-based process of stock certificates.
• Manu Kumar did not have the traditional infrastructure to manage paper certificates, leading him to create a digital solution.
• The idea took years to socialize before finding the right co-founder to launch it.

The simple answer is, it is not easy... And I spent three years socializing that idea with various teams in order to get them to start a company to solve that problem.

Manu Kumar shares the story of Carta's founding, demonstrating his determination to solve a problem he personally encountered and the perseverance required to turn the idea into a company.

• Manu Kumar's experience as an investor has influenced his approach to building companies.
• His recent experience with his company, HiHello, has changed his views on remote teams.
• He now encourages companies he invests in to consider remote teams.

The experience of actually having founded a company and now running that company as the CEO has changed my mindset as an investor... My fundamental belief that I do not want to have remote teams is wrong and I need to actually embrace the new realities of the world and actually learn from that and adapt to it.

Manu Kumar reflects on how his hands-on experience with HiHello has shifted his perspective on remote work and influenced his investment strategy.

• Harry Stebbings discusses the importance of using tools like Slack to truly understand their functionality and value.
• Personal experience with Slack led to a strong opinion on its dos and don'ts.
• Plans to share insights in a future blog post.

"As a solo gp, I never really understood slack until I actually started using it for hi. Hello."

This quote emphasizes the significance of hands-on experience with tools like Slack for gaining a deeper understanding of their use and potential impact.

"And in fact, I now have a very strong opinion on things you should and shouldn't do on slack, which I'm going to write a blog post about in the near future."

Harry conveys that personal usage of Slack has not only informed him but also inspired him to share his insights publicly.

• CEOs gain firsthand experience with various operational tools.
• Exposure to tools used for payroll, insurance, and communication.
• Identifying unsolved problems in these areas can lead to investment opportunities.

"As a CEO, I get to actually experience all of that."

The quote highlights the CEO's unique position in directly engaging with various business tools, which provides valuable insights.

"Areas where there are unsolved problems, and it would be interesting to actually have new companies that could come in and actually solve these problems."

Harry identifies the potential for new startups to address the gaps and issues experienced with current tools, suggesting a symbiotic relationship between being an operator and an investor.

• The discussion moves towards the topic of founders who become angel investors.
• The value of founders investing in other founders is recognized.
• Access to experienced founders can be crucial for early-stage companies.

"So I think it's actually valuable for the early stage companies to have other founders as investors and to have that perspective accessible to them."

Harry supports the idea that early-stage companies benefit from having founders as investors due to the unique perspective and experience they bring.

• Harry's New Year's resolution was to read more.
• "How to Win Friends and Influence People" by Dale Carnegie is highlighted as a significant book despite its misleading title.

"It's how to win friends and influence people by Dale Carnegie."

This quote introduces a classic book that is discussed and recommended despite initial reservations about its title.

• Harry acknowledges the value of having a diverse board of directors.
• Different board members contribute in various ways, and no single member is perfect.

"And there's no board member who I would say is perfect. And that's the reason why you have a board, because you need different opinions."

Harry emphasizes the importance of having a board with diverse opinions to aid in decision-making, rather than relying on a single perfect board member.

• Time management is the biggest challenge in founding and investing simultaneously.
• Cross-functional learning is seen as the most rewarding aspect, allowing for the transfer of knowledge between portfolio companies and personal ventures.

"The toughest thing is simply time. It is very difficult to manage time."

Harry highlights the difficulty of juggling the demands of both founding and investing, likening time to a finite resource that must be carefully allocated.

"The best part about being a founder and an investor at the same time is just the cross functional learning that happens from one direction to the other."

This quote underscores the benefit of learning from multiple roles and applying insights across different business ventures.

• Harry believes in the value of continuous learning.
• Naivety at the start of a venture can be beneficial, as it might lead to actions one wouldn't take with more knowledge.

"I fundamentally believe that it is important to learn all the time."

Harry expresses a philosophy of lifelong learning and the importance of gaining knowledge progressively.

"So I wouldn't go back and change anything."

This quote reflects Harry's view that the timing of learning experiences is crucial and that he has no regrets about his learning journey.

• The recent trend of mega funding rounds is seen as negative, potentially leading to unhealthy companies.
• The positive trend is the increase in operators becoming investors, which is good for the ecosystem.

"The worst is probably easier to describe, and I think that is the mega funding rounds, the hundreds of millions of dollars coming into companies in the late stage."

Harry criticizes the recent trend of large late-stage funding rounds for potentially fostering unsustainable business practices.

"The best thing I think that's happened is really, as you pointed out, a lot of operators are turning into investors."

Harry views the shift of experienced operators into the investment space as a positive development for the venture capital ecosystem.

• Harry discusses his most recent investment in Vercona, a company creating organizational tools for web browsers.
• Vercona's product is seen as a necessary innovation for knowledge workers who primarily operate within a web browser.

"The most recent publicly announced investment is a company called Vercona Workona.com."

Harry introduces Vercona as his latest investment, emphasizing the company's focus on improving the web browser workspace for knowledge workers.

"That's a company that I've invested in and I use their product every day."

The quote conveys Harry's personal endorsement of Vercona's product, highlighting his daily use as a testament to its value.

• Harry mentions several companies and products, including Hello Sign, Pendo, and Pilot, highlighting their benefits and recent achievements.
• These companies are presented as examples of successful products focused on user experience and efficient business operations.

"Check out hellosign.com 20 vc to join the thousands of companies and founders, including me, who value fast, secure, and simple esignatures."

Harry promotes Hello Sign as a valuable tool for secure and straightforward e-signatures, emphasizing its recent acquisition by Dropbox.

"And Pilot for bookkeeping gives you back the freedom to focus on your business and your product."

This quote introduces Pilot as a service that simplifies bookkeeping, allowing founders to concentrate on their core business activities.