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Summary:

Even as we analyze larger trends in VC investments right now, debating if there’s too much money or if it’s going to the right companies, it’s important to note that every VC is different and takes a unique approach to picking and mentoring companies.

manu

Every time someone wonders if there’s a bubble in Silicon Valley, they’re really questioning if the right companies are getting funding, or if everyone’s getting too much funding. But even as we analyze larger trends in investments, it’s important to note that every VC is different and takes a unique approach to picking and mentoring companies.

Manu Kumar has been in Silicon Valley for about ten years now, and has seen his share of technology and investing trends. Last week, he announced that K9, the venture capital firm he founded in 2009, had raised a second micro-VC fund of $40 million to invest in tech-based startups, primarily at the seed stage. Four of his companies from the first fund have already had successful exits (CardMunch to LinkedIn,BackType to TwitterIndexTank to LinkedIncard.io to PayPal), and several others have gone on to raise Series A, B, and C rounds. With his first fund of $6.25 million, K9 invested between $100K – $250K in each deal, as opposed to the new fund, which will allow investments between $250K – $750K and possibly leading rounds.

I sat down with Kumar to talk about his investment strategy and his plans for the second fund. He explained that he has a very specific approach to evaluating companies, focusing not on particular sectors but core technologies, and three specific criteria: companies developing radically new technologies (like the Lytro camera, which allows you to re-focus a picture after it’s been taken), companies creating new markets and allowing money to be exchanged at scale where it wasn’t before (like Zimride, which creates a business model around carpooling), and companies with entirely new business models, which he says is by nature less frequent but always interesting.

You have a very specific investment focus that isn’t based on sector. How did that develop?

How I think about it, and the way that I’m deciding what to invest in, is by asking, “What is the core technology here?” and then approaching it from that angle. A lot of funds do focus on particular sector, and when I started this, all of the stuff I’d seen had been sector-based, which I was initially worried about. But for me it’s sticking to first principles thing. It’s a core fundamental thing for me. How things have been done before is, in my book, not a good book for how it should be done in the future.

You invest only in companies that are located in the Valley. Why is that?

I would say that the prevailing wisdom right now is that the Valley is too frothy. I think it’s probably true, but my reason for wanting to invest in companies that are local is not because I am here, but because I believe that there’s something here that doesn’t happen anywhere else. There’s a serendipity to the Valley that you don’t find anywhere else. Facebook, Twitter, LinkedIn, they’re all local. And when they have to choose if they’re going to acquire a company located here or elsewhere, it’s easier for them to acquire a company that’s already here.

You invest mainly in seed-stage companies. What do you see as the pros and cons of those companies going through accelerator or incubator programs?

Probably the best thing that incubators and accelerators do is provide a network. They give you a network of peers already doing startups, so the network effect of the incubator and accelerator is definitely beneficial. They also teach you how to pitch. But teaching you how to pitch is not always the same as teaching you how to build a business. When I want to get involved in a company I want to actually build a business, and just because you’ve learned how to pitch an investor doesn’t mean they know how to build a company.

I am a mentor at StartX, over at Stanford, and they don’t take any equity in the companies. They’re more focused on education and mentorship rather than cash, and I like that model.

The Lytro camera, which K9 invested in, allows users to change the focus of a photo after it’s been taken.

Who are the founders you’re looking to invest in?

I only work with technical founders, who have both the ability to build their own product and to lead the business. They need to be well-balanced in terms of not just tech, but also having the experience to know what it means to be a founding CEO. The best founders are the ones who can span the whole thing.

How frequently do you see that?

Not that frequently. The most important thing is their ability to learn quickly. It’s, “Can they learn what they need to know a few weeks or a few months before they need to know it?” It’s a lot harder for someone who is non-technical to learn how to do technical stuff. It’s typically easier for the technical people to learn the business side, because a lot of the business stuff is common sense, whereas the technical stuff often requires deep expertise.

What do you look for in the business models you invest in?

I also only invest in companies with a direct revenue model. What I mean by that is I deliver value to you, and you pay me. I don’t want any involvement in third parties. I want to see how is the company going to potentially make money. I have this belief that to be a company, you need customers, not users. It’s a very old-school way of thinking, but it’s the way I understand it and it’s what I will do.

Also I want things that are reasonably capital efficient, which means the amount of money they acquire is commensurate of the opportunity they’re going after. One of my companies, they’ve raised just a couple hundred thousand, but they told me, “No more runway. We’re already flying,” and I loved that. Raising money is not an indicator of success. Making money is.

Is that a new thing?

I don’t think it’s a new thing, it’s a Valley thing. It’s always been very funding-focused, where everybody thinks the only way to do a company is to go raise money from VCs. And there are several types of companies you can do where you should not be raising money from VCs. You can have great ideas and great businesses without it.

  1. Hey Manu Kumar knows his niche and backs it up with smart and hard talk ;)

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    1. Indeed he does. One of the most underrated investors.

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