Video: Manu Kumar – K9 Ventures | The Big ‘5’ for Startups 
Investor Discussion: Manu Kumar | K9 Ventures
Learn all about the ‘Big 5’ — the criteria that pre-seed Silicon Valley investor, Manu Kumar of K9 Ventures, evaluates a startup by.
00:17: 1st criteria – technical teams
01:09: 2nd criteria – novelty and what that means for startups
03:26: 3rd criteria – direct revenue instead of a 3-way business model
04:17: 4th criteria – first money in the game
04:36: 5th criteria – importance of location
04:55: Reasons behind having a tough criteria as an investor
06:36: Lessons from investing in Lyft at an early stage
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Manu is a geek turned entrepreneur turned investor. He is the founder and Chief Firestarter at K9 Ventures – a technology-focused micro-VC fund based in Palo Alto, California. K9 invests in teams of technical founders in the San Francisco Bay Area, who are creating new technology or opening new markets, with a direct revenue model.
I look for five criteria when I’m kind of evaluating a start up, right? So the five things that I’m looking for, and these are all listed on my website. So if you just go to K9Ventures.com, you will see all of them listed directly over there. The first thing I look for is, I look for technical teams. Meaning I want a team that is capable of building its own product, right? And when I say that, the quip that I use is that typically, I want people who are walking out of computer science and double E and if it’s people who are working out of a business school but don’t have a technical background, and they’re like, “Oh, we’re going to hire a team to build a product.” I’m not taking that meeting, okay? And I also want that somebody on that team to actually have both the ability and the desire to be the CEO, right? So that’s criteria number one.
Criteria number two is, I’m looking for the company to be doing something novel. Novelty comes in a couple of different forms. The first form of novelty and the most common form of novelty, is new technology, right? We have new science, new technology, that’s what gives us our competitive advantage, right? So that’s the first type of thing I look for. The second type of thing I look for is new market. And so I gave the example of Lyft and Carta. So Carta is a company that I actually co-founded in 2012. I co-founded this company because the first investment I made in 2009, I ended up holding a paper stock certificate and I’m like, “What do I do with this?” And every other investor I would talk to, they would tell me that, “Oh, we give it to our CFO, and our CFO goes and puts it in a safe deposit box in a bank.” Okay. I’m like, “First, I don’t have a CFO. Two, I don’t have a safe deposit box, what do I do with my stock certificate?” So that was what got me thinking about oh, this is a white space problem that nobody is solving this problem.
And that’s kind of what got me to co-found Carta. Carta today is over 450 people and growing like crazy. But that’s a new market company, right? So that was a market that nobody was solving the problem in that market, we identified that market, and we built a company in that market, right? The third form of novelty in a company is a new business model. That is something that happens so infrequently, that I don’t even look for those anymore, okay? But I can give you some examples. So if you look at Priceline, if you remember Priceline from back in the day. That was a new business model, right? A lot of the solar companies like Solar City and Sunrun, they’re less about solar and more about finance. They essentially will come in and install solar panels on your roof, and then it’s a payment plan structure. So their business model is really more of a financing model, as opposed to a solar model. So those are the companies I would put into the category of new business model, but those are far and few.
So just to recap, so the two things I look for are new technology, new market. Okay? Third criteria for me is, I want companies that are generating direct revenue. So direct revenue means you deliver value to me, I pay you, okay? No three way business model. So a three way business model is Google, Facebook, Twitter, all of those are three way business models, right? So in the case of Google, all of us use Google for free. Some third party is paying Google hundreds of billions of dollars, in order to get access to our attention, okay? That’s not a business model that I want, right? I want a direct revenue business model. And my reason for this is that at the stage at which I’m investing in two people, I have no idea that they’re going to become the next Google or the next Facebook type of a company, okay?
Fourth thing that I look for is I want to be first money in. So literally, if there’s nobody else has invested in the company, that’s great. If it’s only the founders themselves or friends and family, that’s okay. But if you’ve already raised money from another fund, that’s probably not the right fit for me. And lastly, I only invest in the San Francisco Bay Area, so I want the founding teams to be based over here. I want the company to be built over here, so.
Tough criteria to meet, specifically.
So the comment is, tough criteria to meet and that is by design, right? So it’s by design and the reason why I even publish my criteria on the website is because I want people to go there and self-select, right? There’s no point in somebody emailing me when I know that these are my criteria, right? So if you meet all five of these, then I’ll take a look at the pitch deck. If you don’t meet all five of these, then there’s no point in wasting time.
One of the things you mentioned was technically led teams. Of course we love technically led teams here as well, and someone has to go and move into that CEO role, grow into that role. It’s sometimes, it’s that individual that can speak the geek and have the gift of gab, which is a rare quality for both. But how do you have those conversations where you’re just not for sure if this person can make that leap?
I mean, that’s a very common problem. I mean, at the stage at which I’m investing, it’s two people, it’s typically first time founders. How do you know that this person is actually going to become a great CEO? You honestly don’t. That just comes down to a gut call. It’s literally like, “Do I feel like this person has the desire, the ability, the commitment, the flexibility in order to actually learn quickly and adapt quickly?” There’s no formula for that, it just comes down to a gut call that I’m making. I work with a lot of founders who essentially, I’ve seen then evolve over the years. Lyft is one of my portfolio companies, right? So I met Logan and John when it was literally the two of them, and one part time developer, right? And they had just moved here from Santa Barbara and they were trying to build essentially, carpooling for universities to use.
That’s the stage at which I met Logan and John, right? I wanted to invest in them, we didn’t come to agreement on terms initially, and I just told them, “Look, I like you guys. Just stay in touch. If there’s anything I can help with, let me know.” And they took me up on it. Every once in a while, I’d hear from them with some particular problem they were facing, and I would help them with it. And I ended up investing in the company a year later. So I effectively took a year to get to know Logan and John before I did the investment. And it was great, because a year in, I had a much better idea of who they were as people, and I knew what drove them. And I could kind of see what’s the conviction that they have around just re-imagining transportation, right? And the most rewarding part of Lyft to me, is actually seeing the evolution of Logan and John as founders and as leaders of that company. It’s unbelievable to see.
And to your point, connecting the dots over time too, it took you a long time to kind of come to the realization.
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