K9 Ventures sticks to its knitting, closing its third fund with $42 million

K9 Ventures, a nine-year-old, seed-stage venture firm that has become renowned in Silicon Valley circles for working closely with budding startups at the paper napkin stage, has closed its third fund with $42 million.

The firm’s founder and its sole general partner, Manu Kumar — a serial entrepreneur with a PhD in computer science from Stanford — tends to invest less than a million dollars at the outset. But founders get his help building their teams — and their prototypes — in exchange.

The strategy appears to be working. His first fund, closed in 2008, included stakes in the ride-share company Lyft and the software company Twilio, which went public last year. It also has several other promising startups in its portfolio, including eShares, a company that digitizes paper stock certificates along with stock options, warrants, and derivatives to give stakeholders a real-time picture of who owns what at a startup. His second fund, which closed with $40 million in 2012, meanwhile includes stakes in the educational games company Osmo and the authentication startup Auth0.

Kumar tells us he could have raised much more this time around — that in fact there’s substantial market pressure to raise a larger fund these days — but he calls it a “slippery slope” that he isn’t interested in navigating. In fact, to underscore how K9 works, it invested in just two startups in both 2015 and 2016, though it typically looks to invest up in up to four startups per year.

We had a quick exchange with Kumar on Friday to check in and learn what he’s seeing out there right now.

TC: What was it like, raising this third fund, compared with your earlier funds?

MK: Raising Fund I was the hardest for me. I didn’t know much about “LPs”  and so had a lot of learning to do to understand how the “money behind the money” operates. That was compounded by my impeccable timing of starting to raise in July 2008. In January 2009, I finally had to make a call that I would start investing with my own money, and when I said that, a few of the investors from my previous companies participated. The initial closing was at $3 million. Over the course of the year, most investors doubled down and we closed that first fund with $6.25 million.

Fund II required a lot of meetings, as I was moving from a $6.25 fund to a $40 million fund, was a solo-GP, and I was determined to do it in a single closing. The early performance of Fund I, with meaningful distributions to LPs, probably helped. This was also my first time dealing with truly institutional LPs. It took probably a little over a year to get it done.

Fund III, relatively speaking was a breeze. We closed within about around 3 months.

TC: What are you seeing in terms founder expectations, when it comes to check sizes? 

MK: Most companies, when they raise a small amount these days — meaning less than $2 million –don’t issue any announcement about it. So the only announcements that founders see in the press are the that, “company X raised a $3 million seed round” or, worse, that “company Y raised a $6 million seed round.” When you combine that with the conventional wisdom that “seed” is supposed to be the first round — but is not — a lot of founders come in expecting that they’re going to raise $2 million to $3 million in the initial financing, without having anywhere close to the level of team, product, traction, or even longevity behind the company.

TC: Are you seeing any difference in the founders you are meeting with? Are they any more or less humble than in previous years?

MK: I think I’ve successfully selected out of the process for founders that are not humble. Being humble is a key requirement for me — not only for founders but also for myself.

The amount of capital entering the early stage — meaning pre-seed and seed — market is immense. Lots of new early stage funds are being formed, and “non-traditional LPs” are often the source of capital behind these funds. So with that many sources of capital, I can see how founders might feel like they’re in high demand. The smart founders will do their homework on the VCs they’re working with and optimize carefully between the right partner and the right price.

TC: What are some of the next big trends you’re most focused on?

MK: I generally let founders educate me on the future — they’re more prescient than I could ever be. That said, when I look at some of the recent companies I’ve been involved with, I’ve extracted a thesis that I’m exploring further. The thesis is really around non-typical industries that are ripe for disruption. For example: eShares is addressing an industry that was underserved. No one was doing a good job helping private companies manage equity, valuations and transactions. We filled that void. Likewise, Everlaw is doing something similar for lawyers and litigation. The other industry that I’m currently deep into is agriculture.

TC: Have you made a related bet yet?

KM: Yes, one of the companies I invested in recently is building robots that harvest strawberries. So sector-wise, it’s in agricultural robotics. It wouldn’t normally sound like a space that VCs would get into, until you start looking at the market and the problem. Turns out there are 58,000 acres of strawberries in the U.S. And it costs between $10,000 and $12,000 per acre to harvest them. That’s a big market just in strawberries and doesn’t even begin to address how the same technology can extend to other types of fruits and vegetables. To top it off, the current trend is that there simply isn’t enough labor to harvest all the fruits and vegetables.

The press loves to talk about machines and automation replacing jobs. The reality is that there simply aren’t enough people who want to do the job. There aren’t enough farm workers. And there aren’t enough truck drivers, either. And the trend line shows that that problem is going to get worse.

TC: What can you tell us about this particular team?

MK: After an introduction from a computer vision professor, I met them in their garage in Mountain View. Now they’re building a 600-pound robotic harvesting machine right in my office. It’s a lot of fun.

Pictured above: K9’s Palo Alto office.