Seed Capital From Angel Investors: Manu Kumar, Founder and Chief Firestarter, K9 Ventures (Part 3)

By guest authors Irina Patterson and Ravi Bulusu

Irina: Do you think in terms of valuation when you invest in a company?

Manu: Yes, I do look at valuation, and I definitely want to be the first money going into a company. And because the initial investment amount is relatively small, I also want the valuation to be relatively low so that there is a meaningful participation in and stake in that company. So, I do look at valuation as part of the investment process.

Irina: Do you think in terms of how much equity you would like to have?

Manu: No. That’s an interesting question. A lot of LPs (limited partners) whom I’ve talked to have also asked that question. I obviously try to maximize my ownership stake in the company to the limits where it works for the founders as well. A lot of VC firms have this number and say, we would not do a deal if we don’t own an x percent of the company. I do not have anything like that.

To me, I look at the company, I look at the team, I look at the concept and then decide whether I want to invest. The analogy is, would you rather own 50% of a company that goes bankrupt or would you rather have owned even 1% of a Google?

Irina: And what about your equity share and your returns? Do you have any rules about those numbers?

Manu: No, I don’t even look at metrics in terms of how much I expect much of a return off of a particular investment. To me, a lot of that is too hard to predict. I don’t think anyone can predict it. I think it is not even worth saying that I want this type of a return out of this investment because you don’t know what it is going to be.

What you want to see is, does it makes sense from sound principles? Are you investing based on sound principles in terms of its being a good market, good team, and a good product with a business model that makes sense and that will make for a sustainable, profitable company. Those are the metrics I am looking for.

Irina: What stage of the business development do you usually prefer to invest in?

Manu: I have invested as early as when they were just two people and nothing else, not a single line of code written, no prototype, nothing. I have invested at pretty much every stage, including where they have a prototype, potential customers, or even revenue, so at the entire cycle. And often as early as there is nothing there, nothing tangible in the company.

Irina: Do you think in terms of TAM (total available market) or total addressable market?

Manu: To some extent, yes. I definitely want it to be a market large enough such that investing in the company makes sense, meaning that it can actually provide for the investors.

There are lots of businesses that provide a great return for the founders, have excellent cash flow, and provide a great amount of profit every year, but they may not be the types of businesses that would really make sense from an investing point of view.

So, I do have that minimum threshold that I want to make sure that the business is in a market that can provide a return for an investor, but I don’t require every one of my investment to be one that is going to be a billion-dollar company.

If it’s a company that can exit at $10 million, $20 million, or $50 million, those are all perfectly reasonable numbers provided that the company has taken an appropriate amount of investment. So what I am concerned with is a good return on investment as opposed to just looking at what’s the total market cap for the company.

Irina: What about the business experience of the team? Do they have to have senior business experience?

Manu: I invest only in technical founders. In fact, if it was a team that had a lot of business experience but did not have the technical expertise to build their own product, I wouldn’t invest in that team.

A lot of the companies that I invest in end up being first-time entrepreneurs coming from a technical background. What I do look for in them is the desire and the ability to understand the business side of the things and the willingness to learn along the way.

This segment is part 3 in the series : Seed Capital From Angel Investors: Manu Kumar, Founder and Chief Firestarter, K9 Ventures
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