August 8, 2014
Sell or Die
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In episode 17 of Venture Confidential, Manu Kumar stops by the Heavybit studio to talk about how he started a micro VC called K9 Ventures and why he chooses to invest in and help grow early stage companies.
About the Guests
Peter Chapman: Manu.
Manu Kumar: Yes.
Peter: Welcome to Venture Confidential.
Manu: Thank you, Peter. Nice to be here.
Peter: It's really thrilling to have you. I want to start with your entry into venture. You've been a serial entrepreneur for a while. What prompted you to start K9 Ventures?
Manu: K9 started out because in 2007, I was helping to start this company by the name of Lytro. Lytro, if you know, had developed this groundbreaking technology for light-field imaging and essentially built a new type of camera.
In 2007 when Ren and I went up and down Sand Hill to try and talk to people about fundraising, kind of a light bulb went off that most of the funds on Sand Hill were looking to write a three to four million dollar check.
We weren't looking to raise three to four million dollars. We were looking to raise less than a million at that point in time. That made me think that there's a gap in the venture market.
The other things that I observed at the time was that one, the check sizes were wrong. Second, a lot of the new people on Sand Hill didn't actually have a lot of startup experience on their own. And thirdly, they were not really taking technology risk.
So when I observed all three of those things, that's kind of what made me think about that there's a gap in the venture market, and there's room for starting a new type of fund.
Peter: Feels like K9 is hitting all these buckets. You're a serial entrepreneur, you like investing in new technology, and you write pretty small checks.
Manu: That's correct.
Peter: Tell us a little bit about where K9 plays in the venture landscape.
I describe K9 as a frighteningly early stage investor. And the corollary to that, is that I have to be frightened when I'm making an investment.
As we plan the pre-seed space, and pre-seed might be something that's new to a lot of people, but essentially seed rounds are much bigger than what they used to be. I'm still investing at the same stage at which I started, and so today we call that pre-seed.
Typical check sizes are between 400 to 600K, investing in a team that's one or two people, and an idea. And if it's one or two people and a dog, then that's a bonus.
Peter: Hence the K9.
Manu: Hence the K9, yes.
Peter: What does the total round size look like for these investors?
Manu: The total round size may mean $500,000 to a million.
Peter: So you might be the entirety of the funding.
Manu: I might be 100% of the round, yes.
Peter: Got it.
Manu: I am typically at least 50% of the round or a much as 100% of the round.
Peter: Give me a sense of the timeline here, because we've spoken to a lot of seed and even later stage companies. What comes before pre-seed, what comes after pre-seed, what does the stereotypical narrative look like?
Manu: At the stage at which I'm investing, in a lot of cases, the companies have not raised any capital at all. That's actually my preference, when they haven't raised any capital at all.
There are other cases in which they've raised, maybe a little bit of friends and family capital, but there is definitely no institutional or no professional money that's gone into the company at this stage. So the only capital that kind of comes before would be kind of friends-and-family money. Pre-seed comes in at that stage.
After pre-seed is your typical seed round, which today is between two to three million dollars, and I describe it as, you use the pre-seed money to build the team and the product, and then you use the seed money to actually take the product that you've built and try and show that you actually have somebody willing to pay for it. And then you use series A to actually scale up from there.
Peter: You got into this almost 10 years ago now. How has the pre-seed market changed in those nine years?
Manu: The pre-seed market didn't exist until maybe three or four years ago. And in fact, I think the first instance of me even using the phrase "pre-seed" happened in 2013 at my LP meeting where I kind of used it as a joke with my LPs to tell them that, hey, I'm not a seed fund anymore. I'm now a pre-seed fund.
The pre-seed market has really come in its own within the past three or four years.
Peter: Okay, so in 2007 you were calling yourself a seed fund.
Manu: A seed fund, yes.
Peter: And then seed checks got bigger and bigger.
Manu: That's right.
Peter: Your check size stayed the same.
Manu: Stayed the same.
Peter: And you kind of recategorized.
Peter: All right.
Peter: And now we're actually seeing a bunch of players, kind of in the same space.
Manu: That's correct, yes.
Peter: You know, we've spend a little bit of time talking about the different returns that investors are looking for at stages, I'd love to hear how many checks you write a year, how many of those you expect to make it, how you think about your investments from a quantitative perspective.
Manu: The typical adage in venture is that you will invest in a whole bunch of companies and maybe one in 10 will become hugely successful. That's not my model. I take the approach that I want my incentives to be perfectly aligned with the founder's incentives.
The founders, they have all their eggs in one basket. They want their company to succeed. That's what they're in it for. And investors have multiple companies that they're investing in and they're kind of amortizing that risk across multiple companies.
I take the approach that I want to be as closely aligned to founders as I can, in that if I invest in a company, I want that company to be successful.
I don't worry about FOMO, I don't worry about missing out on deals. But I do worry about that if I've invested in a company, I want that company to be successful.
What that then requires is that I have to spend a lot of time with the companies, and literally in doing more company building, and less of company picking. And so with that my pace has almost settled on, I will invest in maybe three to four companies in a year.
There've been a few years in the last few years where I've only done two new investments in a year. So the pace is almost very similar to what the pace would be for a typical series A investor, but the stage is much, much earlier than a series A investor would be investing at.
Peter: Tell me about your involvement with these companies. I take it that you're really involved at the inception. What does some of that early support look like?
Manu: When I invest in a company, typically I'll have a standing meeting slot with the company every week. A lot of the companies, especially if they're based down in the peninsula, the South Bay, they actually end up working out of my space, which is called the Kennel.
And so the companies actually end up working at the Kennel and then I'm not just interacting with them on the basis of that once a week meeting, but it's a lot of hallway conversations, a lot of pop in the door and get a quick update type of a thing, where they're telling me stuff, not that I'm going and checking in on them, they're coming and telling me stuff.
And so yeah, just being very actively involved with the companies. The initial stage is a lot of team-building, so recruiting is incredibly difficult. Just kind of figuring out ways of sourcing and convincing people to actually come and join an early-stage company.
Figuring out what the product is. Figuring out what the business model is. Figuring out what the pricing is. Figuring out who are the investors who will be mostly likely to invest in follow-on rounds. How to deal with PR and launch. So those are all the types of things that I typically get pretty heavily involved with with companies.
I say to them the one thing that I generally don't get involved with is in sales. That was just not something I enjoyed when I was doing my own companies and so it's not something I want to claim that I have much expertise in.
Peter: You mentioned recruiting and it made me smile because I was just having a conversation about how big the delta can be between a startup salary and a mature company salary. How do you find those first-hires? How do you tempt them away from their cushy, corporate jobs?
Manu: That is not an easy thing to do. The cushy, corporate jobs, especially in places like Google and Facebook and all the larger tech companies, Salesforce included, people get paid a lot of money to work at those companies, and
it's not easy to recruit them away into a startup. You almost need to pre-qualify whether somebody is entrepreneurial enough or inclined to kind of take that risk.
And do they understand the equity math? Do they understand that yes, they can either be working at a large company for many years, and yes they will make a sizeable fortune just doing that or do they want to go to a really tiny startup, take a massive pay cut, and then have the chance of having an even bigger outcome in the future?
But definitely not an easy thing, to convince people to join a startup these days.
Peter: One of the reasons I was excited to talk to you is because you continue to split your time between investing and starting companies. A while ago you started Carta, formerly eShares, and I know you're working on a new thing now.
Peter: Why do both? Why not just spend all your time working with existing founders?
Manu: I would say I'm a founder at heart. I love starting things, and even when I was thinking about starting a venture fund, the choice for me was really between should I go off and start another company or should I do something else?
At that time I reasoned that if I were to go off and start another company, and I've done this five or six times already at this point, I kind of knew that I would be doing that for another five years. And then five years later, I would be back to square one thinking about, what do I do next?
And so my solution to that problem was that I wanted to have kind of an over-arching umbrella that I'm operating under, but I still get to work on things that I really enjoy, and that's getting a company from zero, to like maybe the first 20 people in a company, right? That's the phase at which I enjoy building stuff.
Starting a venture fund was kind of my way of being able to do both, where I started K9 with the objective of, I'm going to be in this business for 30 years. Nine years into it already, and now 30 years doesn't feel so long so I might end up extending that a little bit.
But the idea was that within that 30 year arc, I still get to play with lots of different companies and actually build companies. And when I was making that transition, I also didn't want to lose the ability to still found companies. I actually baked that into my LPA, that I can actually found companies.
And I have now done that actually on three occasions. Cardmunch was one such company that got acquired by LinkedIn, and I was the co-founder of Cardmunch.
Carta, formerly eShares, Henry and I co-founded that in 2012. That company is now, in fact, all of your listeners should be Carta customers at this point. So Carta's doing well and kind of off and running, and I'm currently working on a new idea that I want to co-found as well.
Peter: I'm interested in how this team is assembled. Are you finding co-founders for an idea you've had or are you convincing founders that are coming to you that you should be part of their team?
Manu: It's very much the former, where
the only time that I am co-founding a company is when it's an idea that's been bothering me for a really, really long time and I haven't seen somebody else either go after that space or solve it in an elegant manner.
So that's the only time when I consider that I need to actually start something on my own and solve that problem.
But I describe this process as almost a process of inception, from the movie. So in the movie Inception, you're essentially taking an idea and putting it into somebody's head and it becomes their idea and it grows and they live that idea.
Manu: When I'm co-founding a company with somebody, that's the process that I'm going through with the co-founders. It's the process of inception.
It might be my idea, but I'm putting that idea in their head. But it has to become their idea. It has to become their baby, and the other ones who have to build that company.
Peter: It's important that it become their baby because you're bowing out at a certain point.
Manu: Not so much as bowing out, but I become less active at a certain point, yes. Essentially, my role in the early days of a company that I co-found would be extremely active and truly playing the role of a co-founder. But once the company gets to a certain level, then I'm scaling back and essentially playing the same role as a typical investor or a board member would at that point.
Peter: Got it. What is that threshold for you?
Manu: That threshold for me is either, if the company gets acquired, which is what happens, and that happened in the case of Cardmuch, or in the case of Carta, it's when they've become a sustainable business.
It's a real business, it's a real company and they've built up the team and in order to do things, and it then, like, Henry knows more about that space today than I ever will. He is the expert.
That's kind of the threshold, where my co-founders become the expert in the domain. That means that, okay, now it's time for me to step back and let them run.
Peter: I want to go back to the thesis of K9. You said "frighteningly early stage," and I know that you're big on hardware and software. In an earlier conversation you said, "Atoms are bits."
Peter: Tell me a little bit about your process for finding the next generation of high-risk technology startups.
Manu: There are a lot of investors who claim that they know what areas are going to be hot, and then they go look for companies in those areas. I don't claim to have any such advantage. If I ever felt that way about an area, I would go co-found a company in that area, right? So that's how I would approach that.
In most cases, founders are coming in and painting a vision of how they see things will be in the future.
If I agree or believe that vision of the future, then I have to have the conviction to essentially say, do I want to help build that future? And that's the point at which I decide whether I want to invest in a company.
I'll give you an example, of two hardware companies. I have one hardware company that's building power outlets that'll actually measure how much electricity is being used. I believe that that will happen. That is a very logical thing to happen in the future, but nobody has done that well.
I have another company that is doing physical access control and essentially taking anything that can take a key and can work that into an electronic access. Literally anything that takes a key, it doesn't matter if it's a lever lock or a dead bolt or a mortise lock or a padlock or a bicycle lock, anything that takes a key.
Every morning at least for all men, we do our morning male pat-down, which is wallet, phone, keys, right? And while wallet is going in its own direction, phone is probably too late for me to do anything in. The thing that I believe in is keys should not exist. I believe in a future where we don't have mechanical, physical, metal, keys. And that's why I invested in that company.
Peter: Can we name the company?
Manu: Sure, the company's called Nexkey.
Peter: Nexkey. So, did they find you, or did you find Nexkey?
Manu: They found me, but I believe in that future.
Peter: We've talked to investors who span the gamut. There's folks on this podcast who say, "I don't do outbound. I have a great history and maybe I do some content marketing and good companies come to us."
We've had other guests. Shruti was a recent guest who said, "You know if you want to be thesis driven, you have to be doing outbound. You have to be focusing on a specific area and talking to everyone in that area." It sounds like you're more in the former camp, is that fair?
Manu: I'm more in the former camp with the exception that if I feel strongly enough about a particular area, I will co-found a company in that area.
Peter: Okay. So you have a very specific form of outbound.
Peter: Which is, "I just start the company that I want to see." Okay, I like that. I'd love to hear Manu's guide for getting great inbound. What have you learned as you built this brand?
Manu: I think the most effective strategy for me has been making it very clear to the world as to what I do not invest in. And so if you go to the K9 website, I literally have one page dedicated to talking about, "Here are our criteria. You have to meet these criteria," and otherwise I'm not interested.
I want technical founders, a team that can build its own product, I want a company that is either building a new technology or a new market. I want a company that has direct revenue. I want to be the first money in, and I want the entire team to be based here in the Bay Area.
So if you meet all five of those criteria, well, then I'm at least open to having a conversation. But if you don't meet those criteria, don't reach out to me.
Peter: Why is it important to you that companies are local?
Manu: It's important to me that companies are local, not because I'm local, but because I believe that there is certain serendipity that exists in Silicon Valley that is very hard to replicate anywhere else.
Manu: I did my two startups out of Pittsburgh, Pennsylvania. Pittsburgh was great and I had a lot of excellent networking and connections through Carnegie Mellon, but once I moved here, I realized that the Bay Area is just a different league altogether. In fact, I have a blog post on this topic on my site. So I can go a lot more into detail on that in that post.
Peter: We'll put a link in the show next. Okay, you had two criteria for the markets: you said either new technology or new market.
Manu: Or new market.
Peter: What's a new market?
Manu: I define a new market as a market in which money hasn't been changing hands at scale before.
Manu: Okay. So I'll give you some examples. Lyft is one of my portfolio companies, and I consider Lyft to be a new market company for me.
The casual carpooling existed before Lyft and Uber started doing what they're doing, but it wasn't happening at scale. Lyft comes in and essentially said, we're going to go peer-to-peer and make this happen at scale. That's opening up a whole new market.
Carta is an example of a new market company. Prior to Carta, private companies were simply managing their cap table in Excel and it was mostly law firms that were managing the cap table and there was no good way around it.
There was no automation around it. There was no easy way to share and for employees to exercise their options and all that type of stuff. And so that to me was a white space.
There simply was no company that existed that was solving that problem. And so we founded a company in order to solve that problem.
That's a new market. Osmo is another one of my portfolio companies that's in the iPad-based gaming space for kids. Kind of the sweet spot for them is kind of six to 12, is the age group. And they're in a new market because they're kind of doing digital entertainment.
They're kind of at the cusp of what used to be board games and iPad, right? And board games is considered healthy. iPad is considered unhealthy. But if you give a kid a board game today, it's often not interesting enough.
Manu: Right? And that's just how kids have evolved. Like my kids, we literally have told them, "let's go play a board game," right? But iPad, the other ones who are asking us whether they can be on the iPad. So Osmo essentially carved out this new market at the cusp of physical and digital. That's a new market company.
So there are a lot of companies that I consider that are either operating in a white-space area or taking something and making it happen at a larger scale. That's what I call new market companies.
Then on the flip of that is a new technology. The new technology stuff is what all of us are already aware of, where it's some ground-breaking new technology that is being built by the company.
Peter: Do you have follow-on rounds?
Manu: I typically participate in the follow-on rounds. I also almost always lead at the pre-seed stage. So I'm typically always leading the round, taking a board seat, and my MO has kind of settled on that, at the pre-seed stage, I will lead the round.
At the seed stage I will want to do super pro-rata in most cases if the founders think I've earned it. It's not something I ask for, but if they believe I've earned it, then I would typically be happy to do super pro-rata. And then at the series-A, I'll do full pro-rata, and at the series-B, I may scale back from full pro-rata but still participate.
Peter: So you're staying involved with these companies for a long time.
Manu: Correct, yes.
Peter: How does your involvement evolve throughout the stages?
Manu: Best way of describing that is that if it's a company that I've just invested in, I'm meeting with them every week.
Manu: And once they do their follow-on round, I'll typically meet with them every other week.
Manu: Because then there's at least a few other investors involved. So I'm kind of sharing the burden with them. At the series-A stage, I may end up meeting with the companies once a month.
The frequency of engagement with the company for me kind of decreases as the companies scale up.
It happens fairly organically, in that I need to spend more time on new investments. So if I do a new investment, I'm taking on more, a bigger time commitment.
And as companies scale, founders get really busy. So they don't need to come and talk to me unless they have something specific on their mind that they want my input on. And so that scaling of time and how the time adjusts happens fairly organically.
Peter: What is the Manu specific input that founders are coming to you for?
Manu: It can vary a lot. Gosh, I joke that the place where most of my firefighting happens is in my closet. Because typically by the time my kids are asleep and it's after nine o'clock and I'm trying to do a phone call and keep it as quiet as possible, and so I end up running into the closet and doing the phone call in the closet.
Peter: I like it. Okay, so you've got a lot going on. You're the only partner at a single-partner firm, but you're staying involved with companies for a while, and it sounds like you're pretty heavily involved, and you are occasionally starting your own companies.
Tell me a little bit about time management in your world. How do you figure out what to work on?
Manu: I actually just got asked that question yesterday, and in fact, the way it was asked of me was, "How do you manage your time?" And my answer was one word: poorly.
It's a constant challenge. It's not easy to manage time. My SLA with my founders is very simple, that if they email me, they can expect a response within 24 hours. If they don't get a response within 24 hours, then they need to either text me or call me. And everybody else is at a lower priority.
Manu: Founders, if it's a company I've invested in and I'm engaged with, they get priority access to my time, and everything else I will let it slide. And that's something which, it's taken a lot of soul-searching to kind of get to that point where, the last time I was at inbox zero was before my daughter was born and she's now eight.
It used to bother me a lot, but I've had to teach myself that, you know what, there simply are not enough hours in the day for me to get to everything. But if I do get to something, then I want to make sure that I'm giving it the right amount of attention.
Peter: You're telling me your technique didn't change, your attitude did.
Manu: You're exactly right. Yes. It required an attitude adjustment, yes.
Peter: Okay, I like that. That feels like something I can do. I'm just going to learn to become more relaxed.
Peter: With my crowded inbox. So we haven't learned anything about time management in the nine years you've been doing this. What have you learned? What's something that you feel like you've gotten better at as an investor?
Manu: There are a lot of little lessons and a lot of little lessons that have bigger impact. I'll give you an example. One of my criteria when I started was, I want to work with technical founders.
Well, I learned along the way that I don't need to just work with technical founders. At least one person on that founding team needs to have both the ability and the willingness to be a CEO.
And that was an important lesson for me to learn, because I invested in a couple of companies where the founders were incredibly technical, super geeky, but they never figured out how to build a business.
Manu: Right, and so there was a slight tweak to that criteria, that yes, I want technical founders, but I want technical founders who actually appreciate what it means to actually be building a business.
Another small, and I'll mention, and this also goes back to team, it put it as
investors invest once they fall in love, right? They have to fall in love with the team. They have to fall in love with the idea.
Sometimes, you can fall in love with the idea even when the team is not right. That's a mistake, and I've made that mistake. And so I've learned from that mistake. Even if I love an idea but I don't like the team, I'm going to force myself to pass on that company.
So there are lots of lessons that like that, which I would say they come from just specific experiences in investing. I just tweeted last week where I tweeted that you can take a horse to water but you can't make it drink.
That's something I have to remind myself of almost every week. Because I come from an operating background. I've been a founder, and my DNA is founding DNA. I want to get stuff done.
But as an investor, you can't always just go tell a founder what to do. They have to reach the conclusion that, yes, this is the right decision for them.
And sometimes that involves, that as an investor, I have to let them make a few mistakes. Even when I know that they may be making a mistake, that's the right choice. The right choice is yes, they have to make that mistake, because once they learn from it, it'll make them a better founder in the future. That's not an easy thing to do but that's something I do think about.
Peter: This is so juicy. You're saying, you need to let founders have their own educational journey.
Manu: That's correct.
Peter: If you constantly protect them from pitfalls, you're not really letting them run the business and learn from that experience.
Manu: That's right. And in fact, some of the best founders also tend to be some of the most headstrong founders. So you simply cannot tell them that look, that's the wrong choice, you need to do this. They have to come to that conclusion themselves.
Manu: And there is a learning experience that founders need to go through. There's a maturing that founders need to go through, and I would say
the most successful companies are when the founders, literally, they become the experts.
When I think of Logan and John at Lyft, like I was working with them back in 2008, 2009, 2010, and when I look at just the maturing that they have gone through, it is amazing to me. They're amazing founders.
Peter: How do you figure out which mistakes to let a founder make?
Manu: You very often don't have a choice. I mean, you can try to coach them to do something but if they simply don't follow your advice, you don't have a choice. But to let them go in a different direction. That's just part of being an investor.
Peter: What's something you're trying to get better at as an investor?
Manu: Ah, that whole time management thing you were just asking me about, that would be something I desperately need to get better at.
Yeah, I think I'm comfortable with where things are with K9 right now. And in fact, when I started, and this is something that I've told my LPs on many occasions, I did not start out to build a generational firm.
I'm the sole GP in the fund. I'm doing this because I enjoy doing it. I enjoy building companies. I enjoy working with smart people. I enjoy constantly learning. I enjoy constantly teaching. So, as long as I'm having fun, this is what I will be doing.
The moment I stop having fun, I will just turn off the lights and move on.
It's not something where, I did not start out to build something that's going to last beyond my lifetime. So yes, I'm pretty comfortable with where things are, and I want to just kind of continue that. It's with that in mind where for me, my fun size is also going to remain pretty much around the same number.
I want to say stay at the same stage that I'm investing at. And that's the stage that I know I can actually contribute and help companies and help founders. I don't want to fall into the trap of raising more and more capital and then moving up stream and then essentially getting to my highest level of incompetence.
Peter: Something doesn't quite fit for me here. On the one hand, you seem like an immensely curious man who wants to constantly be learning, constantly be challenged.
On the other hand, you just said, K9's at a super comfortable place, "I'm not going to change anything about it, can keep going indefinitely and when I'm not having fun I'll stop." There's a disconnect here.
Manu: There is a disconnect there.
Peter: What am I missing?
Manu: You're not missing anything. The disconnect is very simple that I want all the learning, the teaching, the innovation, all the creativity to happen in portfolio companies.
Peter: Got it.
Manu: Right, that's where the energy needs to go into. I don't need to grow K9 in order to be intellectually fulfilled with what problem I'm working on. In fact, I have a lot of computer vision companies in my portfolio. That's an area that I say that I kind of live vicariously through my portfolio companies.
There was an area that I would have loved to do research in and I kind of now get to do that through the companies that I invest in. I've got a lot of dev tools companies in my portfolio as well.
So yeah, so it's more about the innovation and creativity and curiosity all needs to be targeted towards portfolio companies, and the fund is just a vehicle for getting to that.
Peter: I get it. You want the venture itself to be kind of boring.
Peter: You want the excitement, the learning, the challenge.
Manu: Venture is boring. When have you ever had like super exciting conversations around venture?
Peter: I'd like to think I'm having one now, you know?
Manu: I'd say if I have a choice between going to an event with the VCs or going to an event with founders, there's no choice there.
Peter: That's totally fair. No, I'm with you on that.
I ask all of my guests the same question to wrap up the podcast. Namely, what do you wish you knew going into this that you know now?
Manu: Nothing. You need to have a level of naivete in order to do something creative. If you know everything when you are going into it, you know too much and you won't do it.
Peter: I love that.
Manu: Right. Like, if I knew how difficult it was going to be to actually raise a fund, I probably wouldn't have done it. If a founder knows how difficult their startup journey is going to be, they probably won't do it.
I would much rather have that learning happen at the right time, and if you know it beforehand, one, it's not relevant at that time, because you don't have the right life experience to actually internalize it. And two, you're not going to use it at that time.
In fact, this also rolls into how I like to work with founders, where a lot of firms will talk about, "Yes, we have this program and that program and these events and that events."
I don't do a lot of that for my portfolio, because it's almost like every individual, the best time for them to learn something is right when they need it. That's when they're going to internalize it. They're going to act on it and they're never going to forget it.
And if they know it beforehand, they might know too much. It might almost scare them away. So, as I would say, I'll just learn along the way.
I'm a big fan of just-in-time learning.
Peter: Manu, thank you so much for joining me today. Where can our listeners find you, and who do you want to get in touch with you?
Manu: Best place to find me is on Twitter. I'm @ManuKumar on Twitter. You can also find me on the K9 website. A lot of my thinking is captured in the blog posts that are on the K9 website, which is at k9ventures.com.
I do tell people, if you want to reach out to me do it through a connection. You have to be resourceful to be a founder, and this is part of showing how resourceful you are.