In early December last year, a certain piece of news was inescapable. That is because no matter whether one follows the world’s third-largest startup ecosystem or not, all mediums of media were celebrating the feat. And justifiably so as it was a first of sorts for India.
India’s leading home-grown venture fund Blume Ventures had announced the close of its Fund IV at $250 million, bringing the firm’s assets under management (AUM) to over $600 million.
Naturally, with the world staring at a muted 2023 with the risk of a recession lurking and the so-called ‘funding winter’ blowing out cold waves, the fund raise surprised many, and was inevitably questioned as well.
Karthik Reddy, co-founder and partner at Blume Ventures, remains unfazed though. “You have to see that the evolution of Blume Ventures warrants this size of a fund.”
Funds I through IV
Reddy along with Sanjay Nath—both associated with the Mumbai Angels Network back then—started Blume Ventures in 2011. While Nath had 15 years of work experience across strategy consulting, product marketing and entrepreneurship both in the US and India, Karthik had worked at American Express, Reuters Instinet and The Times of India Group in the US and India across financial markets, technology and media.
With these laudatory backgrounds, the duo, as per Reddy, set a very humble but a realistic target. “We raised an INR-100 crore fund; in those days it was a $20-million fund. The fund was well thought through in terms of the kind of risks we wanted to take. We positioned ourselves as a super angel fund,” said Reddy. The Fund I, though, came about after meeting around 500 limited partners (LPs).
In 2011, the Indian startup ecosystem was at a nascent stage. Valuations of startups were hovering around $2-3 million. This meant an investor could shell out $200,000 and get 10 per cent ownership.
“Markets are very different today; people want $2 million for the same. Where does this confidence come from? Do you think the opportunity is inflated to 10x? Theoretically, yes. What we thought was a $100-million exit opportunity 10 years ago, today looks like a $1-billion opportunity,” added Reddy, spelling out the need for the larger Fund IV.
Since 2011, the Indian startup market size has changed, the nature of the entrepreneurs has changed as they have evolved and the quality of management has upgraded.
However, while back then Blume Ventures operated as a super angel fund, it always wanted to be an institution.
“An institutional avatar means you need to know which companies are breaking out; you have to have reserves to play deeper; you have to play pro-rata; you have to hold your stake in the best companies. These were the principles we imbibed but we had very little money. The reserve ratio was just 1:1; so if we started playing with INR 1 crore, we would have another crore for the company. That was the humble beginning of Blume Fund I.”
The firm in the next four years layered Fund I with another INR 65-70 crore. However, it dawned that the ambitions were bigger, and it pitched a $60-million fund in 2015, the Fund II of which $40 million came from overseas and $20 million came from India. “For the first time we started getting international attention in understanding that Blume has the capability of delivering outcome,” said Reddy. The firm witnessed the first exits in TaxiForSure and ZipDial, among others, and started repaying LPs of Fund I.
“LPs realized that Blume could act as a professional VC and few anchors took a bet on us and we started raising foreign capital. Interestingly, some of the people we pitched in 2014-15 for Fund II came for Fund III in 2018.” According to Reddy, this was a compounding effect of various factors: how great the market is growing, how well the VC is growing, and how long it takes for people to get conviction on the market. “The ability of someone to give us fund now is a function of the fact that we met them four-seven years ago.”
Blume Ventures also saw solid institutional support in Fund III, a $102 million fund. Out of the $102 million, six investors made up $80 million, and $80 million came from overseas. People stared to notice that Blume Ventures is getting international investors.
Post the pandemic in November 2021, the Fund IV was launched.
If Blume Ventures had 10-12 companies above the valuation of $100 million in mid-2019 when it raised Fund III, by 2021 it had 35 such companies. If it had one company with valuation above $500 million in March 2020, now it has around 11.
“So when you reach that scale you know something is happening. It is not luck, not one vintage, not one sector, it is not person in the team, it is everything,” said Reddy, adding it is a combination of all these factors which led to the jump from $102-million Fund III to $250-million Fund IV.
The age of specialists
The portfolio construction has been fairly thought through in the last five-six years at Blume Ventures which has created sector specialists. “This is something we put in motion in 2015-16 because we realised we cannot, as individuals, keep pace with the knowledge of every sub-sector and space.”
At Blume Ventures, Nath is focused on Saas, enterprise software, cross-border opportunities; Arpit Agarwal looks after deeptech and emerging tech; Ashish Fafadia specializes in fintech; Sajith Pai nurtures consumertech, SMBs, marketplaces, edtech; and Reddy perches over gaming, media and consumertech. “We are now nurturing sub-teams under them. We are creating units which add value to the underlying portfolio companies. So we have created $50 million buckets out of the $250 million Fund IV for each subset.”
A notable trend has been the launch of sector-specific funds focusing on climate, deeptech, etc. “If we remain a generalist fund, the challenge is that we will have to compete with a specialized fund. Now we do that with the domain information and the brand on top of that. We bring capital and we bring great networks. We try to be an able second partner.”
Funding winter of 2023
“What does money coming to the fund indicate? The LPs for the first time seem to be somewhat confident of the fact that India will deliver, not in 2023 but in 2030,” said Reddy.
According to him, the winter is not about the value only but also the depth of the opportunity. “The winter is not because investors or LPs don’t believe that company X can build 10 times, they are worried that the price that they will invest will only grow five times.”
There is enough dry powder and investors are being greedy for the right opportunity.
“The year 2023 will be about finding the right value. My summary read on this is three parts: the closer a company is to public, the more it has to correct because I don’t see public market shooting up, especially the tech stocks. The second category is Series B and C which does not have enough depth of pocket. Internal investors have run out of money and you are not profitable, so how do you survive? Smart founders will rationalise and correct and take whatever money available. And at seed stage there is least correction because there is a rush of people who can write cheques, a lot of new players are available. They just need an entry.”
According to the IIT-Roorkee, IIM-Bangalore and Wharton School at University of Pennsylvania alumnus, the seed stage startups will stay stable 2023, the Series As and Bs will correct and the large ones have more damage control to do once the markets correct sharply which, he thinks, has not happened yet. “Late 2023 is when you will see a semblance of order.”
The founder-friendly investor
“Philosophically our view is that we don’t gain and win anything if the founder does not win. We get a tiny percentage of the profit we generate for our LPs. A lot of first-time and even second-time founders don’t know much,” he said, adding that founders make mistake as they come with a set playbook.
So while the Blume Ventures’ investment team initially hopes to make the right choice when it comes to founders, but once that is made they are all in. The Blume team makes the founders believe that they are partners and if it not going to be a fulfilling journey for them, it is going to be the same for the investors as well.
“Our success in making that come through is what builds the brand. And that is something we are proud of.”
Listen to the full interview with Karthik Reddy on Entrepreneur India‘s Spotify channel Audio Shots.
Leave a Reply