The Indian startup ecosystem is far more vibrant now than it was three years ago. Two or more startups are sprouting every day, and there are accelerators, incubators, angel groups, and seed funds vying for the smartest of the lot.
The biggies in the VC space are now getting into early stage investments too. So, while the new vibrancy is good, it can be dangerous for entrepreneurs and smaller funds too, says Karthik Reddy, managing partner of Blume Ventures. It’s a leading early stage investor in India, with a portfolio of over 60 tech startups.
Reddy explains:
Incursions into the US$500,000 to US$1 million range by a plethora of series A and B VCs to buy optionality is a little scary… We don’t know if these VCs are allies in company-building any more; they don’t seem to care about folks like us co-investing and helping manage the early stage companies. Are they going to build the skills internally to help seed companies? It’s great if they are, but what they’re signaling to us is that they’re looking to eat our lunch, not collaborate.
From past investments like InMobi, TaxiForSure, and ZipDial, to newer ones like Explara, WebEngage, and NowFloats, Blume has notched up a string of potential winners.
But now, four years down the line, as Blume prepares to launch its second fund in this rapidly evolving ecosystem, Reddy and the team are taking a hard relook at its investment strategy. “We need to step out of our angel avatar and delve deeper into emerging winners,” says Karthik Reddy in an interview with Tech in Asia on Blume’s experience in the last four years, and why this VC feels the need to pivot now.
Here are excerpts from the interview with Reddy:
TIA: Blume believes in contributing much more than money to startups. Tell us how you engage with portfolio companies to get them over humps on the startup road.
Reddy: At the stages we enter, it’s seldom about the capital alone. We get called for anything and everything – and we can’t possibly have the answers to all those questions. We’ve solved some of them with an internal group of founders – it’s a simple Google Group that sees a wide variety of questions answered. But we will have to iterate this ‘mini internal Quora’ to the next level soon – within the coming year.
Currently, it’s the First Round Capital model – building a system where the startups can all learn from each other. The next grander iteration is the Andreesen Horowitz variant. We can’t have a 100-person expert team across all segments, but we will strive to build partnerships with nimble service providers who are aligned long-term with Blume. We already have a handful – they help in various aspects such as handling mobile partnerships, fund-raising, accounting, documentation, legal, due diligence, etc.
TIA: What do you and the core team do?
Reddy: Business development and channel relationships, VC connects, cross-border connects, advisor pool connects. We’re orchestrators of this grand ensemble. There is no end to this… and we want to keep building.
TIA: What are some of the specific ways you’ve helped portfolio companies?
Reddy: We’ve helped in naming one company’s brand, we’ve helped negotiate M&As for others, we’ve got folks as co-investors, we’ve got them international angels, and the list goes on… When you have over 60 companies, there are too many variants to cover.
TIA: Doesn’t Blume’s early stage focus limit possibilities for deeper engagement with a startup’s journey? Will you raise your quantum of funding in the second Blume fund?
Reddy: It’s a good question. It does limit possibilities. It makes the company and us vulnerable. We need to step out of the realm of being a substitute for angel money in a seed round – which was largely our avatar in fund 1 – and have the ability to delve deeper into the emerging winners. We didn’t budget enough for bridge rounds in the first fund. We’re budgeting 1:1 in dollar terms in the next fund for just bridges. The bridges are also important to ward off sub-optimal series As and extend the growth curve rapidly. We almost did such a round in Grey Orange Robotics and we’ve done such rounds in Rolocule and WebEngage along with our co-investors, since a great series A round sometimes requires US$1 million in total spend prior to that – instead of the US$500,000 which were our median rounds in fund 1. We learn from what our best founders tell we can do better, and this is feedback from them too. Also, the ability to play convincingly in the stars and hold onto your pro-rata and have a 15 to 20 percent stake is important for a fund like ours.
TIA: What are the changes this will entail in Blume?
Reddy: Unlike angels, we are now becoming more institutional by the day and that will reflect in a certain discipline that we will enforce in the new fund. It means that it curbs our flexibility and style a bit, but it’s all for the better. This also means we reserve more for our series As. So, our reserves are going to be rather deep in fund 2 – which all points to a US$50-60 million fund, rather than a US$20 million one. We knew this early enough in fund 1 but without institutional investors, it’s difficult to course correct and get deeper midway. We are also likely to largely step away from the syndicate model and be a co-lead or lead investor in most of our fund 2 investments.
TIA: How has the Indian ecosystem evolved for an investor like you in the past three years? Has it got more competitive as investors with big funds chase startups in hot sectors?
Reddy: It’s more vibrant than it was three years ago. That’s the most important aspect. Competition is good. How else does one prove one is better than the others for what we do? Accelerators, incubators, angel groups, seed funds – all of them are important. It feels like a lot of noise some of the time, but it’s a necessary ingredient to the build-out of long-term sustainability in a young VC financing market like ours.
Similarly, the capital infusions at the late stage by the new breed of aggressive series B, C, D investors (over the last nine months) is also a little irrational, but not when one contextualises it with how much capital they manage and how they expect the market to grow in the next two to three years.
I don’t think both of these affect us adversely in the short term and are actually positive in the long term. However, incursions into the US$500,000 to US$1 million range by a plethora of series A and B VCs to buy optionality is a little scary. I hear that there are 40-50 such investments in 2014 alone.
TIA: What’s wrong with incursion of the biggies into early stages?
Reddy: Basically, that’s dangerous for the founders and us smaller funds. We don’t know if these VCs are allies in company-building any more; they don’t seem to care about folks like us co-investing and helping manage the early-stage companies. Are they going to build the skills internally to help seed companies? It’s great if they are, but what they’re signaling to us is that they’re looking to eat our lunch, not collaborate. That’s a little disconcerting – though we were relatively quiet all of 2014 in the market and didn’t see this bother us as much. Let’s see how 2015 shapes up.
For the founders, the risk is that seven or eight of every 10 of these bets don’t see the series A light of day since the VC wasn’t interested in the scale that they were building. So, they have to make their choices on who to work with at seed stage – I guess a lot of the founders are happy with nice salaries and a longer runway, all signaling issues and long-term negatives be damned. It’s all good! So, it’s inevitable that we have to shore up more reserves as explained earlier, and be credibly large in the founders’ eyes to compete with this phenomenon in the market.
TIA: Which are the smartest calls you made in these four years?
Reddy: I met a professor of entrepreneurship at Harvard last week in Boston. His recent research delved into the returns of one of the Valley’s best funds. This fund has a scoring system before cutting a cheque. He measured these scores and the eventual exit outcomes. The correlation was a dismal 0.1 – and this was for a later stage fund. We were both not very surprised – wouldn’t have been surprised even if the correlation coefficient was mildly negative. That’s the nature of the beast. It’s a probabilistic business. Anyone who says they knew their smartest calls while they were making them are bullshitting you. Which is why the entire industry is now about ploughing more capital as the probabilities then become easier to predict and the company gets more solid in terms of execution post every round. Blume’s smarts come from our ability to model risks and probabilities.
TIA: What have you learnt from mistakes along the way as Blume has matured?
Reddy: We have indeed learnt that getting carried away by an idea and not triple-checking founder capabilities, founder ethos, co-founder relationships, etc is just pointless. The ability of a founder to mature into the future is more important than his or her perceived capabilities to have gotten to the present moment (at the time of the investment).
Everything but the core DNA of Blume – this intangible thing about Blume which most of those who need to know kind of know by now – will keep evolving. Almost everything we’re planning to do in fund 2 is different from where we started off fund 1 and we will constantly challenge each other in the team to keep improving. I learn from my team and our founders and vice versa.
This post Karthik Reddy of Blume Ventures on how the Godzilla VCs are forcing a strategic shift for their second fund appeared first on Tech in Asia.
Karthik Reddy of Blume Ventures on how the Godzilla VCs are forcing a strategic shift for their second fund
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