After two years of investing, Karthik Reddy, MD of Blume Ventures, is now more focussed than ever on disruptive ideas that can change customer behaviour. He feels that seed funds are not meant to promote mediocre growth of a business, but instead, to put the business on a high-growth pedestal. Karthik stresses on the need for an idea to be able to solve a problem at a deeper level and not be superficial. An incremental solution does not pay high dividends. Instead, forcing the customer’s behavioural change requires disruptive thinking. He would like to fund such behaviour-changing ventures, which would be “hundred baggers”.
Karthik Reddy and his friend Sanjay Nath started Blume Ventures in 2011. With a Rs. 100 crore fund, they have set the startup scene ablaze and have created an impressive portfolio across mobile, cloud, gaming, education and social domains. Prior to becoming angel investor with Mumbai Angels in 2008, Karthik had stints in investment banking, technology, and operations. Karthik’s investments include Apalya, Speakwell, AWACS, Insta Health, among others. He now serves on the board of Algorhythm and Asiatic Clinical and is also an Advisor and Board Member of Earth2Orbit. Karthik is an engineer from IIT Roorkee, and holds MBAs from both IIM Bangalore and Wharton.
YourStory caught up with him to understand his perspective on investing and get some tips for entrepreneurs looking for angel funding. Excerpts:
YourStory: Let’s say that an entrepreneur comes to you. How would you suggest that he/ she prepares for the pitch to you?
Karthik Reddy:I am always keen on knowing why an entrepreneur is trying to solve a particular problem. If I don’t see the entrepreneur’s passionate connection to the problem, I am not interested in funding him/her. One can’t say, “I was getting bored in my job, I was looking for ideas, and this idea looks good to me because a lot of e-commerce ideas are getting funded in the current cycle.” It is very important to express why the problem is worth solving, how they arrived there, how big they think the problem is, and whether there are behavioral alternatives that can solve the problem. For example, I just came out of a discussion with yet another food delivery e-commerce company. I have never got the conviction that their's is a problem that can’t be solved in 10 other ways by existing players. Unless the solution that you are offering is exponentially better than what is out there already, and if it is not disruptive, then why would people change their behaviour? And it is true that your consumer is the king whether you are a corporate or an SMB or an individual. Also, what you are trying to solve doesn’t have to be sexy. For instance, if you look at all the e-commerce investments in our portfolio, what they are trying to disrupt is the supply chain, which is not at all sexy. In fact, most VCs don’t want to get into that aspect of e-commerce. So I think you need to deeply think about the problem you are trying to solve and that too, in a disruptive manner.
The other most important aspect is to have a reality check on what it warrants in terms of time, resources, people and performance, with clearly defined metrics, to get a Series A kind of funding. Because as a seed investor, I cannot invest in a company and hope that a lot of M&A happens; that is not a good enough entry strategy for me. It might become a lucky exit strategy for investors, but I don’t like to evaluate companies like that any more. So the entrepreneurs have to explain how they will get to a level where they can raise Series A funding because the bar to raise Series A funding is very high. So how will they get to Series A with our capital is extremely important. Not many entrepreneurs demonstrate that at seed stage. They just come and pitch for the seed round assuming that the seed round is an end state in itself. It is not! The seed round is just a powering stage that allows entrepreneurs to get to an end goal, which happens to be a very, very tall ask. And, you can’t say that I will establish proof of concept, I will acquire customers, I will get the product in 10 companies etc. 10 customers are not good enough to get Series A any more. Moreover, not many people are able to demonstrate very effectively what kind of team and traction is good enough to get them to the next stage.
Focussing on what performance is required to get to the next stage, and if they have all the resources for that is very important. For example, one of the big problems is single promoters who are yet to build a strong team. If you have a strong team, and you are a single promoter, it is okay. If you have established a track record as a single promoter, it is okay. But, if you have not, and as a single promoter you say that you will get to Series A, you are being delusional. If you recognize these problems, and you can demonstrate to me that you can solve them in 12-15 months with the capital, then at least you are conscious of it, and I know that you will make attempts to solve the problems. But if you can’t even listen to advice and if you have never thought about the problems internally, it never works. We probably made some of these mistakes in the initial batch of our companies in which we invested, and we don’t want to make those mistake again.
YourStory: If you have to give three pieces of advice to early stage entrepreneurs looking to build companies to scale, what would you tell them?
Karthik Reddy: First, if you want to build companies to scale, there is an incredibly long journey ahead of you. So if you don’t have the perseverance to take on a lot of unsavoury problems, then don’t do it! Or at least don’t say you can do it. Because it is not about building a product, or just hiring one other guy who can build it for you or cracking online sales. Building a business to scale is a very, very different proposition from starting up. You have to be cognizant of the challenges that will get bigger and bigger as opposed to getting smaller as progress happens. Entrepreneurship is a long drawn out journey, be aware of that.
Second is that you cannot artificially give yourself more importance in the entrepreneurship journey, because it will take a fantastic team to be able to build scale. It is not about the co-founder team alone. It is about whom you get in and whom you hire for the next five years that is going to make it happen. So if you are not a team player and you are not conducive to taking input from people then it’s a journey that at least I don’t want to be a part of, as an investor. You can go build it all on your own and full marks to you if you can get there. But I don’t think we as investors enjoy that process, because we are not about capital alone. If you are coming to a VC, know that the VC wants the business to be built sustainably by way of a team and a well-thought out plan. This cannot be achieved by you doing everything all by yourself. So we don’t want superheroes. We want people who build a team of superheroes.
The third is, don’t solve a problem which is at a very fundamental level, superficial; where the shift in behaviour is not drastic or the adoption of your service is not compensated by the value that is delivered. If the product you are offering the customer only marginally increases productivity, marginally eases filing of information, or marginally eases getting some other entertainment etc., then it is not interesting for an early stage or seed investor. So the idea has to be disruptive to the point where it can fundamentally shake a consumer or a corporate behaviour by way of its adoption. We don’t see enough of that. We are funding arguably sub-optimal plans because we are not seeing enough of the disrupters in the market. And for disruption, you need a very, very ardent commitment and a very deep passion to see it through. We are committed at Blume to making that change happen for a very long run.
At an angel stage you need a super star company, not a moderate success. Because historically angel funds have proven that you need those one or two hundred baggers for you to become a great fund. And, we are not playing to be a moderate or mediocre fund.
So those are my hard demands from entrepreneurs as an investor.
We thank Karthik for his valuable insights and time! Stay tuned for Karthik’s comprehensive views on the early stage funding scenario in India.