The past year has seen an upsurge in seed stage investing, making the sector’s early beginnings through angel networks seem distant. The first quarter of 2013 alone saw as many as 35 seed and angel investments - fewer than in developed ecosystems like Silicon Valley, but still a healthy number.
Through his stints with Mumbai Angels from its inception in 2006, Sanjay can be credited with helping shape trends in the Indian angel investment space. After all, who would have thought that his angel investment in mKhoj (Mumbai Angels’ first deal, widely considered one of India’s best angel exits), a then SMS based search platform could become the world’s leading independent mobile ad network, InMobi. Building on this, upon his return to India after 15 years in the US, Sanjay along with his partner Karthik Reddy, started Blume Ventures in 2011. Since then, Blume has become one of the most prolific India-focused seed stage funds.
Early success stories like InMobi have revolutionized the angel ecosystem in India. Angel investment is no longer just another avenue for affluent HNIs (High Net worth Individuals) to invest their money in; serial entrepreneurs, CEOs, senior executives, and highly qualified professionals with proven track records have also entered this business and are beginning to make high quality investments.
Last year, Blume Ventures made the right noises through its numerous cross-sector investments. To know what they’ve got up their sleeves this year, we spent time in conversation with Sanjay Nath, Co Founder & Managing Partner, Blume Ventures.
On the state of India early stage investments
Sanjay considers the Indian early stage investment environment to have reached a state of “semi-maturity”. He says, “On one hand, there is a trend of many accelerators and incubators being set up. This is good for the ecosystem, as we need capital and mentoring at all stages, and these are potentially feeders into Blume. On the other hand, certain sectors are sometimes hyped up. There are entrepreneurs rushing into business models sometimes for the right reasons, at other times wrong – this makes our challenge of sifting through to catch the high quality ones more arduous!
Sanjay also added, “If you look at a sector like e-commerce, buoyed by the emergence of category leaders and brand names like Flipkart, Snapdeal and Myntra, we have seen many traditional businesses with an offline presence just jump online. This presents us with a quandary of quality vs quantity. So, while the capital available has increased, searching for the best quality opportunities is a challenge.
The involvement of seasoned professionals and entrepreneurs-turned angels like K Ganesh, Ronnie Screwvala, Rajan Anandan and Kris Gopalakrishnan is also a great boost to the startup ecosystem.
The next cheque writers
The lack of exits of Indian startups is a much discussed issue. While Sanjay agrees that it is a concern, he has a slightly different take on the subject. He says, “Companies like MakeMyTrip led the charge, and there will be many that follow. However, exits have been few and far between. Fortunately, the recent series of cross-border exits (including a handful from Nexus Ventures, with large Valley based hi tech companies acquiring their portfolio companies) is a very positive trend. Hopefully this is a Nexus is a situation where a rising tide will lifts all boats."
"Continuing this trend, there will be many more M&As than IPOs. If a fund can return five times the capital in 5 years via M&A, that is better than seven times the returns in 8-10 years via an IPO. Time to exit is also important, not just the quantum of exit. We think that the market will improve, it won’t stay dormant.”
Sanjay says Blume shares a good relationship with VCs, the next round of institutional funding bodies in India. He says, “There are at least 15+ quality series A investors in the country - including Accel, IDG, Nexus, Helion, Kalaari, Lightspeed, Canaan and others, and also more recently, large family office investors like Catamaran and Unilazer who also do early stage investments. We have a very good relationship with them as they are play an important role between angel and growth VC.
Working with early stage companies and common early stage mistakes
When we asked Sanjay how working with early stage companies is different from those working with companies in their later stages, he said, “I think it is a cliche, but in the early stage business it is all about team, team, team. As business models often change over time (InMobi is one of the best examples; Avendus and even Makemytrip are others), the plan that comes to us during seed may evolve before the future financing rounds. Only the team stays constant, so we spend a lot of time understanding team dynamics at early stages.”
“We also look for validation of multiple types. One is from the first set of customers. Take one of our portfolio companies, Grey Orange Robotics; it started as a high tech college project at BITS, Pilani where they developed India’s first humanoid robot and won some of the world’s most prestigious Robotics competitions at Stanford and Berkeley. They have now transformed this project into a real business, and today some of India’s largest e-commerce companies are their pilot customers. This level of validation says something”.
Having played the role of an investor for several early stage companies, Sanjay shares some common mistakes made by these companies. He says, “There is a lack of customer interaction - that is one major thing we see. Many entrepreneurs spend time building product, and not enough time understanding customer insights, mapping product development with actual use cases.”
“We also see entrepreneurs doing 80% of the work by themselves and not delegating enough. Delegation and prioritizing the entrepreneur’s time relative to their internal team’s strengths and weaknesses is extremely important. The best entrepreneurs show conviction and a core belief in the core pain point their solution aims to solve, yet are willing to listen. When we meet companies that are rigid or get defensive when their business model is questioned, that’s a no no – the ability to deal with changing situations and developments (not always in one’s contro and not always friendly!) is critical.
Hot sectors and role models
Sanjay considers retail / e-commerce as an attractive sector to invest in. “Today one new paradigm is how India has moved from ‘”the bottom of the pyramid” to the “middle of the diamond”.’ There are 600 million of these (middle class consumers) in India, and e-commerce is just another word for online retail. However, within e-commerce, horizontal plays are not easy; well thought and developed vertical plays can be”.
“Mobile is a very attractive category, poised to take off. If you look at the 600 million middle class in India, all of them have a mobile phone. We were speaking to someone senior @ YouTube who mentioned an interesting stat - the average engagement time viewing videos higher on the mobile than it is on the desktop!”. India is not there yet, but will soon catching up to very high Internet / mobile-penetration economies like Indonesia and Korea. We have the numbers, and matched with a high rate of growth, the market opportunities are tremendous. Mobile payments (already established), gaming, education, even dating could yield a lot of potential” explains Sanjay.
Blume looks for a few important “fundability factors” before they invest. First, at least a team of two or more founders - convincing a co-founder to also leave his/her job is the first and biggest path in a startup’s journey. Second, today it’s all about execution and unless the company has unique IP or a technology differentiator, we are not just convinced about large market size and related stats – the team has to be able to convince us why they are the best to execute. And third, when they come to us to raise money, ideally they should also have convinced early customers, users and partners to buy into their value proposition (and also a few angels who bring in domain expertise and can add value).
Being an early stage investor
To quench our curiosity about what a day in the life of investor is like, we asked Sanjay for a sneak peak.
“On a typical day… actually, there is no typical day! We work 24x7 – anyone in this space does. It’s
a lot of work! But if I had to….. we spend substantial time, doing deep dives with our portfolio companies. We also spend a lot of time cultivating pipeline – fortunately given Blume’s 2 years in existence, we now focus only on companies referred to us by our extended ecosystem. Most would agree that if one can cover Mumbai/Pune, Bangalore/Chennai, and Delhi NCR, you’ve covered a good 80-90% of India early stage. So there is a lot of travel between these three hubs”.“At Blume, we devote time to developing our ecosystem. By this, I mean cultivating relationships with various industry leaders. For example, we spend time with potential partners to our portfolio companies, acquirers, sales & business development channels, outsourced service partners, and of course, the larger VCs and PE Investors who will come and validate our companies in the next round. We have built this ecosystem globally – across the US, Europe, Singapore and SE Asia.
Imparting his insights into the DNA of an early stage investor - “If you look at the DNA of an early stage investor, you have to think like an entrepreneur to back an entrepreneur, right? Karthik and I didn’t take salaries initially for a considerable period. If you look at most people in this space, many start like that. You can’t have the traditional PE-manager mindset and be an early stage investor – the DNA has to be a balance between an entrepreneur and a Fund Manager.”
Sanjay expresses high regard for larger VCs who have created institutions and played a role in shaping India’s venture ecosystem. There are many VC role, and there are many to pick. When asked, he mentioned Vani Kola at Kalaari Capital as one, for many reasons. “There are not enough women investors, and she has added a nice balance to the mix. Secondly, India has more traditional PE managers who have entered the VC world, and not enough entrepreneurs-turned-VCs, which she also is. And thirdly, Vani and her partners Kumar Shiralagi and Rajesh Raju are all Entrepreneur-Fund Managers (in the PE world, Everstone Capital founded by Sameer Sain and Atul Kapur is also a good example) - they built a platform, went out and raised the fund. This entrepreneurial mindset percolates to how one deals with entrepreneurs and the ecosystem – one can’t just switch on/off” says Sanjay.
Replicating the Silicon Valley story
At the end of our conversation, we asked Sanjay, if India could replicate the Silicon Valley story.
He believes the quick answer is no – there will always be only one valley. Even Boston (the closest recipient of angel and VC money after the Bay Area) can’t compete. The ecosystem back here in India is developing, but has a long way to go.
Indian entrepreneurs also need to do a few things differently. Sanjay says, “We need to do share, meet and learn from each other more. All the initiatives YourStory is championing are fantastic. We need more of these across cities In the valley, you have many open-learning sessions, e.g. an open house, Friday fireside chats with founders and serial entrepreneurs, and so on. We need to encourage more cross-learning - and entrepreneurs VCs and the angel community needs to also play a huge role.
It is this passion, n;enthusiasm and hard work that have helped Sanjay and Karthik make Blume one of the leading go-to seed stage funds in India today. However Sanjay says “we’ve only got started, but the India early stage ecosystem has a long way to go. We’re setting up the pillars in place, so that India can deliver many more Makemytrips, Inmobis and Flipkarts.”
You can reach Sanjay Nath at firstname.lastname@example.org and @sanjaynath (on Twitter)