It’s a bad strategy to just palm off business to someone – let’s build IPO-ble business, says investor Karthik Reddy of Blume Ventures
Karthik Reddy and Sanjay Nath started Blume Ventures in 2010 as a $20 million fund. Today, its third fund (Fund III) is $100 million.
In the last nine years, Blume has invested in 120 startups. Some of the well-known startups in Blume’s portfolio include TaxiForSure, GreyOrange Robotics, Unacademy, Locus, Exotel, Mettl, and others.
Though Karthik and Sanjay were contemporaries, they met each other only through the Mumbai Angels Network.
“We were introduced by folks saying you both are thinking of an early-stage, so you both should talk,” recalls Karthik. And this resulted in the birth of Blume ventures.
On being asked he is known as the hard guy and Sanjay as the soft guy, Karthik says, “I am sort of cut and dried in terms of decision making, and Sanjay is an enabler and loves consensus building. What we are proud of in Blume is that every team member brings the right blend of both soft and hard when it comes to entrepreneurs. We know where to mix it up. Collectively, I would argue that our team is soft and it’s not just Sanjay."
Siddhartha Ahluwalia, Founder of 100x Entrepreneur Podcast and Co-founder of SHEROES, caught up with Karthik Reddy, Co-founder and Managing Partner, Blume Ventures, in this episode of the podcast, a series that features venture capitalists and angel investors.
The 100x Entrepreneur Podcast is an endeavour to know their habits, mindsets, and viewpoints that can help entrepreneurs scale 100x.
Tune in to listen to Karthik Reddy in conversation with Siddhartha:
When investors feel like part of startups
“When we started, we loved the idea of working with founders at the ideation stage. We were naïve enough to think the excitement will carry us for a long time. There are limitations, as you can’t build a team or institution with $20 or $30 million,” says Karthik. He adds that they shifted their position to fund highly motivated founders solving very hard problems and not just simple problems because that, in turn, will drive VCs.
“When founders fundamentally transform businesses like transport or financial services, even investors feel like becoming a part of these startups,” he says.
Speaking about future plans, Karthik says, “We want to grow to what the customers want us to become. We have been listening to our entrepreneurs…… By 2024, we want to have our fifth fund, and $500 million under management."
On giving back money to Limited Partners (LPs), Karthik says, “Cycles are long in this business. We are not way off benchmarks. We are eight years into our first fund, and three and a half years into our second fund. And we have returned half the fund of the first fund. Investors want to know whether we can hit 5X, and they don’t expect more than that, given that India was a tough market."
“It’s not been easy to see exits per se. My disappointment will be that we haven’t built fast. Our first fund companies are predominantly sub scale. We don’t have companies other than TaxiForSure or Naukri that crossed $100 million mark. I still think three to four companies can, if not five to six. The first four years (2011-14) for us were slow. But by 2014-15, we saw things start picking up. There was more series B money, more cross border money, Chinese money, more co-investors, and peer money."
“Founders who survive the first three-to-four year hurdle don’t die, and they survive – that’s the first rule. When they survive for such a long time, hopefully they would have created enough value that someone would come and buy that. But the good news from exits perspective is that people have been building from the last 10-12 years. The first set of venture money came in 2005-06. So, there are some credible businesses out there. I don’t know how many will sell and how many buyers are there. There are not many Indian buyers. Exits don’t happen unless you have an active M&A ecosystem, or you hit a certain scale that will have an attractive IPO,” he adds.
“I don’t know if it will dramatically change over the next 18 months, but I hope it does change after that. I think it’s very important to build a culture in companies that can go IPO. Everything else should be seen as incidental. You can’t build it the other way around saying who I can sell this to, or which unicorn can I palm this to. It’s a bad strategy in my view. One should build a proper business having the potential for an IPO or else don’t bother. Eventually, if you want great cash exit, that will happen through IPO. This is my take,” says Karthik.
Elaborating further, he says, “I don’t think Cisco or Microsoft or Salesforce are coming to India and buying a business for $3 billion. In the consumer products business, people are no way coming to buy. They know that unit economics in India is going to be tough. Even the Unilevers, P&Gs, and Cokes of the world have been in India for decades together. They know it’s a tough margin structure business. Yes, Walmart paid a premium, but I don’t know if you can count on many more of those. Therefore, I would suggest: let’s build IPO-ble businesses. Yes, it might feel a little slow to build on profitability, but companies like Naukri and TeamLease have shown that if you deliver on profit on growth post IPO, you will get rewarded richly. That’s the path I would suggest for my portfolio companies, and I would push for that."
Speaking about startups solving problems, he says, “India needs Indianised solutions. You got to solve it with Indianised price points. We don’t have crazy disposable incomes. When you see a certain behaviour uptick, that means something in the product is working, and you have changed certain behaviour. In the US, if you get a whiff of that, people line up at your doors to fund. But in India, it is almost the opposite – they will see where the competition is. I haven’t seen this work elsewhere, how can this become a great market…… Because of new behaviour, incredibly large and long term value gets created. All the long-term value we create in India is in MeToos, by pumping more money and trying to win more market share."
When asked about which space excites him as an investor, Karthik says, “Anything that touches the 100 to 500 million mobile phone users will be interesting. We do a lot of stuff in financial services and agriculture of late. In the first ten investments of the Fund III, three will be agri. Out of these three, two are fintech oriented. Surprisingly, another three to four investments will be in deep tech. We will do two to three more investments in a year and a half. That has been the flavour for Fund III."
At what stage should founders reach out to Blume?
“We have become a little lazy on cutting early cheques, unless we know the founder or they have incredible credentials. But if it’s a high-quality referral or if it’s a space we love, it’s never too late……. But the good news is that Blume is big enough that we can skip the first round and come in the second round,” says Karthik.
Founders and investors
“In my opinion, we can’t blame all on the founder. There are causes like market condition, the space gets super crowded, and a number of cheque writers disappear. Then there are niche markets which we are guilty of funding. Nobody seems to care about them after us. In 2X or 3X, if you don’t sell the business, you will either become a lifestyle business or you will die. Founders should have known better, and we should have known better. So, we drive away founders to think bigger if they come with too small a vision,” says Karthik.
“If you ask me on the founder’s qualities, I think it needs incredible and incessant energy to build something transformative and founders should transform themselves to get there,” he says.
When asked about the challenges of being an investor, Karthik says, “I don’t think too many people appreciate how difficult it is for our side to raise capital. It’s incredibly tough. It’s no different from a founders’ struggle. We ask founders to empathise us for empathising with them. I am hoping it will slightly be easy for Fund IV because we will have results by then. But the first three funds were tough."
Speaking about the struggles of an investor, he says, “It might look cool to be a VC. But it’s as much of a struggle as that of a founder. I haven’t seen extra savings for the last eight years. That’s all financials and equivalent to founders. Now, all series B founders of my portfolio companies earn more than me. But that is a good sign."
When asked about the founder of TaxiForSure being a LP in Blume, Karthik says, “It’s almost a mandated KRA – to get all exited founders back as LPs. Because we have an Indian fund structure, it’s easier for us. We would like to believe they don’t exit from our lives. I am not giving you an exit from the fund (laughs). But it’s more of an emotional side as we don’t want to forget each other as we diverge in lives."
(Edited by Megha Reddy)