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The groundwork is important.
A FEW GOOD SEEDS

A newly-minted Indian VC takes an honest, hard-nosed look at his industry

By Sajith Pai

Director, Blume Ventures

One morning in October 2017, I returned from my crossfit workout to see a series of WhatsApp messages from Karthik Reddy. An ex-boss of mine at The Times of India Group, Reddy had gone on to co-found seed fund Blume Ventures, which had evolved into a much-loved and well-regarded player in the Indian startup ecosystem. These messages were markedly different from our usual discussions; they were about him thinking aloud about a potential role for me at Blume, and would in turn spur a meeting between us, leading to my joining the firm a year later.

This is a part narrative of my journey and experience, and partly a reflection on the Indian venture capital (VC) industry. I wanted to give readers a sense of what it is that I see from my vantage point in Blume’s investment team.

It’s not just about investing

My initial conversations with Blume, especially as 2018 got underway, took place against the backdrop of the company’s partners working to raise its third series fund. This was to be its largest fund at $80 million (Rs573 crore) and they were trying to onboard a bunch of newer and larger limited partners (LPs), the folks who give us money to invest.

I was involved with a few of those LP conversations, where I was introduced to them as a prospective hire. I don’t think I was as worried about meeting the Blume partners as I was about the LP meetings given any carry over of a poor performance from me to their Blume discussions.

Industry commentators and aspirants portraying the VC’s role as a cushy “buy-side” one—listening to pitches, dispensing cash to select founders, and rejecting others—please note that before VCs can distribute cash, there is a lot of selling to be done to LPs to raise those funds.

Before VCs can distribute cash, there is a lot of selling to be done to LPs.

When founders complain about fundraising, we empathise, for we know how stressful it is and also understand its implications. If we can’t raise the next fund, then we can’t fund startups and are locked out of the ecosystem. Given that 2% of the fund size counts towards fees, from which salaries and expenses are met, inability to raise funds can also cripple a firm financially.

In Blume’s case, just as with all homegrown venture funds such as India Quotient, Pi Ventures, and Stellaris, the partners who invest are the ones hustling to raise cash as well. This is unlike some of the larger MNC funds in India who typically get a carve-out of the money raised, with a partner who focuses on fundraising sitting at the headquarters. Given that Blume is fundraising while also investing simultaneously—the founders don’t know about your fundraising cycles or don’t care—and also has an existing portfolio to worry about, this means a lot more emails, hustle, and travel.

The partners bear the brunt of all this, but it spills over to the rest of the team as well. Accentuating this is the huge volume of inbound early stage investment opportunities (including idea stage pitches), a holdover from our micro-VC days, which calls for a fair share of the organisation’s time. Let us understand this in detail.

We typically get around 3,500 pitches a year. Up to a sixth of those are referrals. The cold pitches get anywhere from a minute to five minutes (very rarely, a bit more) while the referrals get at least 15-20 minutes and a mail back. Often the referrals lead to a meeting. Sometimes two.

Then there are calls from journalists, hiring interviews (everyone wants to explore a role in the industry; often the introductions come from senior folks/LPs, which mean at least a 30-minute call) and often mentoring discussions that don’t have a pipeline or portfolio outcome. Add to this, portfolio catchups, and you can quickly lose control of your schedule. A day spent in meetings is at least 60-70 mails piled up. I don’t think I have worked under 60 hours in any week since I joined Blume.

This tweet on the VC business by Leo Polovets, a VC with Susa Ventures, was particularly interesting (the second observation I thought was on point):

 

Battling ageism

Amongst the most dramatic differences between VC and traditional industries is the time you spend with 20-somethings.

I can go days without meeting anyone in their 40s. Yes, we do get pitches from older founders, but the vast majority of startup founders are in their late 20s or early 30s. This is especially true of business-to-customer startups.

It has been hugely energising to meet these fearless young founders, out to change the world. You can feed off their excitement, energy, and passion.

Even so, I wonder if we celebrate youth a bit too much. It isn’t the celebration of youth that is worrying as is the creeping subtle discrimination against older founders, especially those in their 40s.

I, in my 40s, may discriminate against someone in my age group.

Faced with a pitch from an older founder, I sometimes had to check myself to not judge it unfavourably. There is a real reason for this, especially if the founder has had a successful corporate career before starting up. The assumption being the person has enough money and taste for creature comforts to not struggle for too long.

It is actually bizarre that I, in my 40s, can end up discriminating against someone in my age group.

True ageism, as seen in the Valley, isn’t here in India yet, but I wouldn’t be surprised when it arrives soon.

Role reversal

I spoke earlier about how VCs sell to LPs in the context of Blume and other homegrown funds. However, it is not just LPs to whom VCs have to sell. We also sell to founders. A hot space with hot founders can see VCs lining up to pitch to them, instead of the other way.

This is especially true of successful founders starting out a second time. There aren’t too many of these, and when you hear of a founder planning to startup again, there can be a VC rush resembling a feeding frenzy.

Recently, I heard that a successful Indian fintech founder was approached by three different VCs on the day the news of his exit from his present company leaked.

Effectively the demand-supply gap in favour of VCs (versus founders), inverts in favour of founders as we reach the top of the founder pyramid. There simply are more VCs chasing high quality founders than the other way around. In this context then, as Reddy mentioned in a podcast, “the trick of the trade is actually not about you saying ‘I know how to pick well.’ It is whether the best entrepreneurs want to pick you.”

Once you and the entrepreneurs pick each other, the relationship quickly changes. Investing is only the beginning. It is all of the working together over the next few years, and supporting and adding value to the founder’s life through mentoring, sparring on strategy, support on hiring and fundraising, that really helps set the startup for growth and greatness. As this tweet puts it well, the VC business is as much “customer service” as finance, and that is just as good a lens to see this business through.

The shifting sands

My entry in to VC came at a time when the industry was going through two interesting trends:

  • easy access to capital and its impact on higher valuations, delayed IPOs
  • entry of later-stage VCs into seed-stage investing such as the Surge programme

The first trend, manifested in easy access to capital, is due to greater LP (and international) interest in the Indian market. This is an outcome of not just the performance of the Indian market—exits such as Flipkart and other upround-creating unicorns certainly—but also its inevitability. After all, there is no other large market that can grow anywhere close to the rates the Chinese economy grew at.

A fund manager for Tiger or Coatue sitting in New York or San Francisco, or even an LP, sees the world in terms of different IRRs (internal rates of return, the metric used to determine attractiveness of an investment). With the recent success stories, the Indian market’s IRR is attractive enough for LPs to participate. This manifests in greater allocation by LPs to Indian funds, which means more money chasing founders and rising valuations.

The attractiveness is also seen in more direct investments by the likes of Steadview or Softbank in Indian companies, bumping up valuations and often delaying imminent IPOs, in an attempt to extract as much of the value before the startup goes public.

A related explanation is the emergence of second-time founders in India over the past couple of years, thanks to exits and the maturation of the Indian startup ecosystem. VC funds find investing in these second-time founders a less “riskier” opportunity given their track record.

Accel recently launched Rebound, a programme targeting second-time founders. Other VC funds, too, have such schemes. The result of such competition has been valuation inflation for second-time founders, justifiably or not.

This is also a good segue into the second interesting trend underway: Traditionally, later-stage investors doing seed investments.

Surge is the strongest outward manifestation of this, but there is also Lightspeed’s Extreme Entrepreneurship Program, and other under-the-radar/opportunistic optionality plays from other funds.

The implications of these trends are waiting to be discovered.

The primary reason for this, in my view, is the availability of second-time founder bets. The other is also the increasing availability of highly pedigreed first-time founders or emergence of strong signaling mechanisms (super angels on cap table, YC selection etc.) as the Indian ecosystem matures.

The implications of these trends, and what it means for the Indian VC market, are waiting to be discovered. For now, it is creating a vibrant, or as some say frothy private market, standing out sharply from the lackluster public (stock) market. In fact, this contrast between private boom, reflected in supersized startup funding announcements, and public gloom, manifesting in dropping auto and consumer goods sales, is particular striking.

The mood in startup land is optimistic, but there is a sense that, if the public market and the larger economy doesn’t pick, we may be in for some mild turbulence soon.

The Indian startup ecosystem is a particularly exciting place to be, and I am grateful for the vantage point I occupy in the investment team at Blume. Through this piece I wanted to give the reader a sense of what it is I see and experience. I hope it has been useful, and if you do wish to reach out and ask me questions, I would be happy to help.

We welcome your comments at ideas.india@qz.com.

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