So how did the fund up with nearly 70 companies instead?
For one thing, it was the result of the vintage in which the fund played in. The fund was founded in 2010 but was most active in the 2012 to 2014 period—this period was coincidentally the time when VC funding captured the imagination of the Indian startup ecosystem.
There was a flood of high-quality startups looking for funding, and Blume was one of the go-to funds for them, both because of the fund’s reputation as a founder-friendly organization and because it was one of the few funds who would make seed-level investments. Most of the traditional Indian VCs at that time limited themselves to making much larger Series A bets, which were more selective by nature. Blume led or co-led more than 30 investments. What about the rest?
Until this vintage, most institutional bets were typically made by one or at most by two VCs but this period saw the emergence of institutional investments that were more like rounds made by angel funds—syndicates. These syndicated rounds involved a much larger number of investors, typically three to five, drawn from a motley mix of institutional funds like Blume, individual angel investors, and angel funds.
Blume ended up making as many as 40 syndicate bets. In retrospect, Reddy admits that this was a bit of an overreach not only because of the bloated portfolio size but also because in many of these cases, Blume ended up as the de facto artificial lead, since it was often the only institutional investor and/or the largest cheque, other investors and the founders themselves expected Blume to do all the heavy lifting.
Be that as it may, Reddy says that even if he were given a chance to rewind the clock, he wouldn’t change anything. He says that the learnings from Fund 1 have given him valuable insights that he is applying in Fund 2. These include limiting the portfolio size to 35-45 companies with larger cheque sizes and limiting exposure to syndicate deals with an upper limit of 10%.
The other big lesson that Reddy says the Fund has learned is to provide a higher reserve ratio for follow-on rounds including specifically provisioning for a bridge round in the portfolio companies. This is driven by two learnings—firstly, it takes much longer for startups in India to gain traction, which means that longer runways are needed even if the companies are frugal; secondly, Blume has realized that unless it owns double-digit stakes in its winning companies, the targeted return of 3X will be difficult to achieve.
For instance, even though Blume’s portfolio company, TaxiForSure, saw an exit of $200 million, it was a good but not great result for Blume as it owned only 2% of the company. TaxiForSure could have been the startup that returned the entire fund to Blume but wasn’t.
How was the network helpful?
Reddy has no regrets though. He feels that having a large portfolio allowed Blume to create a great network and as companies within this community grow, it helps Blume by providing a better deal flow as founders refer their friends and there are plenty of cross-learnings and partnership opportunities that serendipitously arise. In Fund 2, Blume has envisaged the creation of an additional unit called Constellation Blu that helps portfolio companies with hiring, finance, and governance.
While the emergence of Blume and its peer micro-VC firms is definitely a net positive for the Indian ecosystem as a whole, the proof the pudding ultimately boils down to hard numbers.
Will Blume be able to give a 3X+ return to its LPs?
Well, the jury is still out on that and a clearer picture will emerge in the next couple of years. For now though, Reddy is cautiously optimistic. More than 24 of its portfolio firms have raised Series A funding, and over seven have reached Series B and above.
The fund has also seen seven positive exits so far, returning 20% of the capital to LPs already. As of early 2017, Blume’s MOIC (Multiple On Invested Capital) was nearly 2.5X and the fund is targeting a 5X return in terms of funds invested and a 4X return on the full fund.
The big hopes are Zoppr and GreyOrange Robotics, which are both up more than 30 times the original investment and could, therefore, emerge as the one startup that can return Blume’s entire fund.