Blume Ventures’ Investment Strategy for Fund II

[The following is a cross-post from Karthik’s interview to VC Circle about Blume’s Fund II investment strategy. The original post can be seen here]

Seed investor Blume Ventures has decided to do away with syndicated investments and lead or co-lead most of the early stage investments with larger cheques even as the Mumbai based firm prepares to accelerate deployment from its $60 million (about Rs 400 crore) second fund which is expected to be fully raised by the end of this year. The VC firm expects to make eight investments by December while it had made a couple of fresh investments so far this year.

Karthik B Reddy, managing partner, Blume Ventures, told VCCircle that going forward, the company would invest in a dozen startups a year from the new fund for the next three years.

“We will write larger cheques—close to half a million (dollar),” Reddy said. “In the first fund we used to do $200,000 (Rs 1 .3 crore) seed investment in each portfolio company. We will write $400,000-$500,000 (Rs 2.6 crore-Rs 3.3 crore) now on,” he said. “Valuations have gone up, teams are getting better and we want to put more money.

Began with Rs 1 00 crore, it raised mostly from domestic individual investors in 201 1 ; it raised Rs 40 crore more later for the first fund.

The firm has so far invested in 70 companies. “We have Rs 20 crore left in the first fund of Rs 1 40 crore. We reserve that for the follow-on investment in our existing portfolio companies,” Reddy said. “We distress sold or written down 20 of those. We have Series A in 20. We have fairly large or positive exits in four or five,” he said.

Blume had good exits in the last one year as four of its investee companies—TaxiForSure, Promptec, ZipDial and 1 Click.io—got acquired by Ola, Havells, Twitter and FreshDesk, respectively. “Right now we are in the fifth year of our first fund. The sum total is well above two times right now. But this are mostly paper as of now,” Reddy said about the performance of the first fund. Reddy said by writing larger cheques, the firm is “trying to lead or co-lead most of the rounds” rather than syndicated investments. “The reason we did such a large number (in terms of portfolio companies) was we used to play option cheques of $50,000-$1 00,000. That strategy is gone. We are not going to do that anymore,” he said. “Little more than half of our portfolio in the first fund is syndicate investments. Now only a few companies will be of that nature.”

Blume had initiated fundraise for a $50 million new fund in early 201 4 and decided to increase the size later  It was expecting to close the fundraising in the first quarter of 201 5 but it got stretched.

About the ongoing fundraise, Reddy said, “The first fund was almost entirely Indian money. This is the first time we are raising foreign institutional money which typically takes a little longer time.” “Institutions should get to know about you and trust you. We started raising late last year. Hopefully we should be able to close most of this by the end of this year. If we get $50-60 million, it should be fine. That is what we are looking at,” he said, adding, “We have got commitments for about half of it. It hasn’t formally closed yet.

Reddy said about two-thirds of the fund would come from overseas. “We will have four or five big institutional investors who would put in between $5 million and $1 0 million. As for domestic money, we will have a lot of individuals as we had in the first fund,” he said.

About the response from limited partners overseas to investing in India, he said, “There were existing LPs; no new ones have come in five years. Those guys continued to invest in the already established funds. New fund managers would not be able to get money from old guys; so new guys have to be looked at. It takes a little time.” About the investment strategy for the new fund, he said, “We are huge believers in domestic consumption but (it should be) mobile first. Consumer, small business and mobile first—that is the domestic story. But we are not afraid to invest in other areas such as SaaS, cross-border, deep technology, energy efficiency, robotics, medical devices, etc. About 40-45 per cent will be in such areas.”

It has already made a couple of investments from the new fund that include $400,000 (Rs 2.6 crore) in job test preparation startup MockBank early this week. The firm had stopped making fresh additions to the portfolio from its first fund early this year and has been focusing on taking a dozen of its companies to the Series A stage. “We have not been active for about a year. We have a lot of backlog; we came across a lot of interesting companies. There would be six-eight companies by the end of this year,” he said.

“We have been building a pipeline. If we look at next three years of the fund, we will easily do 1 2-1 3 in a year,” Reddy said.

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