The macro Convictions and Blume Fund II portfolio construction
What does the application of Conviction Criteria mean for the way Blume evaluates pipeline? I used a very general “efficiency” example to illustrate the point (in Part 1 of this series), but given the diversity of sub-sectors that are presented to us out there by a dizzying range of impressive founding teams, we need to get our heads organized well in advance of even looking at pipeline.
The macro shape of the portfolio for Fund II will likely approximate what we’ve been telling our potential Fund II investors (while pitching over the last year). Here goes:
(a) 15-20%: Alternative + new tech / deep tech
We wish we had the ability to invest into more “rocket science” (clearly, its one of the more riveting spaces of this decade – sharing some thoughts on that topic later this month). In the absence of rocket science startups at our doorstep, I’m happy to find proxies: cutting-edge technologies and solutions built out of India, but relevant globally. This is even more of a default global play usually, compared to the software plays below in bucket (b). Within this bucket, the search for differentiated tech + great founding team leadership & business savvy will continue. It’s never easy, it’s challenging to find and groom such companies, but when they work, they can be game changing for themselves and the fund.
Fund I emerging winners and early signs of great innovation:
Grey Orange Robotics, Carbon Clean Solutions, Threadsol, Shantani Proteomics, Covacsis, Systemantics (+Promptec, acquired by Havells)
(b) 15-20%: Enterprise software / SaaS / Data Analytics
By definition, these are more likely to be regional (pan-Asian or US-centric usually) or global in Blume’s evaluation book. In Fund I, I think our portfolio companies spent too much time chasing Indian enterprises as customers – less said than better re: the experience. From a startup’s perspective, these large Indian enterprises are quite hopeless as customers and at best, a drain on resources and motivational levels. In certain areas, we may still have an overriding conviction and bet on startups that are catering to Indian enterprises in areas where inefficiencies are staggeringly large, but predominantly, we are likely to favor firms and founders who have products and tech and a supporting vision that can compete with the best globally and can execute a cross-border play.
Fund I emerging winners and beginnings of scale:
Belong, Webengage, Dataweave, Tookitaki, Shephertz, Mettl, E2E Networks, Exotel, Hotelogix, Nivaata (+Zipdial, acquired by Twitter)
(c) 60-65% of Portfolio: Domestic Consumption + enabling consumers AND small businesses
Consumers will continue to milk the value out of their pocket supercomputers (i.e. smartphones) and we think the small business establishment in India will continue to thrive and finally has a level playing field with bigger businesses, courtesy the smartphone and using products built for a mobile-first economy. We had tons of such bets in Fund I but given the small size of our cheques back then, our consumer brand ideas struggled while the marketplaces and tech enablers are performing much better. We may therefore stick to betting on the shovel makers, rather than the gold diggers, to use the gold rush analogy.
Fund I emerging winners and exciting young companies:
Nowfloats, Purplle, IDfy, Zopper, Instamojo, Glamrs, Madrat Games, Railyatri, Reglobe, Pesca, Audiocompass, Greytip, Snapbizz, Tripvillas (+Taxiforsure, acquired by Ola)
Now that we are cruising into Fund II (over a dozen investments done, and about half of them announced as of Jan 15, 2016), we are just about finding our sanity with the large deal flow (Modi just accelerated that even further, over the weekend!) – the frameworks are falling in place. The euphoria of 2015 and the very early stage boom expected over the next decade will continue to challenge us and other VCs on how and what to invest into when getting in super early, as we do. It’s a deluge of capital and young uninformed startups at the early stage, followed by the stunted growth in the number of investors at Series A / B / C players result in natural choke points that emerge. Given how high the bar has become to get past each of those stages, it unfortunately ploughs back into how a smaller fund like Blume is forced to think about and construct its portfolio. (sketch of our understanding of the market for venture capital – note how the top of the funnel has widened over the last 5-7 years whereas there’s been very little change in Series A capital)
So, all the Conviction in the world has to yet to be tempered with the realities of the overall marketplace – even if the product/market fit is achieved, a lot of companies fail and will continue to do so. Not a fail in the traditional sense; just in venture parlance – where crazy growth and large exits seem to be the only norm. Are there enough acquirers who will pay the right value for your business? Are there enough VCs who believe that you will be a $200 mill business or larger in value terms? As a founder, one is expected to have these answers miraculously ready at even Series A pitches and somehow, we are supposed to know those answers at Blume as early as a founder does at seed stage. And thus begins the arduous challenge of selecting a portfolio company.
This is the second of the Series that speaks of the Blume Investment Thought process and philosophy. The first part is here. Part 3 of this series will talk about how we are trying to deal with the crazy volume of pipeline and Parts 4A and 4B will offer tips for founders on how to get more noticed by high quality investors.