“What the Flucht is that?” asks my colleague!
“It’s German for ‘Escape Velocity’” I replied, “and Flucht is ‘Flight’” – more inspiration, or perhaps goal setting, for this year’s #BlumeDay.
Why German? There is a subliminal connection. The word ‘Blume’ is not just a phonetic play on the English word Bloom, but won the naming match for our fund in 2010, primarily, since it was the German word for ‘flower’. And with this new word discovery, I quite loved the velocity of Fluchtgeschwindigkeit!
It’s our 6th edition of Blume Day. Wow! We’ve been feeding off our own optimism for a long time. Time for a shift of gears now. Ditto for the rest of the VC ecosystem. If our founders and us (and I speak for all of India VC in some sense) don’t get our act together, we’re going to lose more precious time building the promise that is the Indian startup story. It’s inching along but inching isn’t quite the mandated acceleration towards the requisite Exit Velocity.
It’s the Year of the Rooster in China. It’s the Year of the Exit in India. Correction: It’s the beginning of the Exit Era in India. 6 years for Blume Fund I, 10 for most other Fund I’s in other Fund portfolios, even 12 years in some cases. Lets collectively figure out what engines need to revved to achieve EXIT VELOCITY. In this same timeframe (post 2005), Elon Musk has built rocketships that Escape Earth and land back too, at will. Long way to catch up. We’re just figuring out Escape Velocity from India-only revenues in most cases yet. Just saying.
No – I’m not talking paper markups, I’m not talking about the one Hail Mary (NFL jargon) exit in some portfolios. I’m talking about building a systemic and endemic path to EXIT. That doesn’t mean every company and/or its founders have to sell – it just means the company has to become good enough that someone wants to buy. There is a difference in wanting to Fund and wanting to Buy.
Exit Velocity (for the purposes of this post) is interchangeable with the concept of Escape Velocity. Without delving into the depths of physics, I tried to adapt the conventional formula for my own ability to rationalize why this isn’t working yet in India (see Inset – it’s just me trippin’, wired in with some Coke Studio music).
What the Flucht is wrong with the Indian startup ecosystem? How does one make sense of the vast amounts of $ deployed and nothing back in terms of massive profits in these companies or acquisition-led $ returns or listing-related capital gains back to the investors. What’s gone wrong?
We have not invested enough into understanding what it takes to hit Exit Velocity in India. I’ve been trying to sit down and understand this with Avendus and other bankers, strategics like Amazon and Ad giants, from the online and offline worlds, Small Cap managers in the Indian public markets and it’s only been 6 weeks into 2017. Lot more of this to be done all year, hell, actually all of the coming decade. Every VC in India needs to wake up and set up a dedicated force (even if of 1 person!) to ponder, scope, build new “accelerators to Exit Velocity” and obsess about this full-time. Instead, we keep building more wannabe YC-clone accelerators, seed funds, angel groups and shoving more and more down the funnel that’s clogged the drain to Series A and how!
I can write a multi-part series on the thoughts/angst in my head. However, let me just summarize as thus.
We are, and should be, a country proud of building many many $100-$250 million exits – both in the local and cross-border markets. In INDIA CONSUMER, this means profitable businesses and/or great gross margins in sub-sectors that are growing at 2-3x of GDP growth rates. In India-built B2B, this means highly profitable $20-50 mill revenue businesses. If the ingredients hold after these milestones, just keep building – trust me, no one is complaining post that point. Just get there (Yes – am hoping founders are listening – play for the goals that matter – not just some mumbo jumbo unicorn math)
Prospective and existing LP’s in India VC also collectively need to wake up and smell the hatti kaapi at B’lore airport once in a while rather than the Java Chip Frappucino at Starbucks (which I admit, is my favorite Sbux, as is the mini small print Rs 20 kaapi at the former – the budget kaapi is the real India, jfyi). I’ve been unashamedly telling all the LPs that I meet that we need to design Funds for India where we are proud of seeing 8 of 10 great portfolio co exits being in the $100-$250 mill range and the other 2 escaping to another Orbit and then hitting a $500 mill to $2 bill exit velocity. That latter goal alone screws with too many heads of too many Series A VCs in India – who apply the entry framework of an Unicorn exit too often to all 10 of 10 – hmmm, that’s not right at Series A stage.
I’m not letting founders off the hook here. Most don’t understand the construct of the VC industry as it exists in India and expect capital to be available at will and at any size of round and at terms that are dreamy. I wish it were that simple. The collective responsibility of the Exit lies with all stakeholders. Haven’t delivered any? Don’t have friends who have delivered any? Then, don’t try to teach rules of engagement to capital providers. Run your story without Venture Capital or play by the rules of the capital’s goals. (Can write more separately about what founders’ roles are in propagating this cycle – Write to me if you want me to elaborate via a new post re: my expectations from founders)
Back to VC’s – my suggested mantra for India VC is:
Raise small funds, get these “relatively smaller” exits, keep a deep reserve for the BIG hits and park this reserve outside the fund, deploy quick, put harvesters (Read EXIT VELOCITY generators and EXIT teams) in place, go back to planting seeds and saplings and flowering plants before another harvest and rinse/repeat with 2-3 year primary sowing cycles of deployment with smaller corpuses.
The local EXIT Velocity formula should drive Fund sizes – not the other way around – by salivating for Valley Exit Velocity formulas (see Inset again on how to benchmark).
The VC Fund Structures should budget and accommodate add-on capital at will (maybe through a perpetual capital entity or listed entity)– not force fat fund sizes upon managers at inception of the Fund, accompanied with the pressure of a “big 3-4x multiple” Gun-to-the-head on that fat fund.
VCs need to revisit their own operating models in India. Least innovation and the most cut/paste in India has happened in the mothership of capital guzzlers of the startup industry – the Venture Capital Funds!
Cut/paste works if the Exit Velocity frameworks converge – they are nowhere near convergence relative to China and the US (this is probably true of overfunded cut/paste startups too)
2017 will mark the beginning of the Exit era; where the needle gets pushed by both VC’s and Founders, with whatever means available, towards EXIT Velocity on the speedometer. May the best portfolios prosper! Jai Hind!
Author’s Note: I don’t claim any scientific veracity of my adaptation of the formula – its something that I came up with to humor myself and wasn’t why I started writing the main piece. The formula doesn’t matter that much actually. It’s just a ploy to illustrate the principle. That said, I will see if the formula holds the test of time and valuation math.