Finding Exit Velocity: Flashback! [Part I]

For the last 3 years, at every mid-Dec Blume offsite, we have tried to understand the State of the Blume portfolio. And as a forward looking corollary, what should we expect for the portfolio in the year ahead given the larger VC trends in the country. The investing, the scaling, the pipeline selection and the portfolio management are all consistent discussion points, but what ends up as a theme on our Blume T-shirt on Blume Day in February is a manifestation of what’s top of our mind as a team.

In 2015, this was “Go Big or Go Home” – the year ended with 3 great exits (serendipitously, within a quarter – TFS, Zipdial, Promptec), 4 acquihires which returned 1-2x of capital, many write downs + “fractional price” acquihires. It also marked the first breakouts in the portfolio that were either companies reaching profitability / sustainability early or finding larger Series B and C rounds. It was a year well executed – the Blume team and the portfolio got the message and we rode some of the expected macro-momentum for that year.

In 2016, the focus was in figuring out Fund II’s portfolio construction. The legendary punchline from Hans Solo: “Never Tell Me the Odds” in Star Wars V (“The Empire Strikes Back”) guided our courage to pick outlier founders once again as we constructed the first 50-60% of the Fund II portfolio over late 2015 and all through 2016. It was also weaving the then new Star Wars “The Force Awakens” to show the power of 5 years of work – that Fund II portfolio would experience a much superior Blume platform and community offering.

 

In 2017, while witnessing some incredibly strong businesses coming out of Fund I, we yet realized that there are NO Series A/B/C formulas or templates to building a credibly large and profitable business. One has to fight the incredible odds of building in India with very little capital and all the constraints that crowd startups looking to head from Zero to grand Exits. “Exit Velocity” is an aspiration and a guide for our buildout of Fund I portfolio for the next 3-4 years (we’re 6 years in already! Feels like just the other day when we went in with our hopeful pitch and begging bowls to raise a 100cr Fund I – a miraculous 100% Indian LP fund). We knew it then but were guilty of wishing away this issue of Exit Velocity. Indian LPs were always incredulous about our pitch since they knew that if we are funding at seed over years 1 to 3, we can’t get to Exit Velocity in time for the 8-10 year exit period for the Fund. The historical evidence was on their side. It’s still our onus to prove them wrong. They are right in most part but if I have a few examples in the next couple of years that can help me return my principal at least + lots of marked up gains to harvest (that’s the target we’re playing for at Blume), we can make a huge point.

I think we can win the argument that we have started a revolutionary startup cycle of birth to exits for investors and founders in India, if we reach these milestones in more and more funds between now and 2020.

We convinced ourselves that there will be small M&A’s, large M&A’s, the emergence of more aggressive IPO buyers into growing but loss-making companies and we hoped that the relaxing of rules for smaller IPO’s on a small cap exchange will trigger another listing option. All these trends are, at best, half-hearted today and, at worst, non-existent.

So, the discovery has begun in earnest – to learn the paths to Exit Velocity, I think we will have to park most of the seemingly glorious stories of the last 7-8 years and flashback all the way to pre-2005.

Revenge of the Profit-Seekers

What’s common between these companies:

 

All public or on the verge of getting there.

All at 100’s of crores of net revenue.

Most fascinating fact – even if a couple of these firms were born/reinvented post 2001, the founders all turned entrepreneurs pre-2001. This was the era of the pre-2001 founder – who didn’t know he would be ever allowed to build an unprofitable company beyond a few years. No one told them it was possible – and the VCs hadn’t come in – and that was a good thing!

There are many others – this is not an exhaustive list – there are companies like Directi, and Photon and Zoho in Chennai which have never even raised a single $ of VC money though their journeys.

The scarcity back then (coupled with no funny money to back their competitors much more than them) helped them build robust profitable models even if they took a couple of extra years in the process. Eventually, this healthy business model helped them go public and continue to grow at a healthy 20-30% growth clip for years after going public as well. It’s wonderful. How and when this became so unsexy is beyond me.

And then over the last week, as I bring up this topic, everyone I speak to has a few names to add to this list. Citius, NetroPlus, Rategain, Fractal, lots of B2B plays that exited etc. Of course, we’ve built  incredible stories post 2005 similar to the ones above. They sit across many VC portfolios. However, the VCs’, the media and the new-age post 2013 founders have not at all played up these companies and their arduous journeys of profitability and value creation enough. They should be given the pedestal to speak from. In between, there was a joke that it was too unsexy to be profitable.

We’ve had companies like E2E and Printo in the Blume portfolio be profitable from even before we invested. They’ve grown 3-10x and stayed profitable every year in between and with ZERO outside capital and yet, there is no respect for what’s achieved – just the scale issue of whether they can get to $100’s of millions of valuation has become a holy deterrent. Now, in the last 12-18 months, we’re adding more and more to that list – Exotel, Mettl, Threadsol, Grey Orange, IDfy, Webengage, Nowfloats – some are investing in growth with their new rounds and some are boostrapping away to sustainability from their last round. I think every one of these can easily grow 5-10x from where they are today with very little growth capital over 3-4 years.

(every company in this above paragraph is already at 20cr-50cr actual annual revenues OR ARRs with the exception of GOR which is a breakout)

EVEN IF the 15-year old stories highlighted above are NOT fair comparisons to the slightly more “VC-led capital-dumped” startup frenzy of the last 3-5 years, there are some great lessons from those good ol’ founders and their startups. Talking to Hitesh @Naukri/Infoedge and Ashok@Teamlease at Blume Day (Feb 10, 2017), we picked up some valuable lessons which compound the learnings of the first 6 weeks of inputs we’ve had in 2017 – from bankers, small cap fund managers, strategics etc. All that and more coming soon in part II.

Note: The videos of the fireside panel with the both of them and the 1-on-1’s with Hitesh and Ashok will be published shortly and I won’t be able to do justice to all their wisdom (you’ll have to wait for the full recording for that) but will share my takeaways in Part II.

 

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