Even today, VC funding, especially at the seed stage, is steadfastly opaque. The only information in the public domain is the sanitized press release around a funding event – everything apart from this operates in a black box.
This is a tragedy because it gives us no way to grok how investors operate, what their goals and motivations are, how they manage risks and what their broad investing philosophy consists of.
Having a handle on even some aspects of this would not only be tremendously useful for Indian startups seeking to raise funding but would also make the whole funding process transparent and data-driven based on informed opinions rather than blind hope and hearsay.
Thankfully, that is now starting to change…primarily due to one seed-stage investor.
Say hello to Blume Ventures.
Blume Ventures is a seed-stage fund that is unique in many ways. Firstly, they are the first investor of its kind in India who opened their kimono to show the rest of us what goes into in the mind of an investor. They do this by publishing a detailed investment report every quarter that is available to the public at large.
Not only is Blume Ventures far more transparent than its peers, it is also far more prolific – while other seed funds have made five to ten investments each in the last three years, Blume alone has made 75 investments!
Happily, these two facets combined give us a fairly robust data vector to analyse Blume’s philosophy and performance and extend that to serve as a proxy for the entire seed stage investment activity in India.
Let’s start off with a quick overview of Blume Ventures.
Started in 2011 by two partners who were previously angel investors, Blume operates a Rs. 100 crore fund that was backed entirely by Indian Limited Partners (a rarity in itself) – most of these LPs were high net-worth individuals (numbering around 60 in total).
The raison d’être of Blume is to fill the “funding gap for institutional seed and pre-Series A investments in India”. The core belief is that there is a structural deficiency in the Indian funding scene with an unfilled gap between the angel stage and the traditional institutional investor stage. According to this thesis, there is enough angel investment in India and while this funding is enough to take a startup off the ground, it is rarely enough to enable the company to get to a point where it is ready for a Series A investment. Blume believes that they can provide an intermediate round of capital that will help startups extend their runway to the point where they can raise a Series A.
Therefore Blume’s investment strategy is to “be the first institutional investor in a startup and put in in Rs. 50 lakhs to Rs. 1.5 crores for a 7.5% to 15% stake” and thereafter, nurture the startup and help it grow to the point where it can raise a Series A investment at a Rs. 30-40 crores pre-money valuation.
The goal of the fund is to provide a 3X return to the LPs (Rs. 300 crores). Let’s assume a management fee of 15% over the life of the fund, (NB: The management fee is the amount charged for administering the fund, typically these are salaries for the VCs and the support staff and other operational expenses). This means that Rs. 85 crores is available for investing and to return Rs. 300 crores, they need to achieve a minimum return of 3.5X (anything beyond this is shared between the VC and the LPs).
Blume has a stated policy of capping the post-money valuation of a company that they back at Rs. 10 crores – https://www.youtube.com/embed/_bVJvJIf5ac – this seems to be a cardinal principle that they live by.
Seeding the Stage
From this fund, Blume has invested in a total of 75 startups so far.
Out of these 75 startups, 42 are “Alpha” investments (over Rs. 1 crore participation and often the lead investor) while the rest are Beta (investments below Rs. 1 crores). In total, Blume has lead investments in around 32 startups (rest are syndicates).
Apart from being a transparent investor, Blume was probably the first investor to decide on investments in a matter of days rather than weeks or months. They respond quickly to pitches with a definitive yes or no decision – no “come back when you have achieved X” type of stratagem that a lot of other VCs are in a habit of doing rather than simply saying no. Thanks to this, there is now a perceptible difference in the response times of VCs and decisions are generally made much faster than ever before.
Blume was a pioneer in that they invested in sectors that were traditionally avoided by institutional investors – for instance, hardware and clean tech. Backing such non-obvious candidates is a courageous move that will hopefully impact entire sectors in the years to come.
Growing the Sapling
Blume’s success criteria is straightforward – if a company can raise a Series A investment, it is a successful investment else it is not.
In the three years the fund has operated, nine companies out of seventy five have crossed the Rubicon and have raised Series A funding – a 12% hit rate.
Given all of this, there are three sets of takeaways that we can glean from the data:
- What can startups learn about funding in India from this?
- Does the Blume Ventures investment philosophy and strategy work?
- What can Blume (or any other micro-VC in India) do differently to improve outcomes?
The rest of this post will cover point 1 above – the remaining points will be covered in follow-up posts.
Reading the Flowers – Takeaways for Indian startups
As a preface, I am pulling together the details of the companies within the Blume portfolio that have actually managed to get to Series A. I am going to limit this analysis to the six companies in the Alpha category where Blume has lead the round or made a substantial investment.
Details of Blume companies that have raised Series A:
Let’s use these numbers to try to answer some fundamental questions that most startups have around seed funding.
Who to take money from – Seed fund or VC?
One of the big dilemmas for startups attempting to raise seed funding is whether one should target micro-VCs like Blume or larger institutional VCs.
If you are in the fortunate position of having a choice, raising money from a large VC rather than a seed-fund is the way to go.
Here are the reasons:
The most interesting takeaway from this table is that of these six companies, only one (Mettl) didn’t have an institutional VC participating at the same time as Blume. This implies that having an institutional VC in your seed round significantly increases your chances of raising a Series A. On the other side of things, there are hardly any other Blume companies that have had institutional VCs as co-investors but haven’t raised Series A because they have been unable to (I know of a few who are in the position to do so but have chosen not to do it just yet).
The seed amounts also seem to indicate that the average valuation for these rounds was at the top end of Blume’s canvas – implying that in most cases, having a VC in your seed round leads to higher valuations relative to raising only from angel groups or seed funds.
One might ask why startups who have managed to get mandates from large VCs to include Blume in their seed rounds while they could have in all probability chosen to raise the money completely from these VCs. The most plausible explanation is that they used Blume Ventures as a stalking horse – given the speed with which Blume moves, the startup can leverage this to force other investors to decide quickly and for that alone, having Blume in your seed round might be beneficial!
This might also be the time to point out one misconception that a lot of folks seem to have about the risk of raising a seed round from a VC – that it sends out a negative signal if the VC invests in your seed but not in the Series A. While this might be true in the Valley, in India, the dynamics is very different. Unlike in SV, in India, institutional investors rarely put in money to lock in optionality in future rounds – they actually do so because they want to back the company through an entire lifecycle from inception to exit. The number of early stage VCs in India is in any case very few and not comparable to the Valley, so the value of securing optionality is marginal at best.
What is the right amount to raise?
Startups often wonder what is the right amount of money to raise in a seed round. Often companies make the cardinal sin of raising a small amount in the range of Rs. 25 to 50 lakhs, believing that this is enough to get them off the ground. The problem with this approach is that every round is essentially a strike against you – each successive investor will progressively ask tougher questions of you in terms of what you managed to do with the funds that you raised in the previous round. What occupies top mindspace is not the amount that you raised previously but the number of rounds that you have completed prior.
That is why it is very important to ensure that you raise enough money to give you a meaningful runway to test out your product-market-fit experiments and get to a point where a Series A is possible.
Taking a smaller amount also often leads to intermediate rounds called “bridge rounds” that are pernicious in terms of dilution and terms because they usually occur when your startup is in a distressed state and badly needs the money. So despite its name, a “bridge” round is paradoxically a bridge to nowhere!
So what is the right number to target? The table above shows that that the average seed round for the companies that have managed to raise Series A is more than $500,000 – so this might be a good number for you to target when you set out deciding how much to raise for your seed round. Also, keep in mind that you will end up diluting approximately the same amount of equity (in the range of 15 to 25%) irrespective of how much you raise, so better to shoot for more rather than less.
What is the right runway to provision for?
When raising a seed round, one common question that comes up is the length of time that you need to provision the funds raised to last. The ideal way to model this is to work out how much money and time it is going to cost you to try three or four meaningful experiments around product-market-fit and then work backwards to arrive at a figure. Of course, this is easier said than done.
From the table above, we can see that the average time between the seed round and the Series A is approximately 20 months. This sounds like a good number to provision for as your runway – you also need to keep in mind that it often takes a long time between finalizing a deal and having the money in the bank, so it might be safe to assume that this will take three-four months and add that to your estimate. This leaves one with a figure of 24 months.
Understand the math and align your goals with those of your investor
Finally, compare the goals of an investor like Blume with that of an institutional investor – Blume would be happy to see you get to a point where you can raise a Series A whereas a traditional VC would want you to shoot for the money and get a big-bang exit.
While these goals are not necessarily mutually exclusive, prioritizing one over the other mandates that you adopt completely different mindsets that govern how you operate your company and your ambitions for it.
If you would like to take a measured approach, Blume might not be a bad choice but if you would like to shoot for the moon right at the get-go, you would definitely be better off with other institutional investors.
This post will continue in Part 2 (coming soon!)…
[About the author : Sumanth Raghavendra is the founder of Deck, a Bangalore-based startup. His team is currently building an app that helps startups improve their funding pitches. To join the beta, ask for an invite at firstname.lastname@example.org ]