VC Insights | Issue# 3 [August 27, 2024]
A recent coverage by YourStory discusses exit strategies of the leading early-stage VC, Blume Ventures, which focuses on identifying and investing in innovative, tech-led startups. The coverage follows a discussion with the Co-founder and Managing Partner of the VC firm, Karthik Reddy, and a newsletter for the April-June quarter of 2024, which was sent to Blume’s Limited Partners (LPs) or investors by its General Partners (GP). The newsletter provides with key strategic insights about Blume’s roadmap of exits over the next three-odd years. The exit strategy primarily comprises of the sale of secondary shares, Mergers and Acquisitions (M&As), and public listings. It is worth noting that the early-stage VC funds typically have a 12-year lifecycle and Blume’s Fund I, launched in 2011, is past its exit period. Let us dive deeper.
Sale of Secondary Shares
Secondary share sales is a vital component of Blume ventures’ exit strategy. The decision to participate in such sales depends heavily on their impact on the Distributed to Paid-In Capital (DPI), which measures the return of capital to investors. Blume generally refrains from selling secondary shares unless the transaction generates at least 10% of the fund corpus or significantly boosts the DPI.
Secondary sales typically occur when there is demand for a startup’s shares during various growth stages. Early investors, such as Angel investors and Micro VCs often opt for early secondary exits. Early investors often exit within the first 4-5 years at valuations below $75 Mn, particularly during Series A or Series B funding rounds. Micro VCs generally prefer the $75 Mn to $500 Mn range for secondary share sales.
Larger institutional investors of the likes of Blume, however, prefer partial secondary exits when a company reaches valuations of $500 Mn to $2 Bn. There is generally excess demand in primary funding rounds for such breakout startups. However, for Blume, secondary sales in companies valued between $75 Mn to $500 Mn have been particularly beneficial, as such exits often yield significant returns. It is important to note here that Blume considers its Fund I at $20 Mn as a Micro VC fund that generated high returns, even though the secondary share sales happended at valuations under $100 Mn. For companies valued above $2 Bn, such as Lenskart, returns can be extremely appealing. Such startups are generally cash flow positive, nearing profitability, and are often gearing up for an IPO. Secondary sales at such levels usually take place between the 7th and 12th year, offering early-stage funds nearing the end of their investment cycle secure significant returns.
M&As
M&As are another critical exit path for Blume Ventures. They categorize these exits into three distinct groups based on valuation: sub-$10-20 Mn, $10-50 Mn, and $50-500 Mn.
The first category, sub-$10-20 Mn, often involves acqui-hires or modest buyouts within 5 years of the first VC investment, typically yielding only 1-2X returns for early investors. Blume has seen witnessed many such exits, primarily within the first five years after the initial institutional investment.
The second category, $10-50 Mn M&As, usually occurs between the third and eighth year of investment and can provide returns ranging from 1-10X. Blume’s portfolio companies, such as Runnr (sold to Zomato), ZipDial (sold to Twitter, now X), and Mettl (sold to Mercer Consulting) come under this category.
The most lucrative M&A exits fall in the $50-500 Mn range, where financial or strategic investors often buy out a majority stake in startups that are between 3 to 8 years in their lifecycle. Such deals can result in 3-20X returns for seed (and in some cases even Series A) investors, with TaxiForSure’s acquisition by Ola for $200 Mn being a prime example.
Public Listings
Public listings or IPOs are viewed as the most favorable exit strategy by Blume Ventures, offering the potential for substantial cash returns. Blume notes that the barrier to IPOs in India is lower than often perceived, citing examples of Tracxn and Unicommerce, which went public with valuations of around $100-120 Mn. These public listings provided significant returns, even for companies with relatively modest revenues, affirming that the public market shows a strong demand for companies that are either profitable or close to achieving profitability. The opportunity for compounded growth in the public markets is seen as a key advantage of the IPO exit route.
Blume highlights that companies can list on major stock exchanges, such as the BSE or NSE with market caps starting from $100 Mn to $300 Mn, allowing founders and early investors to realize considerable gains. Such companies attract investments from PE investors, as well as pre-IPO and secondary funds, significantly increasing the liquidity options, as compared to the private market.
Blume emphasizes a clear path to profitability and strong growth for companies aiming to go public. The GPs add that even smaller companies can list on the SME exchange, citing the examples of E2E Networks and Infollion from Blume’s Fund I portfolio. Typically, companies with market caps over $300 Mn go public 8 to 10 years after founding, with $1 Bn valuations reserved for the market leaders. The Indian market does tend to reward companies that achieve profitability post-listing, as seen with Zomato. In this regard, Blume expects more companies to pursue the IPO route, especially those from the first startup cycle of 2007-15.
Blume’s Roadmap
Blume’s Co-founder and Managing Partner (MP), Karthik Reddy, confirmed that the VC firm returned 60% of its capital of Fund I (launched in 2011) by 2018. He also added that the first fund yielded returns in the ‘high-teens’, which is somewhat below the typical expectation of over 25% for a seed-stage fund. Karthik emphasized the importance of aggressive exit targets in maximizing returns. He aims to exit at least 10-15 companies over the next three years, focusing on a mix of M&As, secondary share sales, and public listings to achieve the goal. This strategic approach to exits, combined with a keen sense of market timing and patience, forms the core of Blume Ventures’ philosophy in navigating India’s evolving VC landscape.
Thoughts
The strategic insights shared by Blume are not just relevant for the early-stage VC firm, but for the entire startup investment landscape as well. It is an affirmation of the strategic exit routes of the larger, institutional VCs – sale of secondary shares, M&As, and IPOs. The insights would be mighty helpful for startups looking to raise funds.
As curious startup and VC enthusiasts, we are now certain that we will see more of startup IPOs in the coming future. This will also help streamline startup operations to stay laser-focussed on profitability and sustainable growth. Perhaps, startups would look to replicate the kind of profitability and growth the likes of Zomato, Nykaa, and Mamaearth have achieved after listing on the bourses. This will only bolster the Indian economy, as we move towards the goal of becoming a developed nation by 2047. We look forward to more such strategic insights from the leading VC funds in India, like Blume.
If you are interested to learn more, feel free to check out this blog post by YourStory and this article by The CapTable that covers the insights shared by Karthik, Blume’s co-founder and MP.
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Acronyms used in the blog that have not been defined earlier: (a) Venture Capital (VC), (b) Million (Mn), (c) Billion (Bn), (d) Initial Public Offering (IPO), (e) Bombay Stock Exchange, (f) National Stock Exchange (NSE), (g) Bombay Stock Exchange (BSE), and (h) Small and Medium Enterprises (SMEs).