Reddy’s take away from the current situation is simple. It tallies with the venture capital fund manager I’d spoken to for context. “In India, funds need to have longer lives.” The corollary to this, he explains, is that funds shouldn’t be deploying a lot of the capital in primary cheques in the first two-three years. Instead, this should happen in years four, five and six.
“If you crunch all the investment in the first three years and you return 3X in the twelfth year, even then your IRR (internal rate of return) will be shitty. This is my biggest worry about Fund I. It is not whether I will deliver 3X. With every year that you postpone, 3X is not good enough. The bar only goes up,” he says, adding that IRR is a dangerous metric, to begin with.
Are there any other reasons?
But this isn’t the only reason funds need to have longer lives. Reddy points out that the bulk of the value is added in the second half of the fund, with the last few years usually seeing far more growth than the initial years. “God forbid you to have to sell prematurely just to meet exit requirements,” says Reddy, “That’s how I feel about Grey Orange Robotics (one of Blume’s bigger investments).
After all the struggle of putting together a global robotics company, I can’t look at my clock, saying it’s the eighth year, let’s the exit. The damn journey to a billion-dollar company is yet to happen. You might say, you have made enough but should I leave money on the table?” he asks.
Tick tock. Tick Tock. Tick tock.
Forget about how things should be. Let’s deal with what is. Blume is running against time. And even as all this is happening, the firm must raise capital for Fund III. In the context of Fund I’s performance, the sooner Blume gets to the first close, the better. The first close is when a fund is able to raise 40% of its target. In the next few months, Blume is hoping to raise $80 million from investors in India and outside the country. The firm is targeting a first close by September. This is easier said than done.
Not because there aren’t enough people willing to bet on India. Of course, there are; the India tech story is still alive. Blume’s problem is more peculiar. The last time it went out to raise money, the firm took 18 months to completely raise Fund II. That is, 18 months to raise $60 million. At the time, the firm was selling hope. It had cast its net wide. Spray and pray, if you will. There wasn’t any performance pressure. And still, it took 18 months. This was just 15 months ago. And now, the firm is out to raise again. This part of the story is called, always be raising.
“Well I signed up for this, didn’t I?”
Blume’s Fund II was a peculiar fund. Out of the total $60 million, $20 million came from Indian investors. From its experience of selling to Indian investors in Fund I, Blume realized that the whole ordeal can be quite painful. Quite a few aren’t dependable, long-term partners. They are whimsical.
They like bargaining. Their strategy could be as dependable as, sorry, I can’t invest because I just bought a Bentley. So, Blume went looking outside. In this search, the firm raised $20 million from investors, which is called strategically. Simply put, these are foreign corporations who’d like access to deals in India but are afraid of getting their hands dirty.
Losing the products
Or worried about losing their shirt altogether. In Blume, these corporations found a willing strategic partner. Vice-versa. Blume’s other $20 million came from institutions. Pension funds or trusts like Harvard, etc., who are interested in allocating some part of their capital for an India risk exposure.
So far, so good. The problem, though, is that in the last three years, the strategic investors have wisened up.
For instance, Dream Incubator (DI), a consulting firm based out of Japan. DI invested in Blume’s Fund II because it wanted an understanding of the Indian market. It wanted to access it. In the last three years, DI has co-invested in six companies along with Blume.
All follow-on rounds. But they’ve come to understand the Indian market. They have a decent pipeline. Now, DI wants to play India independently. In January this year, DI said it would start a $44 million India-focused fund. DI isn’t alone. Recruit Holdings, another investor in Blume, is also starting out on its own.