Venture cautiousness: Why Blume, other VCs are treading safe despite IPO wave

Blume Ventures, an investor in prominent Indian startups including Battery Smart, Purplle and Unacademy, has decided to take a more cautious route for its next two funds amid a liquidity crunch in the startup ecosystem despite a spate of recent public share offerings.

Oister Global-backed Blume’s most recent fund, Fund IV, is its largest yet—with a corpus of about $290 million, nearly three times the size of its Fund III ($102 million). Blume doesn’t plan to increase the corpus for its next two funds, maintaining them at about $290 million.

“We are taking a measured approach as it is still a lot of money to manage for an early-stage fund," Blume co-founder Karthik Reddy told Mint in an interview.

“While it is not about the lack of investable early-stage startups, the size of the fund addresses two issues—as to whether they (startups) will become great late-stage opportunities, and if venture capital firms can build that extra muscle to be able to play their portfolio winners more convincingly," he said.

It’s not just Blume. Other venture capital firms are also adopting a cautious stance as they struggle to sell their startup investments, unable to defend or find attractive pricing after the pandemic-induced valuation bubble deflated.

Earlier this month, Peak XV Partners slashed the corpus size of its growth fund by 16% and changed its fee-carry structure, which is expected to lower the overall share of its profits. A fee-carry includes the management fee as a percentage of the corpus raised and a share of the profit.

Blume, which raises a new fund every three years, delivered fivefold returns on its first fund, which was raised in 2011 with a corpus size of $22 million.

While there is pressure to deliver similar returns on its second and third funds, Blume is now more focused on simply returning the principal amount to its limited partners by the 6-8-year mark of a fund lifecycle. Blume launched its Fund II in 2015 and Fund III in 2018. Limited partners (LPs) are investors in venture capital and private equity funds.

“Unless you show some interim liquidity, it becomes challenging to raise successive funds from the same set of LPs," Reddy said.

More IPOs not good enough

Investment exits can happen through several avenues including mergers and acquisitions, initial public offerings of shares, and secondary transactions, which are stake sales to other investors. Several VC firms are focusing on two or three portfolio startups in a fund that are likely to hit the public markets within three years.

“I feel 80% of portfolio asset sales will happen in companies which have matured to the extent that they are at T-3 years to a potential IPO," Reddy said, citing examples such as fantasy sports platform Dream11 and eyewear marketplace Lenskart, which have bagged over a billion dollars on just secondary sales.

Reddy also emphasized on the added advantage of being able to tap the public market at a much smaller scale in India, which could facilitate more exits for private investors.

Last year, 234 Indian companies went public, a 56% increase from 2022 and the highest since 2017, according to a report by lawfirm White & Case.

“I think the market has realized that size doesn’t matter. Only profitability and predictability counts and such companies have been taken into the public market at an earlier stage," Reddy said. “While the number of such companies going public will improve, it will still not be enough to push through returning the fund."

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Startups are actively making efforts to grow into their valuation by reducing their expenses and focusing on sustainable growth and profitability. With valuations becoming more reasonable, there has been an explosion of fund managers looking to pursue secondary transactions for quicker exits.

Institutional investor Oister Global, which has also invested in Stride Ventures and Filter Capital, launched a $500 million India-focused secondary fund last month.

“The demand for secondaries has rapidly increased as it comes with some huge advantages," Oister co-founder Sandeep Sinha told Mint. “Besides allowing an investor to enter a mature company before an IPO, it also allows for shorter 3-5-year tenured funds with faster exits. We believe this trend is going to continue as the overall ecosystem has matured."

Also read | From growth at all costs to sustainable growth: the maturing of Indian startups

The secondary buyer

Oister’s first secondary investment was in Blume’s continuity vehicle—which are funds created to absorb the portfolio companies of another fund that’s reaching the end of its investment lifecycle.

Typically, continuation funds provide an exit for limited partners while allowing investment firms to remain invested in high-performing portfolio companies. These funds support trophy assets that need more time to reach their full potential beyond the typical fund cycle.

Such vehicles have become more common with investment firms including Lightbox, India Quotient, Multiples PE, Kae Capital and Westbridge Capital exploring such moves.

“There is far more demand for the assets we rolled into our continuity vehicles than our usual funds because the pricing is more reasonable and there’s more proximity to an IPO, which is essentially what a secondary buyer looks for," Reddy said.

Also read | 360 One launches secondaries fund with a ₹4,000-crore target corpus

Meanwhile, limited partners are increasingly focusing on factors such as distributions to paid-in—DPIs, which is the ability of a fund to generate liquidity—over internal rate of return—IRR, which evaluates how profitable an investment is—before investing in a fund.

“There are many funds in India that have a great IRR but very few have managed to return capital to LPs. Therefore, we give a lot of weight to GPs (general partners, or fund managers) who have a consistent track record of delivering true returns," Oister’s Sinha said.

“I think the whole concept of secondaries kicks in when GPs are willing to let go of some portion of their investment in a good asset to deliver some amount of liquidity. So there is some amount of calibration that happens."

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