Problems don’t come in a straight line. When they come, they come in slow. They come in fast. They come in all at once. From decisions taken years back.
From calls made yesterday. Flying in from all directions. Thick and fast. Bringing with them a perplexing mishmash of thought—some parts, decisiveness. Other parts, doubt. Long stretches of maybes. There are few places in this world where this state of existence is exemplified more fully than a venture capital fund caught in the middle of raising and returning a fund. Like Blume Ventures.
Bull. Horns. Timer.
Let’s enter the ring.
Who is at fault here?
It has only been a couple of months, but there is a sense of disquiet. There is talk that Blume, one of the most active venture capital firms in India, has slowed down. It isn’t cutting new cheques like it used to. As part of its Fund II, Blume had raised $60 million from investors in India and outside the country in 2016. Of that, the firm had earmarked $16 million to be deployed in new companies.
Or first cheques. Three years into investing, after a total of 45 investments, that money is over. Not that it ran out all of a sudden. Since early last year, the firm has been asking the team to slow down, cut fewer cheques, ensure that the money lasts longer. But it just didn’t happen. The brakes failed. So now, while Blume is meeting founders, listening to their stories, asking for their pitch decks, doing subsequent meetings, when it comes down to committing, there’s nothing on the table. No money. Sorry. Let’s talk in a while.
This is a problem.
Karthik Reddy, the co-founder of Blume, says it’s true but definitely not a surprise. This has happened before. When Blume raised its first fund (let’s call it Fund me) and spent it all too quickly. But the firm got lucky when it raised a small, top-up fund of around $4 million (let’s call it Fund IA). It used some part of this money to invest in five new companies.
Usual self plus
“So it happens. It is temporary.” That’s Reddy speaking. His candid, usual self plus a sore throat. Dressed in a grey tee, jeans, and sandals. His iPhone kept face down on the table. “I understand where the team is coming from, but they need to understand something as well.”
A simple rule—in the business of venture capital investing, a fund must deploy new cheques in the first three years of its life.
What is the future?
Anything later and planning for exits becomes much more challenging. [We will get to exits in just a bit] “This comes with the risk that I don’t have money for new cheques for three to six months when I am in between raising funds, which takes time,” says Reddy. “The team will come, saying boss, this is a good company, it is going away, what is this? There is no money. I say, who is at fault here?”
Reddy doesn’t stop. “All of us no? If you had delivered me the exits, I would have raised the money. Now you can’t hide in the shadows and say it is your job to raise the money. Of course, it is my job. I am sharing carry with all of you. [Carry is earned by partners of a fund after it has returned money to investors. It is a percentage of the profits, usually 20%] Your annual goals are taking the company to the next level.
That’s the KRA (Key result area). Take the companies to the next level because that is the marketing material for my next fund. Not that the company has grown 3X in revenue but can’t raise a single dollar. Or can’t get sold. If you are asking that I go and raise the fund in three months, show me the performance. We are all collectively responsible.”