Welcome to 2024’s first Blume Beacon! We do not have our usual collection of top reads and podcasts this time. We, instead, want to give you, our readers, Blume’s take on 2023 and what to expect in 2024 across sectors and stakeholders (the 4Ps-Pipeline, Portfolio, People, Partners; more on this below). 

We at Blume believe 2024 is the year of reset, the beginning of a new phase, if you will allow us to call it that. 

Why so? 

A bit of historical perspective might help set the context. If one were to track India's startup/VC evolution, it could be split into a few phases.  

Phase 1- Beginning of the internet (late 90s to early 2000s). ABCD ruled the roost --Astrology (has since then expanded into overall wellness, religion tech, and commerce around it), Bollywood (has since then expanded to a strong Media and Content thesis, and large sums have been bet on this), Cricket (a wider thesis on sports and entertainment), and Dating. But there were no smartphones, and only so much could be done.

Phase 2 (2005-06) - Digital Commerce was slowly but surely up and running. The likes of InfoEdge, JustDial, and Flipkart were starting to spread their wings. 

Phase 3 (late 2000s to early 2010s) - Funds were being built out, and angels and US VCs started setting up their shops in India. There was the emergence of homegrown funds like Blume and our peers.

Phase 4  (2010 onwards) - Indian product SaaS companies and consumer product innovation/automation space became mainstream.

Phase 5 - The Covid burst out when valuations fell out of place with reality post the easy funding environment of 2020-2021.

2024 is the beginning of phase 6, where fundamental business values will reset. 

Every business is not a venture, but every venture has to be a business, and every business is not a startup, but every startup has to be a business.

The 4Ps--Pipeline, Portfolio, People, Partners--from a VC/startup perspective will undergo a transition. 

Let’s talk about the pipeline. VCs will back founders with a large vision and the ability to build frugally for the long term, leading to free cash flow in the future. The founders who will get funded are the ones who take responsibility for unit economics in the near future and profitability in the medium term. 

Also, the talk around fuzzy vanity metrics will be replaced by fundamental cash flow metrics, at least after the first few rounds. There will be a deeper governance code and acknowledgment of wider joint responsibility to build the business and the journey that takes the startup to a sustainable company. 

There is already a visible shift in the ecosystem towards IPOs, and we must focus on getting the fundamentals right for startups that aspire to get there. These businesses with solid fundamentals can create public listings where new investors and those exiting through the Offer for Sale will make money. 

While this sets the context, we’ll let you read through what our folks have to say at your leisure. Mind you, we’ve gone into some depth and hope you find enough insights. As usual, we’d love your thoughts on the views below. 

Alok Mehta, Investor Success

It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of light, it was the season of darkness, it was the spring of hope, it was the winter of despair.”

― Charles Dickens, A Tale of Two Cities

If Dickens were to write about the state of the venture ecosystem in India, these lines would apply verbatim. On the one hand, there is the “funding winter,” governance issues, mispriced assets, cost cuts, and job losses. On the other, one sees new ideas, high-quality entrepreneurs, strengthening support systems, venture funds with dry powder, and the interest of global investors.

What does this mean for our investors, especially from India, who are relatively new entrants to venture as an asset class?

Globally, India continues to inspire investor confidence, given the sustained economic performance, accelerating tech adoption and consumption, and the lack of the global market’s capacity to absorb capital at scale.        

Alternative assets, especially Venture, have, of late, gained acceptance as a part of the portfolio construction of not only Indian families / HNIs but also Indian institutions such as banks and insurance companies. Over the last few years, and in 2023, we also received significant interest and support from such investors.

In 2023, the interest of some Indian investors was somewhat dampened due to overall tech-market weakness and the bad news emanating from the private assets markets. The excesses of 2020 and 2021 are now being unwound, which will take another few quarters. This led to some investors moving away or pausing their allocations to this strategy, especially to direct investments. 

We continue to believe in the India tech opportunity and our resolve to back quality founders with differentiated ideas. Astute investors should continue to allocate to the Venture asset class as valuations normalize and the quality of ideas, execution, and governance matures and improves. 

Building and scaling start-ups in India is a long-term game, and we believe investors should align their investment horizons accordingly to get the maximum benefit from their investments in the Indian Venture ecosystem.

Arpit Agarwal, Investment Team

As we predicted in last year’s note, ClimateTech has shone brightly in the year gone by. While the PE-VC funding experienced a slowdown, this sector saw more than enthusiastic participation from investors. Investing in ClimateTech has become a global trend, led by the Electric Vehicle ecosystem. We predict that such a trend will likely continue for the next 3-5 years until the volume of capital in the broader sector becomes a significant chunk of overall PE-VC funding in India.

Amongst the DeepTech and ClimateTech verticals, what really caught our attention in 2023 is the quality of entrepreneurs starting Biotech and Defence startups as an outcome of two very significant government initiatives started many years ago.

In 2012, the Department of Biotechnology promoted a non-profit company named BIRAC to promote biotech innovation and entrepreneurship in India. With its SBIRI, BIG, and BIPP programs, BIRAC has supported over 3,000 startups. Initially, the funding went to research-oriented companies, but commercialization has been a key focus over the last few years. Not only has this helped in new venture creation, but it has also created a whole pool of talent required to build scalable biotech enterprises. We believe the time has come when biotech sector startups, ranging from diagnostics to drug discovery, MedTech to AgriTech, will shine much more brightly. We could have our first innovation-led biotech unicorn in as little as five years.

The other piece of policy is the drive for wide-scale adoption of indigenous technology and products in defense and law and order use cases in India. The Department of Defence Procurement (DPP) has worked hard to achieve its aspirational goal of 75% indigenous procurement over the years. This has spurred traditional manufacturing giants like L&T, Adani, Reliance, and Tata into action and also led to a big boost in the startup world. Catalyzed further by well-designed schemes like IDeX, it looks like IdeaForge will soon not be the only listed company in this fast-growing space. It helps that India has allowed defense exports to a set of friendly countries, expanding the market further.

We feel quite excited about the prospects of Defence and Biotech startups in 2024 and years to come. There’s likely to be a wholesale new focus on DeepTech startups in Startup India 2.0, and the future can only be brighter.

Ashish Fafadia, Investment Team

Consumer (FINancial Services for Indians) and Infra (Financial TECHnologies for the globe)

2023 opened with a bit of a cloud around where the industry can go from here, what are the regulatory mindsets on fintech even as the ecosystem prepares to go to the next level?

Although they have never said it like this, I believe that from a regulatory lens (and borrowing from the Blume narrative of B2B <> B2C), fintech players fall into two distinct buckets --  B2B infra side or  ‘India engineering for the world’ and B2C or ‘Indian engineering to service Financial services for Indian consumers.’ 

On the consumer side, regulators were understandably cautious about how lending is done,  how collections would be made, and how fintech could ensure that customer data was safe, given that everything in fintech was moving towards credit. It did not help that some players indulged in questionable practices that disadvantaged consumers or could create systemic challenges in the ecosystem. 

However, it is a positive sign that the regulatory approach is forward-looking, with more guidelines than before.  It did put a momentary full stop to fintech funding, and the key question was - do our regulators see Fintechs and startups as relevant stakeholders in the ecosystem?  

While the regulatory authorities may not have felt the need to answer it in as many words, their actions suggest a well-balanced and forward-looking approach with both fintechs and incumbents in consideration.  In fact, the number of policies from authorities in the last 18 months is significantly higher than in the last 5-6 years. This is a welcome move and a big sign for VCs that the regulator is taking note.

This paves the way for India to dominate in fintech globally. It is debatable if consumer companies need to move to a global play; however, it is clear that infra companies need to take advantage of the global opportunity. 

Whether it is UPI payments architecture or Aadhaar, these are templates for countries across the globe. There is a mega opportunity for infra companies to spread their wings globally. There is only so much you can do with infra in the domestic market. Eventually, the banks will realize we are spending millions and want to build things in-house.

The big opportunity is global, and the best Indian fintechs will be the ones that can service global institutions in their local markets.

Insuretech Transformation - Leveraging AI towards Personalization

On the insurance side, the government has set up a large infrastructure project for portability. This insurance portal by the government aims to facilitate a lot of stuff that was supposed to be done by startups. 

So, the truth is that plain vanilla is not the way forward in insurance. The big way forward is how you can add value beyond the basic sale of the insurance policy. Can you provide a better customer experience, help with better financial planning, enhanced claim management, etc.? 

Thanks to AI, the insurance and wealth sector will evolve as these sectors aren’t that deeply penetrated now; hence, vast space is open. 

Historically, one usually builds products for the critical mass. Players factor in risk and gauge what it takes to attain that critical mass, and if the product doesn’t get traction, they won’t go ahead, as distribution cost is humongous. 

With cheap communication, storage infrastructure, digital public goods, and AI, you can design things for niche customer segments and then scale from there. A lot of creativity and innovation on the personalization side will come in eventually. 

Anyone with the right data and vision has a chance of making it really big.  PERSONALIZATION is the keyword for me here.

Karthik Reddy, Investment Team

2023 saw a noticeable shift in how VCs profile risk in their portfolios, especially in the pre-Series A landscape in India, where Blume Ventures operates.

Given the uncertainty of when the next funding round will materialize, seed investors only made bets where they had the deepest convictions. In a hot market, even copycat products with marginal innovation get funded, as FOMO and trend-catching are rife. But in 2023, the bar kept rising for an investor to build conviction - a truly innovative or differentiated product or business model AND a founder with a strong track record AND a market opportunity with strong tailwinds (no And/Ors, just ANDs).

The uncertainty in growth rounds also meant larger seed checks: VCs had to shore up more capital than before to give the founder enough runway to build sizable traction. This meant larger checks to a smaller number of founders. It also meant more rounds with co-investors rather than a single lead investor, allowing for risk to be mutualized.

I see this trend continuing in seed-stage investing in 2024, with investors staying up the risk curve, preferring to write fewer checks at double the check size but at half the risk rather than writing more checks - a different model of the utilization of dry powder in Indian VC.

On the other end of the spectrum, i.e., the Exit horizon for stories that began a decade or more ago, I see a major shift in the Indian startup ecosystem in 2024. We see a clear and inevitable reversal of the 15-year-long trend of startups largely shunning public markets in favor of remaining private longer. This model, popularized by Silicon Valley, is characterized by notable large, late-stage funding rounds but conceals inherent business risks, setting the startups on a difficult path and creating very low odds for sizeable cash exits for many unicorns. This problem feels acute in India, but the new path is refreshing.

The writing on the wall was clear as early as 2019, with the failed WeWork IPO, but then the pandemic and liquidity largesse hid the need for some of these course corrections. With the ecosystem reconciling to the fact that the public markets will not converge to private market valuations and companies that IPOed in 2021 finding equilibrium last year, this is a great time for Indian startups to go public. The number of VC-backed tech companies filing their DRHPs is finally gaining momentum.  

Unlike the US and China,  India's public market has a dearth of cash-generating tech companies. The recent IPOs have shown a considerable public market appetite for path-to-profitable and profitable tech companies. This presents a great opportunity for founders who want to head-down build long-term businesses that show consistent growth and margin improvement and it is up to them to take advantage of it. 

Another myth that is to be broken is that one must be a unicorn or larger to be listed publicly. There are stellar examples of companies that list at market caps of Rs 1,000-5,000 crore ($125-600 million) and keep growing at 20-30% for a decade. This is the future that Indian tech must embrace. I believe India is ready for 15-20 tech IPOs across the market cap spectrum annually for the rest of this decade. 

For founders, IPOs represent a transition to building an enduring business rather than just another funding milestone. This mindset is essential as we move into 2024, and I believe many more founders will adopt it. The role models are finally appearing by the dozens on the horizon. Seeing a NIFTY Tech 50 by 2030 will be the truest representation of India’s tech startup prowess.

Kunal Bajaj, Capital Networks

The funding environment of 2023 got off to a slow start and only really kicked into high gear in the early summer, driven by the rally in the "Magnificent Seven" stocks. Some trends we have seen in the last year are:

  • Appetite for innovation: Technology remains a driving force in the private markets, with a continued focus on emerging technologies such as Artificial Intelligence attracting substantial funding.
  • Demand from US Investors: We are seeing a secular shift in demand towards India alternates from the US-based limited partners seeking to diversify their investments from traditional allocations within Asia. Almost every major endowment, pension fund, fund-of-funds, and allocation advisor visited India last year to understand the market landscape for their fund investments and direct/co-investments.
  • Growth Investments: Allocations from growth investors into private companies are still muted. Valuations continue to be a focal point of discussion, with the consensus being that most of the 100+ unicorns minted in India need to grow into their last-round valuation.  Zepto was the only Unicorn from India this year, raising $200M in Aug 2023. The heady revenue multiples of 2021 have come down to earth, and the focus has shifted one level below to EBITDA and, indeed, Pre-tax Profits.
  • Public Markets appetite for new listings: $6.8 billion was raised by Indian IPOs in 2023, just 16% less than in all of 2022 ( Reuters ). "India's share of global IPO proceeds is at an all-time high of 5.98%,” Dealogic says, almost doubling in two years, while its share of Asia IPO proceeds has also grown to 9.9% this year from 5.9% in 2018. There has been a frantic and euphoric rally in the Indian small and midcap index over the last six months of 2023, reducing the margin of safety, particularly in the small and micro-cap universe.

Ria Shroff Desai, People & Culture

It's been a year of battening down the hatches at Blume. We spent significant time strengthening our internal teams and building with an eye on the future. This year, we were particularly bullish about building in public and openly sharing our thoughts about developing the Venture Capital space as an intentional career path for individuals passionate about long-term, sustainable impact. The content put out by our teams on the art of apprenticeship in venture capital (link) and the road less taken by many of our platform and corporate team members just goes to show that all is not what it seems when you work in a VC firm. 

Behind all this, one value stood out as paramount to me as we built Blume this year - authenticity. In a world where we periodically hear about funding winters, VC governance (or lack thereof), inflated valuations, and rotating doors of talent, we've been building ourselves slowly and surely to weather these - and many more - storms and blips on the radar. 

In 2023, we interviewed more than 150 candidates for various roles. We made offers and were rejected. We delayed making offers and lost seemingly good candidates. We asked everyone who knew us to recommend people who were just like us. And that's a tall ask. But slowly and surely, we prevailed. As we end 2023, we have crossed the half-century mark in team size, with almost half the team in non-investment roles, a testament to what it takes to build a strong Venture Capital fund. 

In 2024, we look forward to enjoying the fruits of our hard labor - producing content that demystifies venture capital and finding more copilots for our journey towards Fund V and beyond. We are seeing an increase in mid-career professionals choosing to move from traditional financial services and startup leadership roles to venture. We expect the influx of more dynamic professionals from structured industries to start "professionalising" early-stage Indian VC. 

More and more VC firms are going the Blume way, focusing on career growth and development of their teams and designing organizations to help budding investors grow. There is a two-way obligation that has emerged more prominently, and the Indian VC funds that recognize the need to nurture and continuously train and support their investors have the chance to cast a wider net out there, bring deeper value to their portfolio, and sustain themselves during today’s winds of change. 

Sajith Pai, Investment Team

2024 is the Year of The Great Reset 

2023 has just ended, and there is no better time to take stock of what transpired than now. The trendline is clear. The overall funding in Venture is back to under $12b, approximately what it was in 2020, the year of disruption and dislocation. 

2021 saw over a tripling of funds invested by venture funds into startups ($38b in ‘21), then 2022 saw it drop by a third ($25b), and 2023 has seen it halve from there on to land just under $12b. The trends become even more dramatic when you tease the overall numbers into their growth and early stage parts.

Growth stage funding has dropped from $34.3b in ’21 to around ~9 $b. In comparison, early-stage funding has dropped from $3.6 billion to around $2.5 billion. What we are really seeing is not so much of a venture funding drop as much as a growth venture market funding drop. The seed market has declined, but not as dramatically.

It is particularly interesting to look at the average round size. The average growth round (growth funding divided by growth deals, simplistic, I know, but still) has declined from $90m in ’21 to about $45m in ’23 (the number of deals in ’21 is just over half that of ’23). 

In comparison, the average early-stage round has declined about a tenth in ’23, and the number of deals is down by a quarter. So, while growth rounds have seen a deflation in both fund size and number of deals, the early stage hasn’t seen a corresponding deflation in round size (about a quarter drop in number of rounds, though).

Based on the above data and empirical evidence, it is clear that we are seeing fewer but relatively higher-quality early-stage deals (pre-seed to Series A). We have seen the disappearance of a particular persona of the founder - junior operators with 2-3 years experience in product and tech from high growth companies - who was an opportunistic founder, taking advantage of the bull market in the Venture world rather than driven by the pure mission to solve a problem. 

As this genre of founder has exited the market, we now have more serious, committed, and experienced founders. Then there is the expansion in the Seed market, led both by newer seed and preseed funds and Series A and growth firms expanding to this segment. Because many of the founders are more experienced (repeat founders or experienced operators, many from the portfolio firms of the growth stage funds), it is easier for growth firms to take a bet on these founders. These two factors, experienced and committed founders and the increased competition in the seed market, have kept the average early-stage round size in ’23 high (just 10% less than ’21).

The weak growth stage funding market means that many early-stage funds are in a position where they are continuing to fund pre-seed and seed rounds, but much of their ’21 or ’22 portfolio is not seeing any uprounds or markups. Many of these ’21 rounds were done in a buoyant funding environment; hence, both startup founders and VCs expect growth-stage investors to buy into those valuations. 

However, growth funds are reluctant to play along as they see compressed multiples and limited appetites further downstream (they also have challenges in their portfolio). Hence, they have become extremely risk averse and either want to participate in exceptional companies (or certain sectors like AI) or pay prices that mean flat valuations to low markups for anything else. This is a market without FOMO (fear of missing out).

2024 is likely the year of acceptance or the great reset, where many startups and funds caught in the middle will finally agree to make peace with the market reality. We are also likely to see many seed-stage startups wind down, given that around 3,700 early-stage rounds happened in ’21, but the number of growth cheques in ’23 was around 200. 

This gap is widening as the seed market is still unaffected, but the growth market has declined. There is always a drop from Seed / Series A to growth, but the drop will likely be much steeper this year.

The most practical founders in this market have moved fast to cut fat and burn and are making their runways as long as possible so that they can raise when the market is more optimistic. The most realistic founders have decided to make peace with the market and raise at a flat or even a down round. The most optimistic founders hope the market will lift soon for them to figure out their next round. The next 12 months will reveal who is right.

Sanjay Nath, Investment Team

2023: A Year of Dichotomies and Learning 2023 presented a stark contrast in the Indian startup ecosystem compared to 2022. With a significant drop in funding and fewer deals, startups across the ecosystem faced challenging times. However, the best adapted by focusing on sustainable, profitable growth and capital efficiency. This phase imparted valuable lessons, signaling a shift from the zero-interest-rate era’s approaches.

AI Startups: A Bright Spot Despite the overall downturn, AI startups experienced robust deal activity. At Blume, we observed heightened activity across the development, tooling, and application layers of AI. With AI baked in, SaaS is moving from mere efficiency tools to active business co-pilots. This shift demands that incumbents quickly adapt by integrating AI, while new startups should focus on AI-first approaches for true disruption. The key for these startups lies in offering radically new solutions to enterprise problems instead of incrementally better ones.

Investment Trends: Caution Amidst Enthusiasm AI investments showed signs of frothiness, resembling early-stage deals from 2020-21 in size and valuation. We'd advise founders to be mindful of high initial valuations, which significantly raise the bar for milestones to be hit before subsequent funding rounds. More thoughtful approaches, such as smaller rounds and leaner builds, focusing on efficient growth, might be the best path forward, especially given that this space is rapidly evolving.

2024 Outlook: Promising Economic Growth and Tech Integration Looking ahead to 2024, India’s economic outlook is promising, with expected growth rates of 6.5% to 7% and a significant portion of GDP coming from the digital economy. This positions India as a major global economic player. We anticipate AI’s deeper integration across various sectors, with an additional focus on its role in deep tech areas like health tech and space tech, to create significant momentum in 2024. 

Blume’s Perspective: Focus on the Business Outcome We strongly emphasize the importance of focusing on your customer's business outcome rather than the technology itself, especially in this environment where AI is at the core of the positioning of most emerging startups. Regardless of the underlying technology used, solving the market's challenges is paramount for any business.

In summary, while 2023 was a challenging year for startups, it was also a year of adaptation and learning. The outlook for 2024 is optimistic, with AI playing a crucial role in transforming SaaS and the broader startup ecosystem.

Sarita Raichura, Network Investment Programs 

At Blume, we navigate the TOFU (Top of the funnel/ start-up pipeline) through various channels, including Super angels, Micro-VCs, Incubators-Accelerators, Corporate Innovation labs, etc. While our core strength lies in our thesis publications and the invaluable network of founder referrals ('Blumiers,’ who are ex-founders and CXOs of our portfolios), we also actively engage with the broader ecosystem to stay well-connected. 

A noteworthy development in the past two years has been the significant transformation within the 'Micro-VC' category. In simple terms, we define micro-VCs as funds with a size of $30 million or smaller.  

Based on our data, we believe there are over 100 micro-VCs (majority established in 2022-2023), typically investing $100-$500k at the seed/pre-seed stage. These funds often invest at valuations ranging from $2m to $8m and take a 3-8% stake in the start-up. Notably, the General Partners (GPs) leading these micro-VCs are former entrepreneurs, operators, or active angel investors, bringing sector-focused expertise to the table. 

As a pre-Series A fund, we often find that Incubator/Accelerator start-ups are too early for us. Instead, we focus on micro-VC portfolio companies that have undergone some market validation, typically raising $200-$500k.  

In 2022, we observed a frenzy where micro-VCs invested $250,000 at $25 million valuations, resulting in a 1% stake. Fortunately, some micro-VCs have recognized the unsustainability of this approach and have shifted towards prioritizing value creation and robust founder support. 

Blume closely works with a select set of 20+ micro-VCs. Some of these micro-VCs have honed their strategy, achieving Product-Market Fit (PMF) and remaining steadfast in their niche (a sector or a stage) without succumbing to the allure of 'hot deals.' Sector-focused micro-VCs often get 90-100% coverage in the sector and attract LPs who want to track the sector closely.  

While established founders may question the value of micro-VCs, early-stage founders find dealing with a small team versus a large angel syndicate relatively hassle-free. Our experience working closely with a ‘select set’ of this new breed of investors has been positive, though the proliferation of micro-VCs is a concern. I'm not sure how many of these will stand the test of time. 

At Blume, we have learned that being a good founder/operator doesn't necessarily translate into being a proficient investor. We hope the emerging micro-VCs understand that investing is a patient, long-term endeavor that requires time to master. Given our experience, we extend our support and mentorship to selected micro-VCs, sharing the learnings from our journey and enabling them to 'Blume.' 

Thanks for reading Blume Beacon! Subscribe for free to receive new posts and support my work.