Karthik Reddy on Building Blume Ventures (with Pritish Sanyal of The One Percent Project)

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39 minutes
The One Percent Project Karthik Reddy

Karthik Reddy recently appeared on The One Percent Project podcast, hosted by Pritish Sanyal. Karthik spoke about his experiences of building Blume Ventures, why resilience must be second nature to an entrepreneur, how effective communication is a superpower, the quest to experiment, and the secret sauce to becoming a successful VC. You can watch the two-part interview here and here.

Here's the hand-edited transcript of both episodes for your reading.

Episode 1

Karthik:      0:00     The biggest publicly known secret in venture capitalists is all of our work, our risk and rewards, backwards. Bottoms-up give you cues. For example, if you have 25-year-old founders versus 35-year-old founders who have worked in the domain, and the 32-year-old founders who actually built a very quick 4-year exit and worked in a unicorn, that’s people risk, scaling risk, skill risk, ambition risk, all of those.

Karthik:      0:28     If you take all those three varieties of people pitching you theoretically the exact same idea in three 30-minute intervals, you would price them all differently.

Karthik:      0:36     And to flip that, suppose the same person with same skill set and experience pitch three different ideas, you would price them differently. Because you have a perception on the end-state market and business model. You can get it wrong 8 out of 10 times, both when you pick a company and when you say no to a great company. What does it mean? That you didn’t understand those well enough. And that’s the reality of the market. 90% of the time, even the entrepreneur doesn’t know it. So, it goes back to the necessary ingredient of resilience. Because without that you can’t survive the test of the market. You’re not copying. We’re not building another cement factory. You’re not doing solar installations.

Pritish:        1:20     Is venture capital about funding the next unicorn or backing exceptional founders who are hardwired to think differently and bet against conventional wisdom? My next guest on the One Percent Project is the humble, decisive communicator, and counter-intuitive thinker, Karthik Reddy. Karthik is the co-founder and managing partner at Blume Ventures, one of India’s pre-eminent early-stage venture funds. At over $600 million in AUM, Blume has made 150-plus investments across three funds. Karthik also serves as the chairman of the executive committee at the IVCA (Indian Venture & Alternative Capital Association). In this two-part series, I speak to Karthik about his upbringing and the values he has infused into Blume over the years. Listen in to learn Karthik’s insights on resilience in building his career, the X-unicorn hypothesis, why exceptional founders are mutants, how he assesses risk and much more. Subscribe to the show wherever you’re listening to it and sign up for the One Percent Project’s Think newsletter at OnePercent.live, which brings highly curated content that adds value to your professional and personal development. We kick this off by asking him about his journey from Chennai to Wharton.

Karthik:      2:43     So, a few pit stops in between, Wharton was this aspirational or rather going to the US was this aspirational thing, a yearning that never got fulfilled for 8~9 years. And I didn’t have a plan to go for undergrad, but post that I was a part of the South Indian gang and the root key was always wanting to get to the US.

Karthik:      3:02     And I think almost everybody else did except for me and one more guy. I think we stayed back and at the last minute, we made a U-turn and stuck to IIM admissions. So, Wharton is technically my second MBA. I think that itch never went away I never unpacked when I was in Bangalore for two weeks. So, some professors who had all come back from the US convinced me that it was India’s time and I should stay here. And while I listened to them, & made great friendships and thoroughly enjoyed my two years at IIM Bangalore, which got me my first job in Bombay, which has become my current hometown in some sense, that itch to go and experience the US never went away. And so, Wharton was a clever hack of getting the best of many worlds.

Karthik:      3:45     Eventually, I ended up meeting my wife at Penn. And people ask why you go into a second one. As I said, fate had arranged for other aspects of life also to fall into place. We met within the first week she is a painter. She was doing the Arts there and that’s about how I met her. But going back to the beginning of your question, so Reddy Boy was born to an agriculturalist family in Nellore actually.

Karthik:      4:07     So, technically, 15 years straight in Chennai until the age of 17. But my parents moved when I was two to get me schooling in the big city. And even for the southern part of Andhra, Chennai was the big city, not Hyderabad, going back to the 70s right now. So, we were 2.5 hours from Nellore in Chennai. So, basically, that’s where we migrated. The education system was always acclaimed back then in Chennai. I got lucky, pretty much! The person who gave us the place for rent knew the principal of the school I went to. How crazily coincidental even back when you say the world is a small place. And put in a good word, I joined and never left. 14 years, same school!

Karthik:        4:47     So great friendships! Some people now I know for 47~48 years in my life who are not my parents, which is crazy. So, those journeys and those memories are parked in Chennai. Always! Yeah! Sadly the final death nail on it not being my quote-unquote “hometown”, which I used to say for 45 plus years happened because of my parent’s decision, for health reasons, we just moved them to Hyderabad. So, Chennai is this longing place now it’s not home anymore. My parents were literally bizarre this week that it's come up so it's emotional for us so it has to be mentioned it’s this week that my parents’ house finally got sold. So, they moved here a year ago. So, that brings the end of that era in some sense in my head. It’s almost like when you migrate to another country and you decide you can’t go back to that country, the original country, that’s the moment here.

Karthik:      5:36     A lot of memories, I speak good colloquial Tamil I feel like one basically when I am there. I love the Margazi music festival, I don’t know the technicalities, but I can tap my fingers to Carnatic music. I love the beaches because of Chennai. That’s what Chennai has given in many ways to my life other than very long-standing friendships. And these quick interjections of  Roorkee, Bangalore & Bombay happened for 9 years and gave me a shot at going to the US for 7 years. But I never felt one with the country.

Karthik:      6:12     It didn’t feel like I wanted to be adopted and become one with the US. And today, I’m happy and proud to say that feeling is now embedded in me as Mumbaikar, actually. So, 16 years after coming back, it’s going to be 17 actually next month, and 3 before I left, so by far the longest I’ve stayed in any city and so Mumbai is now home. My kid was born here, she says that she’s from Mumbai. So, that’s how life progresses.

Pritish:        6:40     That’s a fascinating journey. Before we move on, how much of your South Indian environment, Carnatic music & education — we as North Indians do see that South Indians are intellectuals and they have a very specific way of upbringing — has helped you in your career?

Karthik:      6:56     One of my superpowers, if not, for others to see for my own preservation and enjoyment in life is the ability to pretty much experience as many things in life as possible, assimilate what I like and become one with it.

Karthik:      7:11     And so I love my Roorkee experience, which is a shocker for me. Because I never crossed the Deccan Plateau until I was 17. And so lining up there and 60% Bihari, UP, Punjabi population. My roommate was a Bihari. Thankfully, my second language in school in Chennai was Hindi. So, I was amongst the better Hindi speakers in that 20-member crowd of 300 South Indians.

Karthik:      7:35     And so I adapted it far more easily. But to answer your original question, that’s why I like Chennai, because I think it appeals to my sensibilities more than, let’s say, where my cousins grew up, the bulk of them in Hyderabad. I always used to object when somebody said I’m from Hyderabad because it was not me. And Hyderabad is actually... As a lot of you might have heard in the north, Hyderabad’s and Reddy’s especially from Hyderabad, it’s more like the Punjabis of the south. And so in a good way, in a fun way, but also in a flamboyant and outspoken way. And we come from both the ability to be migrants, agriculturalists and civil construction, etc., which is a lot of my original side of the family got their big breaks and life. And so it was just not me I was very different.

Karthik:      8:19     So, I think that’s a happy blend of entrepreneurship in the blood in some sense which I was fighting. I said, I don’t think I can be the entrepreneur that India champions, which is hustle at any cost, like cutting corners, working with too many systems which are broken. And therefore when you work with systems which are broken and you have to survive, then you will cut corners. It is like being in a prison. To survive, you will make amends to yourself. And I didn’t like that existence as what I saw of my relatives of my father, etc and I thought that I want to be an entrepreneur. And I was fighting it for a long time until I started Blume. And I had one failed startup before that, but half-heartedly. So, I wouldn’t call that a proper stint. And then this Chennai, which is very spiritual in one way, the way it operates, it’s very disciplined, it’s very obsessive, it’s very content.

Karthik:      9:12     So, all of those are absorbed from the Chennai water with a little bit of the South Andhra blood is basically my core. And the rest is not my core that’s why I don’t think I could adapt to the US. I don’t think I’m natural in Delhi. I love certain aspects of it, I love certain people. But I don’t think that’s my natural self. Whereas Bombay allows you to be individualistic in that sense more than any other city, I think, in India.

Karthik:      9:43     It is not like I don’t like Chennai, but I don’t like that it curtails me, curbs me in that sense. And so finding a place like Bombay which allows you to be yourself, and yet, bring in elements of multiculturalism and all of those into daily existence, and you can be in the flow without having to fight it, is why probably I fell in love with this city. The industriousness, rigour and hard work in Bombay is basically the ultimate upper layering of my DNA today. And so it’s those original roots and then, this is the layering. I think, these three probably have shaped who I have become the most. That’s why eventually they become a superpower because it can’t be closeted and bucketed into a little window and called me out a Chennai guy or a Reddy guy or a Mumbai guy and too much of all.

Pritish:        10:35   Actually, that leads me to ask, in 2010, you kicked off Blume. And at that time, I don’t think one would say that a homegrown VC fund would be a very popular concept or an idea. What has been the role of resilience in your career in actually standing your hypothesis going forward, pitching and building something like Blume?

Karthik:      11:02   I think it’s sort of core/necessary and not sufficient, but it is a necessary condition if not sufficient for any entrepreneur I would argue. If you want to build long-term, if you want to build something memorable, not if you want to make a quick buck and retire in 5 years, and then figure out how to build on the beach and invest, which is fine. I’m not judging anybody.

Karthik:      11:23   But I feel like that is a different entrepreneurial track from what maybe I didn’t know that I was setting out on that, I’ll be honest. I think it was the excitement of wanting to do what I believed, which was the model of venture capital that I studied in the US but more from the outside. And it was something that I felt had legs. And I was happy to know that I wouldn’t know what the end product is. It likes going and getting started somewhere. And so it started, ironically, with me being a corporate investor from “The Times Group” in “Mumbai Angels.”

Karthik:      11:55   And so when you get to learn the environment, and then you see this big enough gap, then you feel like the hypothesis was right. That’s severely constrained in terms of where to get venture capital for young entrepreneurs. And if you look at it from a classic business school framework of gap analysis entrepreneurship, that is the gap.

Karthik:      12:15   Now, if you look at the emotional weight and the thrill of being a VC, there’s a wide spectrum. It can be Tiger Global and it can be Blume and I wouldn’t be them as much as I love them as my co-investor. My DNA is to Blume, which has basically been those early parts of the journeys, shape the entrepreneurs, get a kick out of seeing a brand new idea, which I’ve never seen before in the world, and be amazed by younger entrepreneurs who have this madness to go and change the world.

Karthik:      12:47   Now, all of that you can claim that you can get into late-stage VC and private equity, but in all humility, it is bullshit. You can’t pretend everything’s cooked by you if you’re not a part of the kitchen at all, you’re just in the dining room. I think being a part of the kitchen is the thrill in this making of new enterprises, etc.

Karthik:      13:06   So, that was always the motivation. So, if that were not there, then I wouldn’t be doing this aspect of venture capital. If I’m not able to see the future and non-humility in whatever humble way, and then take a punt on that, both the combination of entrepreneurs and the capital that goes into building that future, I wouldn’t be interested in what I’m doing today.

Karthik:      13:26   And so that’s what drives me. And it felt like when we started Blume, that’s what I’ll pick and would allow us to manifest ourselves out there. But also I’m reasonably good at understanding risk capital markets that was my grounding from ‘96. Again, with no disrespect to a lot of VCs, not only VCs, get that they don’t have the foundation, I would argue. So, the combination of that men, how to portfolio construct, how to price early-stage venture capital, and how to build a fund which is right-sized, these are also, core thrills in some sense. But that keeps my love for financial services also intact and going. Otherwise, you can be an operator VC and not bother about any of that.

Karthik:      14:13   So, once again, it’s me, I’m also a Gemini. I guess I need to have everything to fit in. The ability to use both parts or both facets of the mind, I’m also an industrial engineer. So, everything that I back is around a natural sense of optimization, making things better, improving things, making the world better, and climate change. It is directed in that sense. Those are the mission and the skill comes together in this profession. So that was a driver. So when we started, I would be lying if I said I knew exactly where we’d end up. But, therefore, as an entrepreneur, to use that specific word, resilience is all you have.

Karthik:      14:50   And so, against all odds, if you can keep the Northstar in the compass aligned, then you won’t go off the path. If one of them is misaligned, you pick the wrong Northstar or you pick the wrong compass to follow, you will be lined up in some wayward land. And you will claim that’s where you wanted to go you’ll be fooling yourself. So, why we are happy, what we’re doing and why the ecosystem likes what we’ve done is because we’ve never strayed from either of those; as we evolved, it became very clear.

Karthik:      15:45   I kept talking to my colleagues and really, I didn’t think I was signing up for this 40-people team and this much capital under management under the companies at any time. But I think you realize that if you’re not doing that, then you’re really not shifting anything from the status quo dramatically. Others might, you won’t be a part of it. You can take both significant ownership and credit for that and that became a life mission somewhere along the way. And you suddenly saw the stock was getting better and you’re in a better set of compasses every time for the next part of the journey. That’s what is all milestones, those two things have to stay intact.

Pritish:        16:21   The reason or the question about resilience came up because I was going through your ex-unicorn podcast which Blume produces. And it showcases the resilience of all the founders. And that is when I thought that I’m assuming you, yourself, see yourself as a mutant who has stood the test of time. And obviously, I don’t think it’s a one-man effort it’s the whole team who have stood with you and believed in you and, obviously, the founders that you have believed in. So, why don’t you tap into the ex-unicorn concept, the hypothesis and what you build? And it’s fascinating.

Karthik:      16:57   It is easy to say that we knew again that this might happen from the beginning we had no idea. So, I say it to my founder’s faces as well from that era, a lot of them are from fun ones, which means none of these companies we actually have showcased so far are less than 7 years old. So, the 7-year-old company might say why am I not on it. Maybe, Neeraj was borderline 7 Spinny. But it’s why are you not showcasing us because you actually haven’t gone through the ups and downs, you’ve only seen an up and up. And there has not been a massive bottleneck in the journey yet. It’s not like I’m waiting for that or wish that upon anyone, so don’t get me wrong.

Karthik:      17:33   If I had to re-draw the odds, I would fund all of these companies. I will give better capital; the market is improved now. So, they don’t have to slog as much. But it becomes a realization that the physical and mental effort of having gone through that journey prepares you for a much longer journey. So, I actually believe the motivation to do an ex-unicorn came from here. We thought this was entrepreneurship, the market was telling us something else. It was a fluffy valuation, quick money, and all of that. And then, you couldn’t have said, “No! even my entrepreneurship wins until you create winners.” And then when the winners come, you say, “Oh my God! Finally, it’s happening.” And then you can go and champion them. Mutants can look ugly, popsicle-like, dwarfs. And then you say, “Who smiles at the dwarf mutant? They smirk at it.” And so until it starts looking powerful and spews out something that nobody else can, no one celebrates it in some sense.

Karthik:      18:33   And so I think you’re absolutely right that the reason we double down on it is we see ourselves as a mutant as well. We see ourselves as something very unconventional and despite all the odds people put on us, we come through somehow. A long way to go, but I’m saying that even reaching here, people can give us odds.

Karthik:      18:50   And similarly to a lot of our companies, we said that we’re all built the same way. This is a core DNA & we should celebrate it, there’ll be exceptions to the rule. They’ll get celebrated in a different way. But how can there be such a disproportionately high share of these in our portfolio? And so that’s who we are. So, let’s celebrate it a little more than we can because that’s the reason we own it. Nobody has the wherewithal to stay on those journeys, even as an investor, and forget about an entrepreneur and we’ve done both. We have stayed with them, if their companies are 12 years old in the portfolio and we’ve given an exit to the investors well, it will paint why it’s taken 10-12 years, but we still continue with 10 of those journeys for another 5 years so, it’s all unprecedented. Nobody’s ever done this in the country to engineer a 16-17 year journey with your portfolio companies. And so you have to put your money where your mouth is.

Karthik:      19:42   You can give gyaan and walk away or say, “No, I just back them.” There’s one company let’s take the name and give it some spot in the sun. Zopper which was originally, believe it or not, a 25 lac cheque that’s how it started. Then we must have added a crore or something like that. And then we didn’t have money. Then they didn’t raise around for 7 years between ‘15 and ‘22. And then they raise the money.

Karthik:      20:07   And now when they actually rolled over, I’ve rolled over my fund position as well. I have 50~60 crores in that company & it’s fresh money. I bought out the position. So I’m not doing that to spite myself. And people say, Oh, you’re just passing hands! What rubbish. I obviously believed that this guy will make that 6300 that’s why I’m betting on it. And the fact that this can happen is unprecedented nobody has done this in this country. So, people say, “Oh, show me a quick buck in 5 years. I need to show IRR quickly.” That’s a financial problem, I get that. That’s what I get paid to do but I think the thrill and the journey with that founder is unparalleled. And that’s what we’ve realized, that’s what we are about and that’s what we get the biggest kicks off in what we do. And thankfully, our founders reciprocate that love both publicly and privately. And they begin to realize after a few years that we are a little different from most others. I’m not saying better or worse, but a little different.

Pritish:        21:09   I would recommend everybody to listen to X-Unicorns. I think, there are fascinating stories, fascinating insights, and a lot of understanding on how to probably persevere over years, not only months to get to where they are today. You talked about a few things obviously, you want to get into long-term brand building. But before that, you mentioned there is risk in the venture capital world, there is risk in investing in a startup, there is risk in setting up the fund and there are multiple risks associated at different stages. So, how do you assess risk?

Karthik:      21:45   It’s a good question. I’m not trying to rediscover financial principles or capital markets. Not even a speck. That’s like now to contextualize thinking that Earth is relevant in the scale of the Universe. Therefore, they’re my God, meaning, I’m not bigger than the markets, I’m not bigger than the financial principles that everybody else operates on. I can’t have my own finance. I have to operate the finance that my next-round investor, my entrepreneur, or the public market all believe in.

Karthik:      22:15   So, whatever that belief is, this is money, this is how it grows, this is what we invest in for. And how it can actually give back money, which is the concept of markets, has to be understood. So, I think, what I like and what I’m reasonably good at is those aspects, which is where I said, the underpinning of financial markets built into me through two MBAs and years in between and the years after, serve me well. That variety of that underpinning is probably not as prevalent in the venture industry, both even globally, I would argue.

Karthik:      22:52   That is why you see far more bubbles than I should mention in my view because the valuation is funny, the math is funny and there’s no answerability to public markets. So, they can do whatever the hell they want in this private market. And eventually, the Mecca is that, the public! Everyone asks the same thing. Somebody who is in the public market. So, eventually, the market’s rule is all I’m trying to say. Essentially, that is also a market. It might be in the private domain, but it’s also a market. So, my principles of risk are driven by, if that is the end-state, how can you interpolate and work all the way backwards to what does it takes to understand seed-stage risk, relative to A B, C, D, E, F public?

Karthik:      23:39   The biggest publicly known secret in venture capital is all of our work, our risk and rewards, backwards. Bottoms-up gives you cues for example if you have 25-year-old founders versus 35-year-old founders who have worked in the domain and 32-year-old founders who actually built a very quick 4-year exit and worked in a unicorn, that’s people risk, scaling risk, skill risk, ambition risk, and all of those. If you take all those three varieties of people pitching you, theoretically, the exact same idea in three, 30-minute intervals, you would price them all differently.

Karthik:      24:21   And to flip that, suppose the same person with the same skill set, same experience, you pitch three different ideas, you would price them differently. Because you have a perception of the end-state market and business model. You will get it wrong 8 out of 10 times in both situations when you pick a company and when you say no to a great company.

Karthik:      24:42   What does it mean? That you didn’t understand those well enough. And that’s the reality of the market. 90% of the time, even the entrepreneur doesn’t know it. So, it goes back to the necessary ingredient of resilience. Because without that you can’t survive the test of the market. You are not copying, you’re not building another cement factory or you’re not doing solar installations but you’re trying to reinvent the world in some way, which means you don’t know how it will play. So, there’s a humility in that, then all you’re playing with is a massive market, I’ll discover it. And you have an opening view if the view is shaky, you won’t pick the thing.

Karthik:      25:20   So, how did the risk pricing topic arise from? You have not understood that you’ve converted that to zero on the decision first. So, you don’t have a view on something which is zero in your head which means I won’t even play it. That means you don’t understand the risks so you stay out. That’s actually the humility of a good VC if you ask me.

Karthik:      25:38   If you don’t understand, then stay out of it! If you understand, then you go and play that. And then, you try to assess one of these two. The more confidence you have on how to assess people risk and how to assess market risk, the more accurate your pricing might be and your understanding of that risk might be.

Karthik:      25:58   It doesn’t mean anything. Why? Because until you can fund this ad infinitum, you’re going to expose yourself, the founder and the business afresh to the God state, which is the market in 12 months from now. And that market is absurdly inefficient compared to the public market. Anything is possible!

Karthik:      26:22   It’s how it is portrayed in movies where you’re walking down street and your dream life partner walks by 10 feet apart and you don’t know they went by, similarly it can happen in VC too. There might be a person sitting two doors away in another VC building who’s always looking exactly for something like what you’re building. So, what is the reason why you didn’t meet them? You can say, “How is this possible?” It is a perfect market they should have pitched everybody but it’s not like that. There is timing, thesis, and gap. Somebody might say, “Yeah! I really like it. But I’ve done two deals in January suddenly so, I’m not doing anything for the next six months.”

Karthik:      27:03   How is this logical? That’s not a way to assess risk or set a price or pick a company. Believe it or not, it’s so thin on the market, it is so inefficient in the capital market that it actually happened also that somebody would have bet on very similar play last year. They said, “Hey! That business that founders are saying, the business model might overlap with what you’re going to do so, stay away.” But I really like it and then eventually, the one you really liked might just totally whip the one that you just said yes to last. Instagram was that by the way for the MVC in public, as the legion goes. They bet on something from the core fund and they bet on something from the option fund, the option one fund was Instagram. So, how do you know? You don’t know! And that is why venture in 55~60 years is still the loss ratio, small-large outcome ratio in every portfolio, every vintage, every market, every VC in the world, every cycle. So, there is so much intelligence in the world, how can that be?

Karthik:      28:08   And then you say, “No! you show me the data which proves otherwise and I’ll change my mind. So, I tell Elphies also, this, don’t be absurd! Don’t make us look bad, tell me who in the US has done this better.

Karthik:      28:21   It’s just that the size of markets, the people skills & cycles are a little ahead of us, it’s a more mature market. They get a $100 billion outcome once in a while, we struggled to get $10 billion so, their outcomes look better. I’m not denying that. You’re trying to say the guy’s more intelligent because he picked better and all that no, that’s not true. It’s on the market he is playing in, there are too many risks and that’s why I think it continues to be called venture capital. Its roots, as you may or may not know, are adventure so it was called adventure capital, that’s what it is.

Pritish:        28:50   Brilliant! Actually, I didn’t know that. I will read up on that it will be fascinating. You talked about founders and their pitching and timing. Founders need to disapprove or disprove your long-term held market or industry hypothesis to get you interested.

Karthik:      29:13   It goes both ways. I think there are too many variants of risk takers even at every stage but they tend to shift. Meaning, somebody who’s not capable of judging that generally, they won’t do what we do. Let all the hard work be done by these 100 funds like Blume, let them figure all this out I’ll wait for three years and see that risk looks more and more like what I’m prepared to take and what the end-state market might look like. Which is business model, pricing, go-to-market, founder stability, co-founder stability, ability to hire senior management. That’s what you need to build a legendary large company.

Karthik:      29:55   I’m beginning to see far more sightings of that is when I’ll bother with it. In fact, people would say, I don’t like technology risk, I don’t like hardware risk, I don’t like a business model risk they will say to your face if you see a BLC. Because if you’re not solving it for them, they’re not cutting the cheque that is their DNA!

Karthik:      30:11   So, from my lens, I’m not looking for cool to have criteria sell me the idea that is path-breaking or world-changing necessarily. So, I think it’s naive to think that only those can succeed. There are enough examples of people coming and breaking an existing business model, improving on those business models dramatically, and taking advantage of big regulatory shifts, like electric vehicles, FinTech, etc. It’s not possible, the same business would not have been possible 7 or 3 years ago. So, that’s what I think you’re looking for as a VC. So, technology, regulatory, and just lethargy/waiting to be disrupted industries is where you want the founder to come and tell them why they will do any of those in those sectors.

Karthik:      31:06   So, I’ve also wrote a blog 8 years ago. And I remember the title because I refer to it once in a while in sessions like this. So, the incremental entrepreneur is not ours to back that’s the headline it was a little controversial. So, I’m not interested in someone coming in making incremental improvements to our businesses that’s private equity, that’s not us.

Pritish:        31:25   One thing that I’ve observed from the interviews, from your blog as well is that you have a very decisive way of communication. Is that something that you’ve developed or it came from your reading or observation? How did that happen?

Karthik:      31:39   I just think a lot of people say this in different ways. Thanks for the observation! But we get this in different formats and different people and it pokes a lot of people. It can poke a co-investor because you’re saying something they don’t agree with, it will hurt a founder because they don’t like to listen to things that are contrary to how they imagine the business. They think you’re an onlooker to my business how can you know it better? It pokes an LP because they think we’re too idealistic they think we don’t know how to make money we’re just talking through our heads.

Karthik:      32:14   So, hopefully, you started proving some of that wrong but until we did, we used to poke them. But fundamentally, the underlying element or the common thread between what you’ve said and all of these three things I mentioned, is eventually, either at that point in time or during the call or after reading it, after sleeping over it, the next day, next year, next fund, they come back and say, “Now we understand what you said. And we love the fact that you’re always honest in what you say, in what you believe.”

Karthik:      32:45   Thankfully, by traverse, we don’t know anything other than that method of communicating. So, I think, this is a criminal waste of everybody’s time and I don’t have time to beat around the bush. So, basically, I might as well get to the point and say what I have to say. I don’t need friends at the end of every conversation there can be dissonance it’s perfectly fine. So, it comes from that philosophically. We try to push as much of that in the organization that’s my persona it’s not necessarily everybody’s persona.

Karthik:      33:14   So, culturally we look for it in the org and therefore it thrives, I would argue. So, Blume as a brand that will weigh towards that it can never be what I am because that’s me. You have to have your own confidence in what you’re saying. You have to have a persona which says what the hell you can say and worry about consequences.

Karthik:      33:35   And you also have to be politically correct. I’m the chairperson of the IVCA now so if the industry has given you that position, then you better speak in a politically right manner to everybody in that lens for eg. It’s not like that I have not been trained enough to be doing that, which is why I got nominated or elected, people thought I’m capable of that. But broadly, I do tell youngsters in the team and otherwise, saying communication itself is a superpower and you got to know what to say when to say it & how to say it. Sometimes it’s about waiting 12 hours, sometimes it’s about leaving a voice note, sometimes it’s about adding an emoji & sometimes it’s about using a podcast, which is why I enjoy these sessions so, thanks for having me again. Because it allows you to communicate something which a natural setting will never offer. And an outsider’s curiosity that you bring is not something that people around me would. They don’t ask number one, they don’t know how to articulate this question and number two, they take it for granted because it’s like how you listen to your parents, you take what they say for granted. And so that happens a lot with our _________ and our team. So, the podcast allows me to contextualize or summarize views at the level that they don’t hear from me otherwise. So, that’s why you hear them the way you do or read them the way you do wherever they are in the public domain. They’re the cleanest, straight from the heart, with no agenda that is nothing-to-hide conversational style!

Episode 2

Karthik:      0:00     The reasonable man adapts himself to the world, the unreasonable man makes the world adapt to himself. So, all progress depends on the embrace. That paradigm cannot play out anywhere other than I mentioned it. Daily, every morning, it’s true. And so it’s not about the exceptions, they exist everywhere, in our business or every entrepreneur makes it big, I believe in my limited lifetime that I’ve seen is an exception to some rule or the other. That’s the nature of the world, you have to be exceptional to make something really massive and impactful. So, that facet apart, it allows you to actually shape if you want to the world in a certain direction.

Pritish:        0:42     What does it take to identify and back the next big thing in the world of startups? How do venture capitalists navigate the complex web of risk and rewards to make successful investments? Welcome to the One percent project, where we continue our exploration of the world of startups and venture capital with the visionary Karthik Reddy, Co-founder and Managing Partner of Blume Ventures. In part one of our conversations, we learned about Karthik’s upbringing, the values that he has instilled in Blume, the role of venture capital in fostering innovation, the X-unicorn hypothesis, and more. In part two of a conversation with Karthik, we delve deeper into the world of venture capital. Listen in to explore Karthik’s approach to investing his counterintuitive insight about venture capital, how he identifies exceptional founders, concepts and frameworks that have influenced him in his career, and much more. Tune-in to the One Percent project for another engaging conversation with Karthik and don’t forget to subscribe to our think newsletter @onepercent.live, which brings highly curated content that adds value to your professional and personal life. Stay till the end where I summarize the top three takeaways from the conversation with Karthik. We continue the conversation with Karthik in part two, by asking him why he built Blume?

Karthik:      2:04     It goes back to 2-3 principles or beliefs that have been shaped in the first 35 years, I started Blume when I was 37. Capitalism rocks, now it can’t have a title that says capital and not believe like that. So, if it does, then you believe that the only way to make the world a better place is through capitalism. However, again, a speck in the universe is a problem. No one cares about your version of capitalism, it is a generally accepted version of capitalism, which as I told you, I had problems with various facets of it. Chronic capitalism is one but like in general, I have problems with money for the sake of money. And you can be on the other hand, idealistic, try to go change the world, as we say, and say that I will go and save farmers and it will save the planet and I will reduce waste, and I will allow for a better quality of life and I said you can do all that with this beautiful tool called Venture Capital. So, that intuitive coming together of all these senses is why I fell in love with it in the first place. And I saw it in its most ridiculous state in the US in 1999 everything came crashing in 2000. But I think that’s where, again, I feel, to have the humility to know that this is all Maya, and you want to distil what is important to you. Your call is my superpower, and for myself, not for the world. It said that in the early part of the conversation as well it’s what gives me pleasure.

Karthik:      3:40     So, the act of extracting that pleasure is what made me a student of this facet, of this aspect of venture capital, “What can technology do to improve lives.” And then you apply it in the context of India, my god, the scale as like everyone jokes about it, but you tell me which other mechanism you have for capacity building to solve problems. You can get a kick, you can be Prime Minister Modi and get a kick and say run the country and it’s improved. That’s not me, I’m not at the scale administrator or a policymaker or politician. I can’t see myself doing that.

Karthik:      6:11     So, that’s the nature of the world, you have to be exceptional to make some really massive and impactful. So, that facet apart, it allows you to actually shape if you want to, the world in a certain direction. So, you can give credit to the folks who are doing only climate tech or only Agri tech they are shaping those industries & they’re helping shape those industries for the future. So, its capacity bending of the change, you want to see in the world is why an idealist venture capital should exist. And that’s not a naive, foolish way, as I do believe is still an idealist, 12 years. And I think that’s why we exist. That’s what brings me to work. And why we want to continue that is, I feel very empowered to see part two, which is interesting is that you can propagate a new school of thought, a new form of entrepreneurship, new role models, in a way that nobody else can. So, let’s say you go and look at 10 companies, and you admire somebody on the street, is there a common thread between them, they usually will never be. So, now I’ve set myself a new goal, as I joke about it, the day I retire would be when I see 10 such companies with the common thread, which I can go and ask... They’ll be different if you go ask someone on the street, but if I go and put these 10 names, and they say, oh, I respect eight of them, or they will return money in the public markets or something, and they’ve lasted for 15-20-25 years.

Karthik:      7:36     The minute I have about 10 of them, I’ll say I’ve done my job, because then you’ve left enough role models for my team, for some kiddos being born today who will be invested out by Blume fund 10 or 11. So, you’ve set that stage. And I think that’s the thrill of doing this ground up in India, as opposed to just plugging into a job and other VC firms. It’s not like I didn’t try I tried in 6-7 nobody wanted to hire me. And so, I went to the media side, as I couldn’t fall out of love with this idea. And so, when the opportunity presented itself, I started & then life’s taken notes.

Pritish:        8:13     What is your counterintuitive insight about venture capital?

Karthik:      8:16     Actually, it’s not counterintuitive, but I think it’s how we have evolved. Anybody would have told us... And a lot of people did tell us I don’t think we believed them, that the industry of venture capital, as a mechanism of financing entrepreneurship, is a very elite form of finance. You can’t democratize that, it’s sad. Not in the way it exists. You can have it like the US has a small business loan program, and India has CIBIL, NSIC & banks, sadly, those will back traditional business models. Even at the micro-scale, if I lend money to a farmer or civil vendor I need it back end of the day, so he is using it for the intraday working tab, which cannot ever be venture capital. What venture capital can do interestingly is, even innovate on such models. It is what Fintech is trying to do with some levels. And I hope the government understands that, yes, regulate them, but please see that only they can fix it. Because the cost of distribution, costs of managing the risk and cost of exit, all these are not possible in a small 99.999% of the enterprise.

Pritish:        12:24   That’s fascinating. And I think that’s very truthful. It’s an elitist game, it’s very hard to break it. You talked about people coming and saying that they can’t get in. When somebody walks into Blume for an opportunity, what do you look for in them?

Karthik:      12:38   I’ve answered this probably 100 times in a decade. So, it’ll only be a variant of that, sadly. Nothing original, I think a lot of the other questions you asked had aspects of things that, I probably may or may not have expressed in the same way ever before. So, thanks for those questions. On this one, it’s a cookie-cutter question. Sadly, the answer is fairly cookie-cutter, in the sense that it’s different from what I might have said over 10-12 years because it only keeps improving since you have a little bit more sophistication and the way you pick. And it’s also not very different from our most good VCs. They might have variants to it, but it’s all about the same. So, what are those? And I will put it in my words, and another VC might put it in different words, but it’s about the same. So, we over-index on the origin stories of the problem.

                                 I’ll tell you the second reason for this, we realized that people get tired of the business there are, they get weakened by setbacks, they erode, they give up, and they say, “Good journey, I can’t handle it anymore.” But the person who started it for the right reason discovers the problem goes deeper and deeper, discovering deeper and deeper problems. I will admit, sometimes more obsessed with creating a large-scale impact through their firm rather than actually the very original problem that they pitched us. But that resilience and that obsession is still intact in some cases. So, that’s why I said, there are all sorts of exceptions, but at least starting point, they should have the same obsession, that’s what will keep them going.

                                 Otherwise, you can build 10-20 firms, it’s BS again. Which is why most co-founders leave halfway. They don’t stick around. Why is that? Not just because they’re being undermined or whatever, you get bored of either the job or the role, or the fact that they’re not as passionate about building the problem to the next scale. Eventually, everybody should get bored, because it becomes monotonous as a job and the innovation has gone down to somewhere else, in the firm. So, the Cash-Cow firm, the public firm etc., should be run by professionals. It should be on autopilot. This is the kind of DNA we’re looking for. Because even at that level, they should have instilled enough culture in the firm, that you can hire so easily into that culture and never lose sight of the original culture. Continue to build a great firm, and they can still sit on the beach, 12 years down. A lot of asks of somebody you’ve met for 20 minutes. And so what happens typically is, therefore, we try to gauge as much of this using gut in the first 20-30 minutes. And if you don’t get these guts, I need to know more about this person, you should never do it in our opinion. If you do get it, you should try and poke holes in it for the next 10 hours of meetings. That’s the diligence of a founder and the last thing, which is very important, you have to have a view of the market. The market is something that the founder has a view but sometimes it’s actually, believe it or not, I feel a naiver view than even the VC. Because they don’t understand it from a time market perspective, they only understand the problem they’re obsessed about. But I need to have a view on whether that problem becomes large enough as a market. They might say, “No, I don’t know that but I’ll go build something else and extend the market.”  They have to have that courage, but they should have that knowledge as well. And so your view on the market is, what makes the journey really memorable.

                                 Outside bets come from a combination of the two whenever we have looked back. And I’m not a genius, I’m not writing consulting reports on it. Again, you have an intuition on the market. That’s what shapes an early-stage VCs life, every two-three years and it keeps recalibrating. It helps you stay young but that’s the only reason you have this job because you have to reinvent yourself every two, three years.  It’s relevance three years ago was useless.

Pritish:        18:58   Three books or blogs that have influenced you the most.

Karthik:      19:04   I am not good at random access memory. So, these random access memory questions always trip me, not because I can’t give an answer but I’m sure I’m missing good answers is what I am saying. I think I’m going to stick to the easy idealistic ones. So, in Black Swan by Taleb, there is a very interesting chapter about how outsized outcomes come from these edgy almost artistic bets in life. And again, this lot of my theory around venture capital is, why we do what we do comes from that, what I gleaned again from Black Swan. Everybody else took away very different things from it. But for me, that was very life-changing.

                                 And third I would say, these frameworks that I just described maybe so let’s give them credit, came from adapting Marc Andreessen’s framework of product market team. And so I cited a lot, I give him credit when I wrote my fund to kick her blog. So, every time we raise a new fund and launch it in the public domain, we accompany it with the blog. So, the fund two blog will have all action to take Anderson’s framework and adapt it to an Indian context. So, that informs my day-to-day life. So, it’s giving credit.

Pritish:        20:44   Three productivity tools.

Karthik:      20:47   Simplifying concept returns and why we do venture capitalists, this notion of 25% IRR. When things have to compound at 25% IRR, how scary it is to be in quick terms of multiples. You ask me about risk & that allows me to frame all risk. So, I reveal it here as everybody knows it. But a two-bagger in three years is 25% IRR, three-bagger in five years is 25%. You do every combination of two x’s and three x’s and number of years. And you can actually do the math very quickly on how outsize this outcome should be. So, I know what it should be in seven years, I know what it should be in eight years, I know what 25% means, compounded 10 years. So, that’s one tool I use all the time to frame my decision-making around risk, that’s just a life’s hack. So, if one says you do so many things what is the work model? just this framework is enough. Because then it allows you to distil backwards on how big the revenue should be etc.

Pritish:        23:31   What is the kindest thing that anybody has done for you?

Karthik:      23:41   Same thing, I feel like maybe again, random access memory is really bad. So, I’m gonna go with the relevance of something that is in the course of one macro generalist thing and one micro thing that came up in today’s conversation so that people can contextualize. One is I think, innumerable people have stepped up, 10 times more people have said, ‘No’ when you go to raise money, as an entrepreneur you can’t count that as anything, but an incredible gesture of kindness. Because of the belief in you, I don’t think they thought that I kept in quick seam and make 10 times the money. So, everybody who backed us through this is one or another type of gesture of kindness, I’ll be honest. They simply saw our face or they knew us, trusted us, believed in this mad mission, and just gave us money. So, it’s too large, an amount it’s like how many days, 100 crores, it’s not a small amount of money. And nobody believed us, no institutions believed us only individuals. I think there’s a long list you can’t put. The other is for some strange reason because I’d applied for an MBA loan, the Embassy rejected me twice. And that bans you from actually applying again. So, there was someone who, because of his business influence in the US, actually had enough cloud to at least put in a word. And so we tried two angles and the first one ____ also failed. And then eventually a sealed envelope was presented somewhere and that’s how I made it to the US. And sometimes I tell my wife, what all fate had stored to make that meeting happen. That second MBA, the intervening well-wisher. But they didn’t do that, right? It’s so easy to say what can I do for you? That changed the course of my life. So, I’m glad it happened.

Pritish:        25:28   What advice would you give to your younger self?

Karthik:      25:31   Obviously, you tend to project a little on your own child, I have a 14-year-old now. And I think the advice is always been experiment much earlier in life with as many things as you can. And try to find what you really love much earlier in life. I think mine came from just slowly eliminating more things I didn’t like and not having the opportunity to test what I like. And conventional upbringing little rigid in both conservatism and upbringing and not having the capital to experiment. Now my kid can’t complain about that. I’m willing to sponsor the experimentation. I think I definitely took the initiative, but I don’t think I had the capital. That’s why I ran away to the north, I needed to go and see the country. But because I had two admissions in the South, I wanted to break away. So, I think it happened much later. Now the world’s getting so fast-paced and so current. You need to be so current with the times that I think you need to start thinking in that fashion, not about a job or an education, but generally playing that out much faster. I might have chosen the mad passion that I’m trying to run venture capital. Now I might have chosen a very different track. I was a sports buff, but I didn’t do enough for it as example. So today, as a sports buff, everything is tough, all of us know that if you want to be at the top of your game anything is tough. But I didn’t experiment enough, I would have loved being a sports commentator, roam the world, and be the best at that. And I tried even as early as my brother was five years behind me I would tell my parents just let him go & enjoy football or whatever he wants to do, become a commentator. I think there’s a profession in there. And somebody who started in the 90s, you could have looked absurd, but you could have been Harsha Bhogle. So, I think you have to constantly test yourself today it’s much more crowded, where there are opportunities, but 10,000 people vying for it, more than they were in the 90’s. More opportunities, but also those privileges have become more normalized. So, which means you have to work doubly hard in discovering that. That’s what I would tell myself.

Pritish:        27:45   That’s brilliant. Actually, before I close I want to say a few days ago, I was telling somebody that I wish Harsha Bhogle can come on Cast.

Karthik:      27:53   It was meant to be mentioned today I guess.

Pritish:        27:54   Karthik this was an excellent conversation. Thanks for being on the show.

Karthik:      27:59   Thanks for having me. Pleasure.

Pritish:        28:00   I hope you enjoyed the conversation with Karthik. Here are the three key takeaways from this conversation.

                                 #1. Venture capital allows one to take on technology, market, and regulatory risk that other types of capital are not able to have. It also allows us to shape the world in a certain direction and propagate new forms of entrepreneurship and role models.

                                 #2. Venture capital is still an elite form of financing that cannot be easily democratized.

                                 #3. Investors should over-index the founder’s obsession with the problem and their ability to remain resilient in the face of setbacks.

                                 If you enjoyed this episode, share it with someone who will find it valuable. And for recommendations and feedback. You can drop me a line at pritish@onepercent.live. Until next time!