The VC investing ecosystem can often seem complex and difficult to understand to an outsider. There is an imbalance of information between investors and even the founders themselves.
As more and more ambitious founders launch their businesses, it becomes increasingly important to understand the space from those deeply entrenched in the investment ecosystem.
In an effort to narrow this gap, Nikhil Kamath and Nitin Kamath, the founders of Zerodha, recently sat down with three of the most prolific and well-respected VC investors in India in the 9th episode of WTF is with Nikhil Kamath. These include Karthik Reddy, Co-founder and Managing Partner of Blume Ventures, Prashanth Prakash, Founding Partner of Accel Partners, and Rajan Anandan, MD at Peak XV Partners (Earlier Sequoia India).
During this discussion, these experienced investors offer valuable insights into the sectors they believe hold the most promise in the coming years, as well as the sectors currently experiencing rapid growth. They also address the challenges faced by the Indian VCs and reflect on the lessons learned from the previous decade.
Karthik initiates the conversation by sharing his personal journey, where he started investing as a weekend activity and eventually transformed it into a full-fledged passion.
Below are some of his insights from the session:
Blume Ventures was founded in 2010 on the thesis that micro-VC funds are erupting in the US, and Blume will be the go-to micro-VC fund in India. Blume invested in roughly 60 to 70 startups from its first fund, with a fund size of INR 100 Cr ($20M), and most recently closed its fourth fund at INR 2300 Cr ($290M). As its fund size has grown leaps and bounds, so has its investment thesis evolved.
Blume doesn’t want to let go of winners from its primary funds as the compounding of capital has just started, but it cannot be a perpetual fund as capital is to be returned to LPs. So a hack Blume found is called ‘opportunity funds’. These funds double down on identified winners, a la companies that are breaking out from primary funds.
International LPs expect a compounded return of at least 25% while investing in Indian early-stage funds.
Referrals and trust help a venture capitalist firm raise funds. Trust is indexed more than returns when it comes to international LPs investing in Indian VC firms.
An international LP’s mindset is like that of a waterfall – They need to be first sold on the idea of India, then the LP examines the best fund managers operating in the country and then ultimately decides which strategy (early- or late-stage) suits them the most.
Rule of thumb - In a fund cycle, five companies will return 80% to 90% of the total fund, irrespective of the size of the fund.
Contrary to the popular narrative, the incentives of a founder and a VC investor are aligned when it comes to generating returns, especially with respect to the exit covenant of 5-7 years on the term sheet vs. the fund lifecycle of 10 + 2/3 years.
As a founder, never go towards where the money is, go where the opportunity is. An entrepreneur should never choose a business idea based on the cyclical ups and downs of a sector. They are building for the next ten years, hence, betting on what will be big ten years down the line makes the most sense.
The X-Factor of a successful founder: Truly relates to the problem they are solving for and having a long-term mission & vision.
Himali is consulting with Blume's marketing team. She is a generalist with 9 years of experience with startups/mid-sized cos in pharma, hospitality, data analytics, and agtech. She is also taking strategy consulting projects with senior…
