During the winter break, we asked the team to take a close look at what the next year can look like. How will fundraising change in 2023? Which sectors will be hot? Where should be expect change? Read Blume's outlook on what lies ahead.

Karthik B. Reddy on Blume's vision #

As we step into 2023, it’s time we rethink how Blume should be in the future. Can we build an inter-generational firm? Can we deliver companies that outlast even VC firms? Can we build a firm that is one of the most important partners to an entrepreneur’s journey to glory?
 
Our $250 million+ Blume Fund IV marks the first definitive step towards getting these answers. We’ve been looking at our winning stories, and Blume’s partnership has arguably been the longest marriage on the cap table. We often call ourselves Conviction Capital for this reason. This conviction is where our blood, sweat, and money flow.
 
For 2023, Blume’s investing game will follow three tenets:
 
1. Cheque size at seed no bar, ownership of the journey is the bar
 
We love what we invest in - both the people and the problem they are solving. We will own our share of this journey and when we play our core cheques, we will not only back young first-time entrepreneurs with a $1-1.5M solo or co-led cheque but also be an emphatic deep partner to a seasoned repeat founder by contributing half of their $5-10M round.
 
2. Hold depth of reserves to play compelling follow-on cheques when the founders deliver
 
We want to ensure we have enough depth within the fund corpus and reduce dependency on growth pools till companies reach Series B or C. Our “reserve ratio” (loosely defined as aggregate capital set aside for ALL follow-on rounds across all companies: aggregate capital across ALL first cheques) is now projected to be 2:1. It has grown from 1:1 to 1.3:1 and in the last fund to 1.6:1. 
 
3. Thesis-backed investing by individuals who are OGs in their sector
 
We’ve often told our LPs that they pay us to be ahead of the curve. The only way to do that is to take a bold view of the future of a certain market and marry it to the firm’s collective read of a great founder.
 
More importantly, being ahead of the curve is what generates outrageous returns in venture capital, not lazy trend-spotting post-facto. You need to be the trend writer with the entrepreneurs you back. As a generalist tech-VC, this is tough. Hence, over the last few years, we built the following technology risk buckets to consider while investing:
 

  • Deep tech and emerging technologies (read EV, Robotics etc),

  • Software (read SaaS, dev tools, Enterprise vertical software etc),

  • Fintech (both infra/rails as well as applications of tech to Financial Services), and lastly,

  • (Indian) Consumer and SMB internet (includes edtech, health, commerce, media etc)

 Our reward is in our stakeholders' conviction on our new responsibility of Fund IV.

Sanjay Nath on the blossoming of the India-US SaaS corridor #

Since the dawn of the Indian startup ecosystem, this important corridor has been a familiar territory for Blume, thanks to Blume’s expansive linkages with Silicon Valley VCs, startup founders and CEOs, serial entrepreneurs and M&A executives. It also resonates at a personal level, as Karthik and I had spent a considerable amount of time in the US before we had our own Swades moment and came back to India. Today, a substantial quantum of capital pooled into VCs and startups comes from the US. There is also a two-way bridge for talent that has come to exist between the two countries. 

It has been 12 years since InMobi became India’s first unicorn. Being a small but early supporter of the InMobi journey, I would venture to say there has been a sea-change in how cross-border businesses are conceptualized, capitalized, built and scaled across this Indo-US spectrum.

As we see innovation in this corridor evolving, particularly in key areas like Enterprise Software, Vertical SaaS, Cybersecurity, and Product Led Growth products, we are seeing the emergence of a clear playbook being leveraged by Indian companies. India’s license to win is no longer just about cost arbitrage for building such startups, but increasingly about talent arbitrage and product innovation. Thanks to a series of x-border IPOs and M&A transactions, and the availability of 2x entrepreneurs and founder/operators, there is a huge increase in the breadth and depth of the collective wisdom and insights emerging from the startups in the past decade. Inside Blume’s own stable, starting with Grey Orange, Exotel and Webengage, and carrying onward to Lambdatest, Locus and Sprinto, the lessons learned and network effects gained have given us immense confidence in the story of the next decade. 

We intend to deepen our roots in this increasingly important corridor, not just from an investment lens but also from a platform view to help our startup founders hire key global talent, strike important partnerships and strategic alliances, land customers, and raise capital from the best global VCs. We’re excited about what the next decade holds in store for Founders “building for global, from India”, from day one!

Sajith Pai on how VC money moved in 2022 and the outlook for 2023 #

2022 started off strongly, and it seemed for a while that the Indian venture funding market would be subject to different gravitational forces than the ones affecting the U.S. and China, which were seeing dramatic declines, but this was not to be.

Much of the decline was led by the growth segment cratering. Depending on which venture funding database you track, the total size of venture funding in 2021 was anywhere from $35b to $41B. Growth funding ranged from $30-35B, anywhere from 85 to 90% of the whole. This saw a 40-50% drop over the previous year and is primarily the reason why the overall venture funding marketing dropped to $24-25B in 2022. The decline was led primarily by growth funds pausing investments because the multiples in private markets were rich compared to their public peers, and the weak unit economics of the growth-stage companies.

The early stage market held, and depending on the study you prefer either declined marginally or grew slightly over the past year. All studies however revealed that the average early-stage cheque was well over last year’s benchmark.

Two sectors, in particular, saw sharp declines even in the seed segment – Crypto, led by macro headwinds and scandals, and EdTech, led by growth slowing down as the pandemic market fit eased off, and led to poor retention metrics and unit economics.

We are seeing a common theme emerge across sectors – hitherto bootstrapped founders operating profitable businesses that have revenues typically seen in the early growth segment approach for Seed / Series A cheques. The 2021 bull market (though it is waning now) is a factor as is perhaps the popular Indian version of the Shark Tank franchise, which seems to have made funding conversations popular across dining tables in Indian business families. Whichever it is, it is undeniable that we are seeing a new category of bootstrapped founders emerge, to unlock value, and access capital for faster growth.

 At Blume, in 2022, we saw our average cheque size rise, led by higher quality founders, and supersized seed rounds. We invested in edtech as well, in the upskilling subsegment, built off our strong conviction to invest in education that has strong employment outcomes. Other consumer tech segments where we were active included consumer brands where we issued our first term sheet attracted by generous margins basis a structural advantage and a compelling founding team. 

The above rationale is much the same theme that will inform our 2023 investments as well. We will continue to double down on businesses that have sustainable margins, indicative of the value that they create for customers, as well as compelling founders.

Kunal Bajaj on raising money in 2023 #

The private markets became more discerning in 2022, leaving more fear than FOMO. We saw a massive correction in US tech company valuations, where the focus moved from revenue growth at all costs to profitable growth instead. 

The marginal buyer of late-stage private companies (be it a large public-private crossover fund, a hedge fund, pension or sovereign fund) is sitting out the market and will come back in 2023 once global equity markets stabilize. 

We’re already seeing signs of this with a shift in the three important global narratives that drove the markets down in 2022. 

“If the Fed pauses near 5%, the fighting stops in Ukraine and China opens up the world will feel like a less gloomy place. None of these things seemed thinkable only a few weeks ago, but they are now plausible outcomes for  Q1 2023” - Jonathan Wilmot, Global Strategist, Dec 2022

At the seed and early stage in India though, there is no sign of a slowdown as virtually every early-stage investor raised a new fund in the last year or so. 

Founders looking to raise money in 2023 should understand that the market will no longer support business models that choose customer acquisition over making money. One way to attract investors is to think about your business in a “box replicator model.”  If you can show how to make money from one box (a city, a product, a division, a customer segment), you will be able to convince investors about the inherent profitability of your business and institute fiscal discipline in your team along the way.

Ashish Fafadia on regulations around fintech #

As compliance and governance become mainstream and companies demonstrate a path to profitability, I expect investors to be back on the table in mid-2023. 

RBI came in with a host of regulatory framework changes that spooked investors, but this is likely to be short-term.  The ecosystem will be better over the next few years once RBI guidelines are aligned better. The trust deficit between the incumbents (banks) and innovators (fintechs) needs to be bridged.

There was a significant drift away from credit/payment-led models targeting SMBs and consumers and a welcome surge in infra/guardrails businesses targeting enterprises and SMBs.  Embedded plays and platforms like Central Bank Digital Currency (CBDC) will open up new sectors like cross-border payments. This can help India build a global financial services ecosystem, something that was so far controlled by a few banks and settlement systems.

Last year, we saw that more needs to be done before we accord monetary status to cryptocurrency. It is not yet fully qualified to be monies, let alone be considered a legit currency. Our exposures in the space have been very limited (less than 1% of our AUM) and we will continue to look out for plays that are using Blockchain tech to build guardrails and avoid consumer-centric plays on crypto payments and applications.

Arpit Agarwal on the changing winds in climatetech #

As VCs, we have a need to be astute about picking sectors. While all our companies make a deep impact on the lives of people, this can’t be delivered as a return to our investors. Hence, the narrow window of opportunity that comes about is only in sectors that are about to take off. 

The Electric Vehicles ecosystem has been that narrow window for us over the last 24 months.

Companies like BatterySmart scaled up while being climate-focused without any major policy intervention. These trends prompted us to go deeper into this space. In the last 13 months, we announced six of our climate tech investments - ElectricPe, Battery Smart, Aerem, Relove, Accacia and Vecmocon

As the ecosystem matures, various sectors within the EV space will attract more VC love in the next 36 months. But the broad ClimateTech space is going to be much bigger than EVs alone. We expect sub-segments like accounting software and marketplaces to get off the ground earliest. These are easier to understand, the need in the enterprise segment is urgent and they look similar to what VCs are most comfortable underwriting. Some early-stage money is likely to flow into (deep) technology startups solving for Green Hydrogen, battery recycling, and other forms of mobility like eVTOL. Infrastructure scale services like Carbon Sequestration (Blume portfolio company Carbon Clean works in this space) will become an attractive solution to fix polluting industries. Businesses that help others make sustainable changes in their behaviour and processes will find traction in 2023.

Sarita Raichura on angel investing  #

2021 was a bumper year for angel investing in India. Deals closed in minutes and valuations were higher than ever before. It was clearly a founder-driven market. For existing angels, acquisitions by the unicorns led to exits - hence, they were happy to pump back in all the profits made. We saw quite a few syndicates come up.

By early 2022, things began to change. The numbers indicate that larger platforms closed approximately one-third of the number of deals they did in 2021. Companies began to collapse and, well-funded startups went into a cash-preserve mode, and exits for angels dried up.

Coming to 2023, only serious angel investors have stayed the course. Those with crores of notional money but not many cash exits are still writing cheques, but they are fewer in number and undergoing longer evaluations. The platforms are re-evaluating their strategies - some have reduced the carry-on deals to encourage more investors to come on board.

Micro-VCs ($1.5-$10M) are mushrooming. However, it is a decade-long journey and it’s hard to differentiate in this market. Many good founders are now directly going to micro-VCs as the decision-making is quicker and relies on just 2-3 GPs.

In the pre-seed / seed stage, a good founder and proposition can comfortably raise $500K-$1M. The valuations have come down though. Two-time founder deals too have trended down in valuation including some as low as $4-$5M. 

Now that the frenzy is past us, we expect better quality deals at better valuations backed by committed angels. The slowdown was needed to bring some sanity into the system.

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