Why Don’t More Indian Startups IPO? Karthik Reddy On The Use Case Podcast

The following is an excerpt from the Use Case podcast where hosts Ravish Bhatia and Jayadevan PK quiz Karthik Reddy, the co founder and Managing Partner at Blume VC on why the Indian VC world faces a lack of cash exits and on the broader systemic challenges that exist in the Indian startup ecosystem. He calls for a shift in the consciousness of the industry, focusing more on profitability and sustainable rather than reckless growth. You could listen to the audio of the episode on Apple / Google Podcasts/ Spotify/ other podcast platforms or on the Turnaround Newsletter. Subscribe to the show on turnaround.substack.com.

Ravish: So, Karthik, the reason we reached out to you was because we saw this interesting blog post on the Blume website… But for those of us who’ve not read the blog post, help us understand the debate.

KR:I’m trying to provoke, stimulate the ecosystem and start a debate about why we fund the companies we do using institutional venture capital. The reason we exist is that we usually pick founders who are trying to either disrupt or create a new market, build new use case behaviors or categories. So I’m fully cognizant of the fact that, it requires a boatload of venture capital. I’m not saying that I expect them to be profitable in year one or year four, that’s not my point. The point is, eventually, to be able to see the value generated out of that outcome, you either have to be able to build a sustainable business. People used to laugh about Facebook and Twitter in the early years, they generate a boatload of revenues and profits today, right? Eventually, there’s got to be a sustainable business model, either that comes from advertising, subscription or commerce of some kind.

And so in a nutshell, the reason I’m saying what I’m saying is, everybody who’s giving you that capital from an institutional VC is looking for cash return on the investment made. Somebody asked me, are you waiting for secondaries to happen your portfolio? I said, “No, that’s not a great outcome.” Why should I think that that is the only way I should exit? Are you basically saying that the company is not capable of going IPO and that’s why it’s still, you know, changing hands in the private market?

And at least that is the truth so far, that we’ve not generated profitable unicorns yet. You’re not able to count them off even on one hand and that is a worrisome thing.

JPK: Just one of the things that I’m hearing is about how, as a founder, you treat other people’s money with respect and with a sort of prudence that the old school businessmen had because they put their credibility on line. But I want to rewind the clock a little bit, you know, go back to 2011 when Blume started. There were only few micro VCs like yourself, who were doing investing and then you know, you started seeing newspaper clippings and you hear a lot of larger funds, without willing to put in that effort and time into these companies. And did that have an effect on how things shaped up in the rest of the journey, If you look at Indian startups?

KR:I mean, they’re free to do what they do. And I think it’s all healthy for there is always net positive effects of all the madness. But it’s been a decade and I think, you know, the clock for experimentation is expiring, right? So you essentially, you do all the experiments you want once you build the outcomes on the other end of the funnel, right? And the outcomes have not started coming as fast as the experimentation keeps widening. I can’t visually depict this because we are on a podcast, but I had this kind of mental graph that I show every LP that the funnel in India used to be very narrow at the top where like you said, there were very few micro VCs and angels, and it used to narrow to 10-15 Series A. In the last 10 years, what we’ve done spectacularly is just kept on widening that top of the funnel, without doing anything to change the choke point of Series A capital. As opposed to doubling down and picking better.

Ravish: Don’t you see there’s a problem in that, and we have multiple databases in the Indian VCs ecosystem; all of them have pointed out that in the last three years, the total funding that is coming into the Indian startup space has increased, but the number of checks that have been written have decreased. And so the deal sizes and ticket sizes have usually gone way up. Does that say that most of the capital is being pumped into the already bad players? And the damage that it does for the ecosystem is that because big players are not exiting, they’re not leaving room for new startups to emerge. Is that an overarching argument to make or is there some sense to it?

KR: It makes some sense partially. After I wrote the blog, my colleague Sajith Pai wrote up a tweet storm where he said that globally investors are trying to infuse more capital into the company so that they can capture more of that value and not share it with the public market investors. After Flipkart got acquired Paytm, Ola, Oyo etc and for that matter, companies which were on the verge of profitability, like a Delhivery, Lenskart, BigBasket instead of moving towards profitability are on path to justify a higher valuation and drive more private capital into that company, which in my opinion, could have been avoided. You could have actually passed on that wealth, to the public market. I don’t think the journey is getting any simpler.

At some point you call the things and say “Hey, there’s enough money. I can show profitability. Now let me raise public capital.” Why postpone that by 2X and make it seem as if that is radically simpler, just because you’ve done it inside of the private domain? Unless you’re saying the model is not yet sustainable, and I am saying, what is that limit, right? Can you absorb $500 million, $2 billion? Where does it stop? How do you absorb that much capital and actually make it meaningful? I

Ravish: In the foreign markets, including the US, we’ve had companies that were not profitable, but still got listed. So do you think it’s more of a regulatory issue for India, where companies that are not profitable for the last two three years and not allowed to list. Is that what’s stopping the market?

KR: I think these are all excuses. I think who are making those comments have not even gone and met the regulator or the exchanges before 2019. If you have started this conversation in 2014, it would have happened in 2019. You can’t parachute in in 2019 and say I lose hundreds of millions of dollars, let me go public. In India, everything takes time.

Okay, forget about India. If you had this issue why aren’t you listing overseas? That’s what the Chinese are asking us. The Chinese supposedly had the same problem. The Chinese public markets are not used to seeing large loss making companies on the exchanges. So the bulk of these businesses went to NASDAQ because you had a US firm. But you had numbers you could disclose you had unit economics which were beginning to trend in the right direction, and you had large enough numbers that they were worthy of taking. That is the point. If you’re saying, “I don’t have numbers worthy of position in NASDAQ, then why are you taking more capital?

JPK: You know, the other thing to think about when you’re looking at US companies is that they have a track record of going public with  razor thin profitability going public, and then showing value to the investors. So every time a new company is out there in the market, the investors are like hungry for it like retail investors or, you know, even the bankers are happy with it. I don’t know if that’s the same case with India. Because, you know, if at all we go public, you know, I don’t know if the retail investors do have the faith to back a company which doesn’t have…

KR:In the US, the market size and the capacity and the capacity of the customer, whether its enterprise or consumer to be able to pay and eventually take you down the path to profitability has been proven many a time around. If you tell me that there’s one more of the same nature coming to go public, I can believe the damn playbook, because you’ve shown it to me 100 times before. I don’t need a fake playbook.

Ravish: I was reading Sidharth Rao’s new book, How I almost blew it, in which he had a chapter in which he did an interview with Pradeep Kar from Microland, and they talk about the 1997-98 time when they were thinking of going IPO. They were competing essentially with Infosys back then and they had a revenue of 180 crores when Infosys had a revenue of to 260 crores. I think Infosys earnings call came in for the last quarter yesterday. So, that number has grown massively since then. But then suddenly the whole Pavan Sachdeva scandal came up and the Bombay Stock Exchange closed for three days. Looking back, Pradeep today says that and I quote this directly from him. He says, “Had we gone public, we would have probably got screwed. Being a public own company would have taken away our ability to shut down operations and pivot.” So, do you think when companies actually list there is a restraint that puts on them, which is good for discipline and good for corporate governance, but that also limits how much they can pivot? And this is important because when we are talking about companies and their path towards profitability, how much leeway as an investor are you willing to give them and is it even true that they lose that ability to pivot?

KR: Yes and no. Which is why I said maybe the timing is not about listing for the sake of when you have uncertainty in a large part of your business model. You have to have some path towards sustainability. They counter the same argument that I made with Tarun of E2E. Once the money’s in the bank, unless you’re being dishonest about how you use it, right, or the lack of integrity on how you’re actually building the business, I find that the other point is a little bit of a fallacy in the sense that I don’t think these employees and himself came to work to be because they were listed. And yes, you might have faked the fact that there’s been no value destruction by being private, which is what we are doing as an ecosystem, like whether we’re creating or increasing value. The milestone marker is only the last round valuation, right?

JPK: Karthik one, you know, theme that seems to consistently sort of, you know, linger is that the Indian economy itself like a larger theme, right? Like, you know, you have a per capita GDP of you know $2,000 odd and you need some to be somewhere around $4,000  for the digital economy to really take off and start making sustainable profitable businesses. And over the last few years, we have seen many things happen for the good but we’re still nowhere close to that real uptake where you have a large middle class, large disposable incomes and large consumerist tendencies taking shape. Do you see this as a big challenge ahead of us in terms of, you know, having to first address some core issues before we actually go ahead and sort of pump in all this money into the ecosystem?

Ravish: Yeah. I’ll also add one more question on the ecosystem to this. Are Indian markets, even equipped to understand and have confidence in new age businesses, which startups usually are around?

KR: I think we are undermining intelligence of people, right? Eventually, they’re only worried about how businesses can make money, right? So even when VCs actually back something, that’s because they’ve seen that trend line in the past. VCs are not geniuses, they’re basically just great readers of trend line, right? When something gets backed in India, it’s because it worked in China or the US for that matter, or when they back the 14th different plan on some form of commerce, it’s because out of the first 13 they’ve seen three fantastic outcomes.

So, if you say, India suddenly will start developing a crazy, really interesting biotech market in VC, it won’t happen. Because we don’t have the the ability to sort of absorb those kind of things.

I think my answer is basically, my problem with the ecosystem is, if you are aware that the macro is not changing fast enough to be able to absorb the cost of acquisition or cost of subsidizing certain changes in behavior, then how do you monetize?

I know whether we are creating a new bank, a new model of commerce, a new model of media, these are going to be expensive. I’m not denying that, but on what outer bound? For example, if your model is to be dependent on advertising revenue, the model is to be dependent on Commerce revenue, then the capacity is already established. You can’t have that market to your macro question. You can’t have the overall advertising economy grow at more than 2x that of the GDP. We’ve seen the trend line for 15 years. How’s it going to change in the 16th year because you pump more money into your startup?

Ravish: What should the ecosystem do together to ensure that more sustainable business are built, that unit economics take precedence? And secondly, if right now is even a good time to IPO in the next one or two years, given that yield curves in the US are inverting, especially impacting those who want to list on NASDAQ?

KR: You know forget IPOing, intent itself has not been expressed by more than 10 people. The journey from intent to even possible action is two years minimum, if you ask me. The amount of prep that goes into wanting to be a public company, both in the mind and in reality and in employed resources to be able to pull that off, bankers, advisors…that readiness is about 24 months. I think the solution is to be able to be a little bit more calibrated on when you raise a round. Are you conscious of being honest with what the proceeds of that round should actually enable in terms of performance? And so people are sometimes blindly sharing, or sort of blindly promoting top line growth, without any basis of saying, is there long term sustainability of this business model?

It’s  very easy to do, especially in e-commerce. You keep throwing discounts, you keep building, more and more people will game the system and buy from you.  The customers and the retail crowd is very smart. So if you’re calibrating yourself through most rounds fairly well, I think you’re building strong fundamentals of the business. And this includes, for example, amping up your team to be able to scale to that level.

For the full conversation check out the Use Case podcast titled “Why don’t more Indian startups IPO? With Karthik Reddy, Blume VP