Karthik B. Reddy and Rohit Kaul of Blume Ventures talk about the Power of Compounding

Blume

Karthik: We played with opportunity funds into a company like Purplle at $50 to $100 million or an Unacademy between $50 and $100 million, and Slice also at that level. And today, they've all passed the unicorn mark, for what it's worth. And I'm judging the founders, but then also, I might have been fooling myself if I knew this for a fact. But now I'm actually quite clear that all of them want to build these companies to leverage the power of compounding. They can still grow 10x from here. So when you take the totality of that multiplier, it's just an amazing journey.

Rohit: Warren Buffet says, “My wealth has come from a combination of living in America, some lucky genes, and compound interest.” We all know Warren Buffet as one of the best investors and richest persons in the world, with a net worth of over $100 billion. But do you know that ~98% of it accumulated after his 60th birthday?

Rohit: Morgan Housel, the author of the best-selling book, The Psychology of Money, theorizes that if Warren Buffet started investing in his 30s, like most of us, and stopped in his 60s, like the rest of us, his net worth would be less than 1% of what it is right now. In other words, the genius of Warren Buffet is not only that he picked multi-baggers, But because he stayed in the game of compounding for so long.

Rohit: Welcome to the second season of the Blume Podcast. I'm Rohit, I lead marketing at Blume, and I'm your host today. Our guests in the second season of the podcast exemplify compounding. These remarkable founders have dedicated their lives to building generational companies. Despite facing numerous challenges, setbacks, and near-death situations, they have persevered, always believing that there is something more to be done. With their unwavering determination, they have compounded their ideas and resources into multi-billion dollar enterprises, but instead of talking about their valuations, in this podcast, we talk to them about tales of courage, anecdotes of resilience, and of course, the stories of compounding.

Rohit: Today, we talk to Karthik Reddy, co-founder and managing partner of Blume Ventures, and the host of the second season of the Blume Podcast. 

Karthik, last year, the theme was X-Unicorns. This year, we are talking about the power of compounding. So is it a shift from X-Unicorns, or is it more of the same? And what is your inspiration behind the power of compounding?

Karthik: Thanks, Rohit. As you know, the annual podcast theme kind of slowly emerges out of the womb of Blume Day every year, and that's how we've progressed this. And if you see the Blume Day T-shirt this year, its form is temporary, class is permanent, which is a way of saying when you build long-term sustainable organizations, that's when you're deemed remarkably memorable and world-class in the long term. And, what we see in the venture world is a lot of celebration of fleeting milestones which may or may not survive, and it comes from this underlying fact that to be able to build with some degree of attempted permanency, you need to be able to compound value for all stakeholders. It's not about valuation, and it's not about investment, what it returns to the investors, but it's also about how it compounds in terms of its recall to customers and value to every person who's built that company along the way the team. So I think that was the motivation when we got the podcast kick-started. So primarily my motivation, and we'll come to who the guests are, but when you look at what I was attempting here, I wanted the narrative to shift away to a new set of role models. So if you look at our mainstream media and what we've been tom-tomming in the venture world for the last decade or so, we've been constrained by playing who gets fastest to the unicorn stage. And that is not the true test of whether these survive and become very large companies. The idea of showcasing these companies in the Power of Compounding series is that they might have been built slowly, but the founders didn't build for valuation.

Karthik: They built for sustainability. They built for profitability. A lot of the time, all of that is a very non-sexy venture narrative. But that's the thing. It's only seemingly. I think the biggest venture paradox actually is that the entire ecosystem earns its stripes by sort of claiming trophies around such legendary companies or having their portfolios acquired by them. Those are the companies that have compounded the longest, right? And it's not by the ones that come and go in three or four years. And such outcomes have to compound dramatically post the 7 to 10 years mark, sometimes longer. So, to actually draw a very objective delineation between X-Unicorns and compounding, X-Unicorns was the tough, arduous route through the first ten years. The power of compounding stories were picked for the possibilities of scale post the ten years mark. And that is fundamentally what we're trying to bring out this year. 

Rohit: Amazing. Double-clicking on compounding. We have all learned about compound interest and compounding in school, but still, many, if not most of us, struggle to grasp the true power of compounding. Why do you think compounding is such a difficult concept to understand, and, uh, what could help people understand it better? 

Karthik: You opened your introduction with Warren Buffet. He is also attributed, whether other people said it or more or equally, for having called compounding the eighth wonder of the world, and it's because, as you said, he has seen the power of it. He has seen what it can do for wealth creation and eventually reached a point where he started funneling that capital towards charitable or societal impact causes along with Bill Gates and others. What people don't realize is it is a luxury. So at one level, it's a luxury. You compound when you have philosophically the ability to think through very long-term objectives, being very missionary in your objective and not worrying about short-term goals.

Karthik: And 98% of the world is not crazy enough to ignore the short term, the needs of the daily life and daily travails, right? And so, compounding doesn't happen if you think short term. Like how if you look at your fixed deposit in the bank and you invest in one for five years while reinvesting your interest every three months versus taking out the interest every three months, they're very, very different numbers at the end of five years. So it's not about the formula, but for it to multiply the application of capital, it has to hum and be in cruise control. It's not about taking capital and spending it to reach a certain steady state. It's actually how you have made that steady state possible, after which is when the effects of compounding kick in. And most people don't make it to a steady state. That's why it's so difficult, even when it comes to discipline around health and savings. And these are the other things that compound, right? It's easy to say yoga is good for you, but how many people will actually do it, for years at a stretch, and people want like one year or one-quarter outcomes, you're not going to get much. Right? And so anything which is long-term good by definition compounds in my view.

Karthik: So if you want to hit that cruise control mode of compounding from an organizational standpoint, I think you have to incredibly stable, well-established culture. You need to have incredibly stable organizations, processes, and teams, and you got to have customer love. And you know, you've hit that point when you have what I believe are cash cow products, which means, people could all go to sleep for a few weeks, and everything will just hum along. Most people think it's a mythical end state, but I actually believe that compounding is a more achievable end state than the mythical unicorn. So, I would aspire to drive most of the founders that I partner with to the compounding journey, not the unicorn.

Rohit: If you look at the last four or five years, for every company you look at, which displays some power of compounding, there are some other companies, which have become much larger and have grown much faster in a very short span of time. Do you see this going against the narrative of compounding?

Karthik: I've been a part of a bunch of WhatsApp groups where these debates are happening. Right? For the last two years. Were we right in spending, burning through as much capital as we did? Yesterday I was speaking to a very seasoned second-time founder, and everyone admits we just spent way too much money to get the business to where it was. So I think it’s the circumstances. It's not like you can't build, but it's very difficult to build in isolation, ignoring all external circumstances, right? So I think circumstances of classic cycles of fear and greed we've had. We've had an incredibly long run of the greed cycle before the pause has come with the fear, the fear hiccup at this juncture and, as a result, short-term memory because that's what all humans are good at, points to the fact that we have celebrated, these power law of venture investing, yielded by short term unicorn formation rather than long term power of compounding outcomes.

Karthik: And I think if you go back seven, eight cycles like in the U. S., I think you'll find this to be a false narrative. You have to measure it over a longer period of time. I think we're taking a very ad-hoc, short-term sort of slice of time and trying to extrapolate these conclusions from them. I think it is possible, so don't get me wrong, it is possible that market situations in terms of capital availability, the genius of an entrepreneur, market changes, regulatory changes, etc., create that rapid increase in valuation, which could be legitimate. I'm not saying all of it is fake, right? You can legitimately have a shot at taking off. But my answer to that is in the proverbial hare versus tortoise race story. Who cares who's leading when 25% of the race is done, or 50% of the race is done? We only care about end outcomes, both the entrepreneur and me as the investor. So if the debate is about which path to take, there is no doubt in my mind. Great example 

Rohit: Great example of the hare and the tortoise. You touched upon briefly on the power law of compounding and the power law of venture. We've all heard about the power law of venture, and we've all read books on that. What would be interesting to understand is, do you think there is also a power law of compounding in the venture ecosystem

Karthik: I think there is one, but it's been difficult to exhibit for both ends of the private equity spectrum. For an early-stage venture capitalist, you start very early in the journey, and the establishment of the various foundational pillars for compounding takes so long that when the compounding journey is beginning, you're actually out of the door. You've cashed in, there's pressure to show returns. You're raising not just the next fund, but the fund after. Your LPs are asking, why haven't you given the money back? And so, you're actually selling short, I would argue. And not playing the long game. On the private equity side, I think they're there for a more consistent shorter duration appreciation of value. They're not playing the 10-year or 12-year games. They're only playing the three-year or five-year games, right? If you look at most private equity term sheets, they will say that I want an exit in five years. Ours, at least for what it's worth, we'll say seven years or eight years. So all the stories that you know, we have some of them being featured in the podcast, are stories pre-2010 or non-VC funded. So I think there is no law on the power of compounding since VC terminates too early, takes its gains too early, and private equity folks play for too short a period of time. And even if it compounds at 25% or 30%, it is very attractive, but it can only grow 3X or 4X, not 10X or 20X, because they've come to a stable state. 

Karthik: I'll give you one personal anecdote about the conversation that I have with LPs. I say that the idealistic end state that I would want for a Blume for the core activity that we do, which is early-stage investing, is you model that for a three-year period and see what you can get out of it in 10 years. I get that. I don't think that can change because you have to show money back at some point. But, you know, by the 7th, 8th, 9th year, you start getting a feel for what can actually play out in the power law of compounding. We played with opportunity funds into a company like Purplle at $50 to $100 million or an Unacademy between $50 and $100 million, and Slice also at that level. And today, they've all passed the unicorn mark, for what it's worth. And I'm judging the founders, but then also, I might have been fooling myself if I knew this for a fact. But now I'm actually quite clear that all of them want to build these companies to leverage the power of compounding. They can still grow 10x from here. So when you take the totality of that multiplier, it's just an amazing journey. But my time's run out. What do I do? So I used to tell LPs that I have this dream of reaching a point where we've returned enough capital that you allow us to keep the gains to run a perpetuity fund. So it's an evergreen fund. So I tell founders this as well. They say, how come you're not selling, a lot of people are selling. How come you're holding for much longer? How come you're rotating your capital? Because I'm waiting for the damn power of compounding, right? And I think it's coming, right? It's almost there. So I'm tempted. And more importantly, as long as you believe you're coming to work and have confidence in your own ability to compound at 20-25%, I want to be in on the journey. It's the cheapest ride I can get. You've been there for ten years, doing all the hard work. Founders put everything in place. That's why I said the machine is humming. Why would you want to get out? And so I would say I want this perpetuity vehicle eventually as my end state. So I'm just saying, I do believe that's the only way you can lever the end state of both - the power law of venture, which creates those freak outcomes, but then also takes the very best ones.

Rohit:  So Karthik switching gears, coming to the second season of the Blume podcast. We've spoken to a number of guests. It would be interesting to understand what are some of the themes around compounding that you heard from our guests, which really resonated with you.

Karthik: There are some learnings. There are some expectations. The longest journey we're going to record is someone who's close to 50 years in this journey of compounding. And the shortest is a little over ten years, which is Lenskart. The idea was to show a range of different businesses, a range of different styles. To show a few technology businesses, a few seemingly non-sexy, non-tech businesses. And yet extract the idea that the themes, the behavior, and the principles are about the same with such diversity in styles. This is where entrepreneurs falter. The best ones know that there's nothing like copying. It's your own destiny. You take pages out of other people's playbooks here and there and adapt them to your strengths. Every journey looks ridiculously unique at one level, but they're always common patterns. What does not surprise me is that element because I've had a strong belief that that's what entrepreneurial journeys are about, which is they are individualistic in their pursuits, but they have common principles that have to fall in place for this kind of massive compounding to happen. There's no way to judge or test that, by the way, in the fifth or sixth year of the business, however hard you try, how much ever you grill because they haven't reached that point. They are still burning capital, still establishing. Sort of the gravitas of an organization that can build for another 10-15 years. But once it's reached a point, you start seeing these remarkable similarities. And, uh, that's been, that's been kind of the biggest takeaway for me, that it validates that thinking.

Karthik: And I want more entrepreneurs and our audiences to understand that that's what it truly, truly takes. Not like a cool idea that may or may not last three-four years from now or be relevant for both the customers and for them. Those are fine, there's nothing to shun any form of entrepreneurship, but I have a personal bias, as I said, towards the folks who want to long-term compound, and I'm constantly looking for what kind of triggers fall in place, and for the entrepreneurs, I'm giving them enough cues to take away from a new set of role models. And for the venture capitalists, I'm asking them to index only on such founders. They're the ones who will make us all proud as an Indian ecosystem that has delivered at scale. So what if you have thousands, and they're all dying? It's like everywhere else in the world, but who remembers them after the second year? Nobody. So, if you're looking for specific characteristics, I do firmly believe these are the characteristics that you need to build legendary companies. I'm just trying to extract them. I want the audience to, I don't want to profess what they are, I want them to be able to invite them from each one of our guests.

Rohit: Great. Thanks, Karthik. Lots of good points in this conversation. Getting inside the mind of VC from a power of compounding perspective, understanding why we're indexing the entire season on a core thought, and what the audience can expect when our episodes start rolling out. If you're listening to this podcast, we have also dropped our first episode, please continue in the playlist and listen to it now. Thank you.