Building a portfolio by developing a Conviction Criteria

I’ve always maintained that the “job” of an early stage investor is to have a view of where the world is headed. Yes, perhaps great teams are predestined for success and yes, the ever-important “size of market” question becomes primordial in the quest for what will eventually become a ‘great investment by Venture Capital standards’, BUT these are Selection Criteria. As a firm, as a team, as an individual investor at Blume, we need a Conviction Criteria to be able to decide what we even begin to look at.

Conviction comes in a 2-flavored ice-cream cone – you have to taste them both together. The first is how human behavior will trend and the corollary is how you (as a firm and an investor there) would like to help shape such behavior. This is a gargantuan ask and responsibility and implicit in it is the second flavor – approval of the Fund’s Investors who are called LP’s (assuming one has raised money from investors and its not your own). To state the obvious, electronic betting and adult sites would probably be frowned upon by some LP’s even if you liked them basis trend spotting and if you had a personal choice.

The primary guiding light in Blume has been that for a country our size, with its scale of problems, no tech = no scaled answers. The tech fund premise began there. Of course, a lot of characteristics of great tech startups have fed venture capital through its 50 year history– risk capital available per startup, speed at which a great team and idea scales, behavior change it can create etc.

Fund I Sectoral Snapshot

Let me walk you through one broad category. If you took a sweeping look at the portfolio built in Fund I and early parts of Fund II, an obvious obsession in the Blume portfolio is ‘efficiency’ and ‘productivity’ e.g. anything that has a good shot at saving the planet through energy savings – route planning, supply chain optimization, energy efficiency. On the other hand, big data, for example, without an end application, is just data – a founder with a vision to use the data to transform an industry for posterity is a delight to listen to and watch grow her/his business.

Speaking for my preferences (and not necessarily that of the entire Blume team), this early focus on efficiency and optimization comes from the seemingly abandoned Engineering education but deeply instilled programming of my brain from 20-25 years ago. Starting with almost every element of my Industrial Engineering curriculum and arriving from a chaotic, everyday India to an incredibly market-efficient and tech-enabled US in 1999, that decade shaped my obsession with efficiency and productivity. And what better test bed for anything that leans in this direction than India!

This is how we are beginning to operate now at Blume, across the firm. Or rather how I’m forcing it down the throat of my colleagues as the defacto-CIO. Its not a perfect science and it will never be, else we wouldn’t get any bets wrong. It’s also not a new thought process at Blume. This was always the mandate. It just took one investing cycle to demonstrate to everyone in the team that this is the method that allows us to be doggedly passionate about our portfolio. I would argue that (excluding the value of a founding team’s sacrifices that are always unquestionable through most of the startup journey), the death of some of our portfolio companies were more felt as much by the Blume team as the portfolio company founders. That’s the emotional downside of building Conviction – it gets a little more personal than maybe you would like as an Investor – but we are an emotional firm and we wear our Conviction proudly on our sleeves at Blume.

This is the first in a multi-part series that I’ve started writing and will be continued by my colleagues and myself through the year and beyond

(Updated: Parts 2, 3, 4A, 4B and 5 – coming shortly)

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