Decoding a seed fund’s investment philosophy

Decoding a seed fund’s investment philosophy

Karthik Reddy, managing partner, Blume Ventures, spoke to us about the fund’s investment thesis in the various sectors it invests in.

S. PREM KUMAR

Blume Ventures, founded by Karthik Reddy and Sanjay Nath, is a Rs. 100 crore multi-sector seed fund that has raised money from over 50 domestic investors including entrepreneurs, senior management professionals and angel investors. Till date, the company has announced investments in various sectors including niche vertical software, consumer e-commerce, employability, HR, travel, ad technology and consumer brands.

In this chat with The Smart CEO, Karthik Reddy, managing partner, Blume Ventures, briefly explained to us his investment strategy and then went on to explain his view on the various sectors (or sub-sectors) he has bet on. The company invests between US $ 50,000 and US $ 250,000 (seed round) in its portfolio companies, monitors progress closely and invests further (either between the seed and series-A round or as a co-investor in a series-A round) in select companies that show tremendous promise. The fund calls this the investment funnelling strategy – wherein it uses the nine to 18-month relationship it has with a portfolio company to dig deeper and keeps its “options” open to invest in a follow-on round.

Keeping the team’s bandwidth in mind, Blume invests either as a lead or a syndicate investor, and understands that making the right calls at the series-A stage (when it cuts the second cheque) is what is crucial for the fund. Reddy explains, “Eventually, as a Rs. 100 crore fund, we need to return Rs. 300 crore (just used as an example figure) to our investors. It is not about investing Rs. 50 lakh and getting back Rs. 1.5 crore. It is the series-A bets, where we’ll invest a larger amount, that’ll make the difference.”

Recently, the fund identified another gap in the investment ecosystem – the need for a round of funding between the seed round and the Series-A round. Reddy calls this the “green shoots” round that’ll help seed-funded companies get to a pre-money valuation of at least, say, US $5 million, a stage when most VCs are willing to invest in the companies. Typically, the seed round alone hasn’t been enough to get to the Series-A round and that’s where the “green shoots” round comes in.

With this strategy in place, the fund has made seed investments in several companies across the sectors mentioned above. Reddy sits down with us to comment on each of these sectors, the challenges and his broad-level thesis on each of these plays.

NICHE E-COMMERCE: 

We decided to look at the e-commerce space with a slightly different perspective. The questions we asked ourselves were: Can we solve a problem that is not being tackled by a flipkart or any other larger player? Can we build up a business by focusing on a niche that could potentially scale up to say a US $100 million company (in value)?

We’re very clear that we cannot compete on pricing or volume with the larger e-commerce players. The four tenets of e-commerce are discovery of newer products, best price, convenience of home delivery and buying anytime. These have largely remained the same since amazon.com’s inception. The problem we’re focusing on is how can we enable the larger players. Can we help with logistics or payment or create brands that can supply to them?

Take the case of Sportsnest, a company that sells sports goods. After a few modifications to its business model, the company today services the B2B segment and can be defined as a sports goods supply chain-as-a-service provider. If someone wants to startup a sports shop in a tier-2 city, he could source all his products from Sports Nest. Today, Sports Nest services Snapdeal’s supply chain of sports-related products. It supplies to schools and works with coaches. We believe, there is tremendous potential on serving this niche very well. In the future, the company may get into establishing its own private label. Once it understands the B2B business, it can look at other categories. Once FDI opens up in retail, such players may become valuable and relevant. Time will tell. Overall, our thesis is, for a fund like ours, we’ll have to spot a play way ahead of when VCs spot these trends.

BLUME’S PORTFOLIO:

SPORTSNEST,

PLAYGROUNDONLINE.COM,

GIFTERY,

UNAMIA


VERTICAL SOFTWARE

For software-as-a-service and software product companies, I think the key is early-stage customer adoption. You use your network, tap into your advisory board and use your angel investors to get some early customers. The important thing here is to solve a deep problem faced by the customer. It should be something the prospective customer deeply obsesses about and if you can give him a solution, that’d be great. For example, Mobstac clinched The Hindu as a client. Mobstac’s product helps the newspaper with all its mobile publishing. It is a deep problem for them (publishing on mobile devices) and Mobstac’s solution is a good one. Otherwise, a publisher needs to work with a few development companies to make this happen. The whole approach has to be  problem-driven, customer-driven and sector-driven.

At an investor level, VCs probably look for a much bigger market size – say around US $ 500 million out of which they want to capture US $ 100 million. We, as an early-stage investor, feel that we have done well if touch Rs. 100 crore in size. Then we need to figure out how this company can scale. If you have a deep relationship with the client, they’ll seek your help to solve their problems on a recurrent basis. You scale by having that stickiness and deep relationship with clients.

The other observation in this segment is that the global market is huge. You can use India as a test bed, but can you make it a global play? Largely, a global play depends on partnerships and the ability to find a great channel partner. I’d recommend these vertical software companies to keep costs low and see some traction by serving the right clients. For mobstac, we’ve a have a couple of partnerships with Google and Pubmatic that is helping the company scale outside of India. Partnerships are crucial.

BLUME’S PORTFOLIO:

OVASCIS,

EKI COMMUNICATIONS,

EXOTEL,

GHAR PAY,

HOTELLOGIX 


ADVERTISING AND MARKETING TECHNOLOGY 

This sector is very tough to break into. To give you an example, there are three or four companies trying to track ads (to measure the reach) as they are playing on TV. The question here is: who pays for this offering? In this space, there is usually a gatekeeper as well, which is the media agency. Your technology might help a brand plan its advertising spend better, but the media agency already has a deep relationship with the brand manager. So, as a startup founder, you will have to go convince that brand manager to use your tool. Now, the manager personally won’t use that tool, someone junior will. He has to be trained. Then that person has to come back and say the tool is very useful. I’d say, the industry process and relationships are well defined and that is what makes this a tough segment to play in.

To give you an example, one of our portfolio companies, Red Quanta, is working on a business model around mystery shopping. We’re seeing good progress and I’d say one of the reasons for this is the payment comes out of the brand budget. A company’s private equity investor will say lets look at reports on how service quality is at a store-level. Red Quanta’s offering comes in handy in such situations. The good thing working in our favour is that there is clarity on who pays for a Red Quanta report; it is the brand manager.

At another portfolio company, Adepto, we’re building a product to tackle a brand’s social media challenges. Crowdnub, as the product is called, helps in brand building, and more importantly, engaging its fan base. The big challenge (again) here was figuring out who within the client company would pay for this product. It also took time to signup large clients – the company eventually signed Jet Airways. I’d say the market for such products is global and that is the strategy our portfolio will adopt. But solving a deep need and building deep relationships with clients is crucial here as well.

BLUME’S PORTFOLIO:

ADEPTO,

WEBENGAGE,

ZIPDIAL,

REDQUANTA


ONLINE HR, EMPLOYABILITY AND TRAVEL

Here, the potential lies in the second generation of what a sophisticated job seeker, traveller or an employer wants. The successful guys like naukri and makemytrip have already solved a few problems (easier booking methodology, finding jobs online etc.) in these areas. Let’s say, I, as a consumer, buy my ticket, travel by air and land up in some place. What next? It is answering such questions that’ll make up the second generation of businesses in this space. I call it the sub-niches. It is highly risky, but the goal is to evolve further than where we are today.

For example, in the HR space, there are several broken links across employment and employability. This cannot be solved trivially. Recently, Hindustan Times bought myparichay (a business built around employee referrals) to bolster shine.com, the newspaper’s job portal. Such acquisitions will happen and could potentially drive more startups in the space. Maybe, with the advent of 4G, there is good potential for mobile plays in these sub-niches.

The other aspect I’d like to point out is the opportunity to create hybrid companies with a combined online and offline business model. One of our portfolio companies, IDfy, a background verification company is working on such an approach.

BLUME’S PORTFOLIO:

23 SPACES LABS,

IDFY,

CAREERVITA,

METTL,

MOBSTAC,

POLAMA,

TAXI FOR SURE 


CONSUMER PRODUCTS 

We’ve invested in a couple of consumer plays –The Style Kitchen, the company that owns the Missisippy brand to sell nutritious, eco-friends food products and Cherish Maternity, a retailer of maternity products.

The entrepreneur at Cherish, Arathi Kuppu, started a traditional retail store to sell products to pregnant moms. Then she wanted to scale up and go the e-commerce route. Over time, she figured out that the older model was better. For example, she started working with doctors as a channel for customer acquisition. Pregnant moms want specific products, for example a comfortable sleeping pillow designed for pregnancy. There was no branded player and there was potential to create the Cherish brand. Today, Cherish is working on creating a brand for a wide range of products for pregnant women (T – 9 months to T + 9 months). So, I’d say Cherish is now part of our consumer brand portfolio rather than part of our e-commerce portfolio. We figured this out after the investment was made.

With Mississippy, we’re investing in a venture that is looking to create a brand around selling cereal snacks, whole grain cookies and herbal teas.

BLUME’S PORTFOLIO:

MAD RAT GAMES,

THE STYLE KITCHEN, CHERISH MATERNITY 

At a broader level, it’ll be interesting to track how Blume’s investment strategies pan out. At The Smart CEO, we’ll also be closely tracking the portfolio companies to draw insights and observations from the many different business models they operate on.

Leave a Reply

Your email address will not be published. Required fields are marked *