Start-up Street: Will 2024 see more Dragons take wing?

Highlights

• There are many lessons to be drawn from Blume Venture Fund I data


• Just 20 percent of the start-ups that the fund had invested in accounted for as much as 98 percent of the total returns


• Just GreyOrange returned more than 150 percent of Blume Fund I - making the start-up a “Dragon”


• The Blume I numbers have established that Go Big or Go Home has to be the mantra for every VC-fundable startup in India


• Software and Enterprise Tech sector companies provided a 9 times return to Blume Fund I


• The highlights from Blume Fund I will only provide VCs even more reason to look more favorably at Enterprise Tech, SaaS and DeepTech startups.

As the year where the Funding Winter bit the hardest draws to a close, start-up founders will clearly look forward to a much brighter 2024. As they prepare to make fresh funding pitches to Venture Capitalists in the New Year, start-up founders would do well to draw some key lessons from the recently “declassified” report detailing the performance of home grown VC firm Blume Ventures’ first fund.

Power Law Applies Here
It is broadly understood that the success of a VC fund is determined usually by a top few portfolio companies that provide outsized exits. And that about 50 percent of the investments don’t work out (i.e, end up being written-off) and the ones in between (providing say, between 2-3x returns) don’t end up moving the needle much for the fund. However, the data to support this thesis has so far depended on Silicon Valley VC funds.

The data of the 2011 vintage INR 100 crore Blume Fund I finally provides local data to establish that this “Power Law” of VC returns very much applies to India as well. Just 20 percent of the start-ups that the fund had invested in (17 companies out of a total of 78) accounted for as much as 98 percent of the total returns! And just three start-ups (less than 4% of the portfolio) - warehouse automation start-up GreyOrange Robotics, carbon capture tech start-up Carbon Clean and insurtech start-up Turtlemint - accounted for 50 percent of the fund’s total 5.7 times return. Just GreyOrange returned more than 150 percent of Blume Fund I - making the start-up a “Dragon” (or a company that returns more than the size of the entire fund from which the investment was made).

In an environment where they are already more selective, this data point will only make VCs expect the start-ups pitching to them in 2024 to be more “GreyOrangish'' - ie, have much more likelihood to produce an outlier outcome. As Blume's co-founder and managing partner Karthik Reddy said in a media interview post release of the report, “Raising $250 million means we are signing up (to return) a billion dollars; there’s no running away from it, which means each large outcome should be over $100 million just for Blume...”

What is the take home for start-up founders? That VCs need to be “Unicorn Hunters”. If your start-up is unlikely to hyperscale into a mega company worth Rs 8,000 crore or more, the chances are that Blume and equivalent sized VC funds are unlikely to be interested in funding you.

As a first-time founder, while the prospects of creating such a large outcome may seem daunting (and an Icarus-like agenda), there is no escaping the VC math behind the need for mega scale. Everything else might be ok. For example, VCs are likely to be ok if founders take “money off the table” through part exits along the way - so that they stay motivated to keep aiming big. But there should be no doubt about the size of the potential prize at the end of the ride.

The Blume I numbers have established that Go Big or Go Home has to be the mantra for every VC-fundable startup - in India as well.

Tech Domination

Software and Enterprise Tech sector companies - led by GreyOrange, Carbon Clean and E2E Networks (a web hosting company that went public on the SME stock exchange) - provided a 9 times return to Blume Fund I. This figure is three times the returns generated by start-ups that did not have technology at their core, even though such start-ups - including Domestic Consumer (read E-Commerce) and SMB focused ones - accounted for about two-third of the fund's investments.

At a time when businesses with positive unit economics are already being preferred (over the now infamously cash guzzling B2C startups), this highlight from Blume Fund I will only provide VCs even more reason to look more favorably at Enterprise Tech, SaaS and DeepTech startups.
With public markets at all-time highs and IPOs going strong, there is clearly more optimism in the air. The release of the Blume Fund I data is another sign of an increasingly confident VC industry. Here’s hoping the optimism and confidence among investors at the end of a very challenging 2023 spills over into the New Year. And results in the creation of many more deserving Unicorn startups and outlier VC funds, with many a Dragon to their name.

Arun Natarajan is the Founder of Venture Intelligence, India’s longest serving provider of data on Private Company Financials, Transactions (PE-VC and M&A) and their Valuations. For more information, please visit
https://www.ventureintelligence.com. Views are personal, and do not represent the stand of this publication.