Exit timing – cap out or tap out

The fact that the Indian rupee has depreciated from approximately Rs 55-56 to the dollar (when Kalaari made the investment) to Rs 74 to the dollar at the time of the exit dents the numbers significantly, dropping the return multiple to 3.2X and the IRR to 25%.

A total investment of Rs 3.5 crore delivering a return of nearly Rs 55 crore ($7.4 million)—a whopping return of over 15X.

In addition to the seed and Series A rounds, according to RoC filings provided by Paper.vc, Mettl seems to have raised a previously undeclared bridge round in 2015-16 wherein the original angels re-invested in the company along with a new investor called My Growth Partners LP.

It is not clear whether this Cayman Islands-based entity is affiliated to any of the existing investors but it appears that its entire holding was transferred to Singapore-based VC, M&S Partners Pte Ltd in March 2017.

Founders

Finally and probably most importantly, the founders ended up with a whopping Rs 114 crore ($15.4 million) by virtue of their 38% holding.

While the RoC cap table does not specifically mention any ESOP, the founders have gone on record to say that as many as 60 of Mettl’s 380 employees earned anywhere “from a few lakhs to a few crores” as part of the exit. A stellar performance that is likely to change the lives of many people.

So what do these numbers tell us?

Fund size and mechanics matter

As the numbers show, fund size matters. The Mettl exit is far more impactful for Blume than for Kalaari because of the difference in the sizes of their funds. Fund mechanics matter just as much. Mettl is the second $40 million-plus SaaS exit for Blume this year (after Minjar, whose exit story followed a similar trajectory to that of Mettl).

While Blume undoubtedly made a good return in both these exits, the numbers could have been even better if they owned a bigger piece of the pie. At the time of the exit, Blume owned only 7.58% of Mettl, unlike Kalaari which owned nearly 20%. If Blume owned 20%, Mettl would have returned more than half their fund on its own.

Blume’s strategy of investing small amounts over a large portfolio might give them a bigger pool of potential winners but the trade-off is that these smaller stakes don’t allow them to truly capitalize on the winners. It is a Hobson’s choice in many ways and balancing these conflicting imperatives is something that Indian VCs seem to be learning only of late.

From a startup perspective, choosing an investor with the right fund size is just as important. As a very rough rule of thumb, your startup needs to be able to make a case that it can exist for at least a value equal to one-fifth the size of the VC’s fund.

This means that if you plan/hope to exit for $40-50 million, you are probably better off not raising from a fund that is a billion dollars in size, where shooting for the moon is not just desirable but almost mandatory. If Mettl had raised money from a larger fund, you can almost take it for granted that the VC would have discouraged an exit at this time and would have instead insisted on a follow-on funding round, perhaps even a pre-emptive one, and shoot for a much larger exit down the road.

How to recognize the exit timing?

One question that might arise is why did Mettl choose to exit when it might have tried to raise another round and aim much higher. After all, it has been a profitable company for four-five years now and at a rumored topline of $10 million, has achieved product-market-fit and scale.

Assuming Mettl had chosen to go down the follow-on funding route, it could have probably raised $10-20 million at a pre-money valuation of $50-60 million. That would mandate the company to then grow to a $40-50 million topline and shoot for an exit of $200 million at a minimum.

Neither of these things is a given even at the best of times, and choosing this path would have pushed a possible exit back by two-three years. A $40-million bird in the hand is in most cases better than a $200-million bird in the bush.

But in addition to the general considerations of a follow-on round with its attendant higher bar of exit expectations and increased dilution, there is one aspect that is germane primarily to SaaS startups.