In the year 2011, Blume started out with a Rs 100 crore ($14.5 million) fund. It was raised entirely from investors in India, making it one of the first funds in the country to do so. As part of this fund, Blume committed a 3X return to its investors. After a period of eight years. With an extension of two years. That’s 8+1+1. In 2019, Blume’s Fund I completes eight years. This is the time for redemption. For payback. Not on paper. In cash.
As things stand, Blume doesn’t have much to show.
Investment in the number of startups
In the last eight years, Blume has invested in 70 startups from Fund I. Its actual cash return from this fund stands at 0.3. And not all of it has been wired. What’s been wired stands at 0.18.
This figure raises many questions. What did the hell happen? Where are the exits? As a first-time fund manager in India, how do you plan for exits? Is eight years a good enough time frame to return a fund in the country? Our founders even thinking of exits? If they aren’t, how do you make them understand?
Do they even understand the venture capital business enough to understand that they must be thinking of exits? Faced with all of this, what must a fund manager do?
All good questions.
As research for this piece, and taking into account Blume’s actual cash performance, I reached out to a venture capital fund manager. At one of the largest Series A funds in the country. He requested not be named because he is not allowed to speak to the media.
He said that eight years is just not good enough. “You can’t make money in this country in eight years,” he says. “Things take longer, companies take longer, so exits take longer. This is not a problem specific to Blume but to the industry in general.”
I asked Reddy the whole laundry list of questions because, after all, the buck stops with him. He said he’d answer all of them, but one at a time. Let’s start with what the hell?
What does redemption mean?
“Redemption is a technicality. It is not mandatory if you can work with your investors to procure extensions,” he says. “So if you have a position, and you can’t find a secondary buyer for it, what are you going to do? Hold it, right. Or what we called Distributed to Paid-in Capital (DPI) in our jargon. So, paid in right now is 100. Distributed is how much are you paying back. If DPI is more than one, most investors will give you the license to hold positions worth holding.”
Put simply, DPI is a metric of how much investor money has been returned. A DPI of 1 indicates that the fund has returned all the investor money. 3 would indicate a 3X return. The higher, the better.
With just one year to go, Blume’s DPI stands at 0.3. Not good enough, surely?
“I am not far off from the rest of the world,” he says. “You can only speak in relative terms. Absolute is my problem. If I don’t show a great DPI, I won’t be able to raise a Fund III.”
“We are not being flogged for our performance. We are being flogged on a generalist level. India has not delivered. If we had not delivered and everybody else had, then everybody would have said, you are a shitty fund. I haven’t heard that too often. So that’s Part A. As for Part B? My investors, as much as I owe them, the biggest is Rs 1-2 crore ($145,000-$290,000). Their life moves on. Of course, I want to deliver a 5X or Rs 5 crore ($725,000) to them, but for most of them, it is some rounding off error. Thankfully, I have got some very rich investors.”
This isn’t just about his investors. It’s also about his own payout. Or carry. For 10 years of effort. “Carry does not start till the DPI hits 1,” he says. “There is no exit by exit carry. That itself is two to three years away, so I am motivated on a daily basis to get those returns.”