VC Caution: Why Bloom and Other VCs Remain Cautious Amid the IPO Wave

Blume Ventures, an investor in prominent Indian startups such as Battery Smart, Purplle and Unacademy, has decided to take action on its next two funds due to the liquidity crunch in the startup ecosystem despite large public equity offerings of late. A more cautious route.

Blume’s latest fund, Fund IV, backed by Oister Global, is its largest to date, with a fund size of about $290 million, nearly three times the size of Fund III ($102 million). Bloom does not plan to increase the capital size of the next two funds, leaving it at around $290 million.

“We are taking a cautious approach because there is still a lot of money under management for early-stage funds,” Blume co-founder Karthik Reddy told Mint.

“While this is not due to a lack of early-stage startups to invest in, the size of the fund addresses two questions – whether they (startups) will become great late-stage opportunities, and whether VCs can build additional muscle to able to play their portfolio winners more convincingly,” he said.

It’s not just Bloom. Other venture capital firms are also taking a cautious stance as they struggle to sell their startup investments, unable to defend or find attractive pricing after the pandemic-induced valuation bubble bursts.

Earlier this month, Peak XV Partners cut the size of its growth fund by 16% and changed its fee structure, which it expects will reduce its overall profit share. Fees include a management fee that is a percentage of the funds raised and a share of the profits.

Blume raises a new fund every three years, and its first fund, raised in 2011, was $22 million and returned five times.

While the second and third funds were under pressure to deliver similar returns, Blume is now more focused on returning principal to limited partners over the 6-8 year period of the fund’s life. Blume launched Fund II in 2015 and Fund III in 2018. Limited partners (LPs) are investors in venture capital and private equity funds.

“Unless you show some temporary liquidity, it will become challenging to raise capital from the same set of limited partners on a continuous basis,” Reddy said.

More IPOs aren’t good enough

Investment exits can occur through a variety of channels, including mergers and acquisitions, initial public offerings of shares, and secondary transactions (i.e., the sale of shares to other investors). Several venture capital firms are focusing on two to three portfolio startups in their funds that could hit the public markets within three years.

“I think 80% of portfolio asset sales will happen in companies that are T-3 years old that are mature enough to potentially do an IPO,” Reddy said, citing examples such as fantasy sports platform Dream11 and eyewear marketplace Lenskart. Generated over a billion dollars in revenue from secondary sales alone.

Reddy also highlighted the added advantage of being able to access India’s public markets on a much smaller scale, which could facilitate more private investor exits.

According to a report by law firm White & Case, 234 Indian companies went public last year, a 56% increase from 2022 and the highest level since 2017.

“I think the market has realized that size doesn’t matter. “Only profitability and predictability matter, and companies like this have entered the public markets at an earlier stage. “Although the number of listings of such companies will increase, it will not be enough to drive the return of funds,” Reddy said. “

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Startups are actively working to increase their valuations by reducing expenses and focusing on sustainable growth and profitability. As valuations become more reasonable, there has been a surge in fund managers seeking secondary deals for quicker exits.

Institutional investor Oister Global, which has also invested in Stride Ventures and Filter Capital, last month launched a $500 million secondary fund focused on India.

“The demand for the secondary market has increased rapidly as it offers some huge advantages,” Oister co-founder Sandeep Sinha told Mint. “Besides allowing investors to get into a mature company before an IPO, it also allows for shorter 3-5 years We believe this trend will continue as the entire ecosystem matures.”

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second time buyer

Oster’s first secondary investment was in Bloom’s continuity investment vehicles – funds created to absorb portfolio companies from another fund that is nearing the end of its investment life.

Typically, continuation funds provide an exit path for limited partners while allowing investment firms to continue investing in high-performing portfolio companies. These funds support trophy assets that require more time to reach their full potential outside of typical fund cycles.

Such investment vehicles have become increasingly common, with investment firms including Lightbox, India Quotient, Multiples PE, Kae Capital and Westbridge Capital exploring such initiatives.

“Demand for the assets we put into continuity vehicles is much greater than our usual funds because it’s more reasonably priced and closer to IPOs, which is essentially what secondary buyers are looking for,” Reddy said.

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At the same time, limited partners are increasingly focusing on factors such as distribution of paid-in capital (DPI), which is a fund’s ability to generate liquidity, rather than internal rate of return (IRR), which evaluates an investment before investing in it. The profitability of the investment. fund.

“There are many funds in India with high IRRs, but very few are able to return capital to limited partners. Therefore, we place a strong emphasis on general partners (GPs, or general partners) who have a consistent track record of delivering real returns. fund managers),” said Oister’s Sinha.

“I think the whole concept of secondary markets comes into play when general partners are willing to give up some of their exposure to high-quality assets to provide a certain amount of liquidity. So there’s a degree of calibration that happens.”

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