Blume Ventures to raise new fund to offer exits to existing investors in rare startup move

Indian starup investor Blume Ventures is in talks to raise a Rs 400-crore fund to buy out its own holdings in older portfolio companies and double down on a few of its existing investments, said people familiar with the matter.

The so-called secondary fund will give an exit option to early investors from whom Blume raised funds to invest in businesses. This kind of fund-raising—unprecedented in the Indian venture capital space—allows Blume to retain its stake in startups with a new set of investors.

"No VC in India has done this before—to replace old LPs with new LPs and still manage the fund yourself. It's a unique structure that could become common in the future," said a senior investor on condition of anonymity.

LPs, or limited partners, are high net worth individuals, family offices, university endowments, or pension funds that invest in venture funds.

Blume plans to use the proceeds of the fund—named Fund 1x and launched in December 2020—to reshuffle the investment structure in eight to 12 companies, according to these persons who didn’t want to be named. Moneycontrol has also reviewed documents that reveal Blume’s secondaries fund plan.

The move underscores the paradox of increasing investor interest in Indian startups despite the difficulty in securing timely exits.

It is also a validation of Blume's track record—in recent years, the Mumbai-based firm has picked out several winners such as online learning firm Unacademy, delivery startup Dunzo and robotics firm GreyOrange. Even if a startup is doing well, early-stage investors often look for an exit depending on how long businesses stay private.

No VC in India has done this before—to replace old LPs with new LPs and still manage the fund yourself. It's a unique structure that could become common in the future.

-An investor

The new fund, which has a different set of LPs, will function as a lower-risk, lower-return investment vehicle compared with the early-stage funds Blume typically runs.

Blume declined to comment on a query from Moneycontrol.

Blume’s new fund would centre on two type of transactions. One, the so-called secondary sale under which shareholders—typically early investors—of a private company sell their shares to another buyer. This is different from a ‘primary’ sale, in which company issues new shares to investors, and the proceeds of that sale go directly into the company.

Using proceeds of the new fund, Blume will buy out its own holdings in GreyOrange, makeup brand Purplle, insurance firm Turtlemint and software-as-a-service firms WebEngage, Exotel and IDfy.

As a sweetener, this fund will increase its stakes in Dunzo, milk and groceries delivery platform Milkbasket and Slice, a credit and payment platform in their future funding rounds, according to the persons cited above, "So along with older companies, the LP is also getting stakes in newer fast-growing startups," said a person involved in negotiations, requesting anonymity.

The new fund essentially means a unique structure for the Indian startup ecosystem. Raising this fund solves many key issues for Blume and its investors.

Many of Blume’s proposed secondary investments— GreyOrange, Exote, Webengage and IDfy­— are from its first fund in 2010. This poses an issue.

The Lifecycle of Such Funds 

Venture funds generally have a lifecycle of seven-10 years during which they are supposed to invest and return profits to their LPs. The LP structure is key to this transaction working out.

“They are effectively replacing old LPs with new LPs. They are selling a whole block of six companies to new LPs and Blume will still earn carry whenever these companies have an eventual exit—a merger or an IPO,” one of the persons cited above said.

Carried interest, or carry, is the money venture capitalists earn on profits made on investment—often in many millions— and is the cornerstone of the VC business model.

A combination of primary and secondary investments is vital to Blume’s investment recast. With the new fund and new LPs investing in Blume’s 10-year-old investments today, they are betting these companies can still grow significantly.

“The secondary investments have to grow from here. Only then does the structure really make sense and the new LPs stand to make money,” said another person aware of discussions, requesting anonymity.

Adding some primary deals was like a sweetener from an LP perspective. So, in addition to some of the older companies, they would also get stakes in some of the newer companies and be part of their long-term growth, the person said.

Fund 1x will have an investment period of two years and a five-year life cycle that can be extended to seven with the approval of LPs.

The Returns Blume Is Targetting

It expects to generate an Internal Rate of Return (IRR) of 25 percent—the average rate of return adjusted for the time value of money—generally the yardstick for measuring VC returns. Because this fund will invest in established firms but at higher valuations, its risk is lower but so are the returns.

Most LPs in early-stage venture funds expect a gross IRR of 30-40 percent over an 8-10 year fund lifecycle.

They are effectively replacing old LPs with new LPs. They are selling a whole block of six companies to new LPs and Blume will still earn carry whenever these companies have an eventual exit—a merger or an IPO.

-A source

For instance in 2019, Norwest Venture Partners India sold stakes in half a dozen of its business-to-business and software bets, including now unicorn Zenoti, Capillary Technologies and logistics firm Elastic Run. These stakes were acquired by Avatar Venture Partners, a fund set up by Mohan Kumar, a former partner at Norwest.

What Blume is doing is similar except it is managing the selling and the buying and only the LPs are changing.

Started in 2010 by former angel investors Karthik Reddy and Sanjay Nath, Blume raised a debut Rs 100 crore fund entirely locally to make angel investments in an institutional manner. It followed this up with a $60-million second fund in 2015 and a $102 million third fund in 2019.

As it grew, it became much more like a traditional venture fund— looking for sizable stakes early on with a focused approach and raising money from foreign institutions and family offices.

Its second fund had 67 percent of the capital from abroad and the third fund had 80 percent. Foreign LPs have a different approach than Indian LPs—they invest in large funds globally, cut larger cheques and have a longer horizon.