Success in India’s venture capital market hinges on mastering exit strategies, exercising patience, and strategically timing investments to seize the most opportune exit moments, ’ General Partners (GPs) told its investors or Limited Partners (LPs) in the latest newsletter sent to them.
The GPs’ take on the exit environment in India comes when the exit debate is hotting up in the country, with many domestic venture capital firms coming to the end of the cycle for their first fund. For instance, Blume Ventures launched its first fund in 2011 and it’s a 12-year cycle typically for an early-stage fund. Blume’s Fund I, thus, is well beyond its exit period.
In an interview with The CapTable, Karthik Reddy, Co-founder and managing partner of Blume, said that the VC managed to generate returns in ‘high-teens’ from the first fund, slightly lower compared to the average return of over 25% typically expected from a seed-stage fund.
Reddy has kept aggressive exit targets going forward and wants to exit at least 10-15 companies over the next three years, he said in the interview.
He explained the road map of exits in the newsletter for the April-June quarter of 2024, which was sent to LPs. Reddy outlined three key types: mergers and acquisitions, public listings, and secondary share sales.
Secondary share sales
The company argued that a fund’s decision to participate in secondary share sales hinges on how much the sale impacts the DPI (Distributed to Paid-In Capital), which reflects the percentage of capital returned to investors. Blume noted that funds typically avoid selling unless the sale can generate at least 10% of the fund corpus or significantly boost the DPI.
Investors, therefore, tend to engage in secondary sales when there is demand for a startup’s shares at various stages of the company’s growth. Angel investors and Micro VCs often take early secondary exits, as they enter at an early stage and can achieve substantial multiples in subsequent funding rounds like Series A or Series B, Blume said.
The GPs further explained that larger institutional investors, such as Blume Ventures, tend to pursue secondary exits at later stages, typically when a company reaches valuations exceeding $500 million. However, most institutional investors tend to take part and not fully exit, the GPs said.
This contrasts with early investors, who often exit within the first 4-5 years at valuations below $75 million. For Micro VCs, the $75 million to $500 million valuation range represents a ‘sweet spot’ for secondary share sales, as a 1% holding can result in cash returns ranging from $750,000 to $5 million, according to the GPs. The $75-500 million bracket is typically unattractive for larger VCs, the GPs said.
Blume quoted some of the VC’s examples, which it claimed were ‘game-changing’ for its first $20 million fund. Although the secondary sales happened at sub $100 million valuations, Blume’s Fund I, because of its size, can be considered as a Micro VC fund, the partners argued.
The GPs further emphasised that the $500 million to $2 billion valuation range is the optimal zone for institutional VCs to start securing secondary exits. At this stage, excess demand in primary funding rounds for these breakout companies often creates opportunities for secondary sales. Institutional funds can potentially achieve exit values in the tens of millions, typically after the seventh or eighth year of making their initial investment, according to the GPs.
For companies valued at over $2 billion, a 1% stake can generate $20-50 million in secondary sales, as seen with investors who sold shares in Lenskart. These companies are usually cash flow positive or on the path to full profitability and are often preparing for an IPO. Secondaries at these valuation levels typically occur between the 7th and 12th year, providing early-stage funds, many of which are approaching the end of their lifecycle, with the opportunity to realize substantial returns.
Selling through M&As
The GPs further presented their view on mergers and acquisitions (M&As).
Blume’s partners said that large dollar exits, typical in the range of $50-500 million, usually occur between years 3 to 8 of a company’s lifecycle as a majority buyout by a financial or strategic investor.
Super-large M&A outcomes, on the other hand, worth over $500 million are rare in India, and only acquirers with large cap tables or massive cashflow can afford these acquisitions, Blume said.
Blume’s GPs further said that most M&As in India, within five years after the first institutional cheque, occur at sub $10-20 million. These are typically acqui-hires, yielding just offers for employees or at best 1-2X returns for early investors. Blume saw a few dozen of these over the 13 years, the GPs said.
The second category is $10 to $50 million M&As. These exits also typically occur between years 3 and 8 post-investment and generate 1-10X returns on seed cheques. In Blume’s portfolio, companies like Runnr (sold to Zomato), ZipDial (sold to Twitter now X) and Mettl (sold to Mercer Consulting), were in this category. Occasionally, a fast-growing company in a hot sector will provide a quicker exit in this range, the GPs said.
The $50 million to $500 million range of M&As provides sizable dollar exits to seed and perhaps even Series A funds, the GPs said. According to them, these deals almost always involve a financial or strategic investor taking control by buying out the majority stake. In most cases, seed investors exit with 3-20X returns. For Blume, TaxiForSure’s acquisition by Ola was one such example.
Ola Cabs acquired TaxiForSure for $200 million in 2015.
Exits through public listings
The GPs concluded the newsletter by stating that aside from M&As and secondary sales, the most favorable exit strategy for investors in India is through a public listing.
“IPOs offer the best exit outcomes for founders and venture investors in India, with the potential to generate significant cash returns for the fund,” the partners said.
They noted that the entry barrier for an IPO is lower than often perceived. Companies like Tracxn and Unicommerce, which went public at relatively modest valuations of around $100-120 million, demonstrated that the public market has a strong appetite for profitable or near-profitable companies, even with revenues as low as $10 to $20 million.
The GPs highlighted that companies can list on the main board of the BSE or NSE with an initial market cap as low as $100 to $300 million. This provides substantial returns to investors and enables founders to achieve impressive compounding in the public market, similar to what would be expected in the private market.
As companies move towards this stage, there is often a surge of interest from private equity players, pre-IPO funds, and secondary funds, which significantly increases the options and opportunities for liquidity compared to private market alternatives.
“The key requirement is a clear path to profitability, if not already achieved, coupled with strong growth prospects in revenue and margins. Even smaller companies with $4-5 million in revenue can list on the SME exchange,” the GPs explained.
They cited Blume Fund I portfolio company E2E Networks, which listed within eight years of its seed investment, later transitioning to the main board and continuing to thrive well beyond Blume’s full exit. Another Fund I company, Infollion, followed suit in 2023.
The GPs pointed out that IPOs beyond the $300 million market cap generally occur 8 to 10 years into a company’s lifespan, with the $1 billion market cap typically reserved for market leaders.
“The strength of the Indian public market is that even if a company isn’t profitable at the time of listing, if it delivers on its promise of achieving profitability, it will be richly rewarded,” they said.
As an example, they mentioned how Zomato experienced a surge in market value after fulfilling its profitability promise. Other companies are following this trend set by early movers like Infoedge, Nazara, Rategain, and IndiaMART in their respective categories.
The GPs expect the trend of companies pursuing public listings to continue, especially among those born in the first startup cycle of 2007-2015. They anticipate that many venture-backed businesses will follow this path.
“Between SME, small, and mid-cap IPOs, we are on track to see the numbers rise from under 10 in 2020 to over 50 by December 2025,” the GPs concluded.
