Episode 69: Part 2- Building Blume Ventures w/Karthik Reddy
About Karthik Reddy:
What does it take to identify and back the next big thing in the world of startups? How do venture capitalists navigate the complex web of risks and rewards to make successful investments?
Welcome to The One Percent Project, where we continue our exploration of the world of startups and venture capital with the visionary Karthik Reddy, the co-founder and Managing Partner of Blume Ventures. In part 1 of our conversation, we learned about Karthik's upbringing, the values he has instilled in Blume Ventures, his perspective on the role of venture capital in fostering innovation, the X Unicorn hypothesis, and more.
In part 2 of our conversation with Karthik, we delve deeper into the world of venture capital. Join us as we explore Karthik's approach to investing, his counterintuitive insight about venture capital, how he identifies exceptional founders, concepts and frameworks that have influenced him in his career and much more.
Tune in to The One Percent Project for another engaging conversation with Karthik. Don't forget to subscribe to our "Think" newsletter at onepercent.live, which brings highly curated content that adds value to your professional and personal development.
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Key takeaways:
Venture capital is a means to create wealth and bring positive change to society by investing in technology and innovation. The focus should be on distilling what is important and applying it to the context of India. Blume is doing exactly that, which highlights its commitment to finding solutions to the country's challenges through capacity building.
Venture capital allows one to take on technology, market and regulatory risks that other types of capital are not able to handle. It also allows us to shape the world in a certain direction and propagate new forms of entrepreneurship and role models.
Venture capital is still an elite form of financing that cannot be easily democratised.
When evaluating potential investment opportunities, it's important to take the time to understand the origin story of the business and the founder's motivation for solving the problem they're addressing. Investors should over-index on the founder's obsession with the problem and their ability to remain resilient in the face of setbacks.
One should experiment with as many things as possible and find what one loves much earlier in life. In today's fast-paced world, it is necessary to keep up with the times and constantly test oneself to discover new opportunities. Opportunities are abundant, but they are also more competitive, so it is crucial to work hard to find one's passion and pursue it.
Book Recommendations by Karthik:
In this conversation, he talks about:
00:00 Intro
02:04 Why he built Blume?
08:13 Counterintuitive insight about venture capital
12:34 How he evaluates founders and ideas.
18:58 Three books
20:44 Three productivity tools
23:31 Kindest thing anyone has done for him.
25:27 What advice will he give to his younger self?
Transcript:
Pritish: That actually brings me to ask, why are you building Blume? You've proven that it works. It obviously has shown a lot of merits, has given money back to its LPs, and is growing, but is it just another homegrown VC that has become successful, or do you think about it beyond that?
Karthik: It goes back to two-three principles or beliefs that have been shaped in my first 35 years. I started Blume when I was 37, and Capitalism rocks. We can't have a title that says capital and not believe it. So, if it does, then you believe capitalism is the only way to make the world a better place. However, again, a speck in the universe problem. No one cares about your version of capitalism. It's a generally accepted version of capitalism, which, as I told you, I had problems with various facets of it, chronic capitalism being one. Still, like in general, I have had problems with money for the sake of money. And you can be, on the other hand, idealistic, try to change the world as they say, and say that I will go and save farmers, save the planet, reduce waste, and allow for a better quality of life. And I said we can do all that with this beautiful tool called venture capital. So that intuitive coming together of all of these senses is why I fell in love with it in the first place. And I saw it in its most ridiculous state in the U.S. as a first glimpse in the year 1999. Everything came crashing in 2000. But I think that's where, again, I feel to have the humility to know that it is all like “Maya,” and you want to distil what is important to you, your core, is my superpower and for myself, not for the world. I said that in the early part of the conversation as well. It's what gives me pleasure. So, the act of extracting that pleasure is what made me a student of this facet, this aspect of venture capital. What can technology do to improve lives? And then you apply it in the context of India and, my God, the scale as like everyone jokes about it, but like, you tell me which other mechanism you have for capacity building to solve problems. You can get a kick, you can be Prime Minister Modi and get a kick and say, run the country and it's improved. That's not me. I'm not the scaled administrator or a policy maker or a politician. I can't see myself becoming that. The only other place you can do that, it’s a dramatic statement and I'm thinking about whether I'm making an absurd statement, a motherhood statement, but the only other place you can do that on an unthinkable scale is venture capitalism.
Karthik: No, I've seen my peers at private equity say that that's what we do: capital formation, giving a lot of jobs, industry, etc. No, it's not true. When you provide capital, you come with that mindset, with a positive mind. They're also enabling the country, the industry, people, everything to grow in some sense, but, and that's the role that capital plays. So that's what we debate with the government as well. Everyone thinks facilitating certain elements of financial services of the public markets is good enough. That's the health of the economy. Actually, it's not. What's building the economy is infrastructure finance, private equity capital, and venture capital. So, in that spectrum, let's assume for a minute everybody's doing it for the right reasons. So, then all become equally important if you ask me. The reason we do what we do is, as I said, we are able to shape two things at the same time, which are the two that definitely cannot. I'll tell you what I mean by that. So, one is to take the technology market and regulatory risks that they're not able to. And it goes back to that famous quote that the reasonable man adapts himself to the world, the unreasonable man makes the world adapt to himself. All progress depends on the unreasonable man. That paradigm cannot play out anywhere other than in venture capital. Daily, every morning, it's true. And so, it's not about the exceptions. Exceptions are everywhere. Every entrepreneur makes a big guy believe, in my limited lifetime that I've seen, is an exception to some rule or the other. So that's the nature of the world. You have to be exceptional to make something really massive and impactful. That facet apart, it allows you to actually shape, if you want to, the world in a certain direction. To give credit to the folks who are doing only Climate-tech or only Agri-tech, they're shaping those industries. They're helping shape those industries in their future, and they're applying all of their skills. So, it's capacity building for the change you want to see in the world, is why an idealist venture capital should exist. And that's our naive, foolish way, as I do believe, I’m still an idealist after 12 years in the business, and I think that's why we exist, that's what brings me to work. Why do we want to continue that is because I feel very empowered to see that. Part two actually, which is interesting, is that you can propagate a new school of thought, a new form of entrepreneurship, and new role models in a way that nobody else can. So, let's say you go and look at ten companies you admire. You ask somebody on the street, is there a common thread between the ten? There usually will never be. So now I've set myself a new goal. I joke about it, but the day I retire would be when I see ten such companies with a common thread, which I can go and ask, not, they'll be different if you go ask someone on the street, but if I go and put these ten names and they say, oh, I respect eight of them, or they've returned money in the public markets or something and they've lasted for 15, 20 years, 25 years, the minute I have about ten of them, I'd say I've done my job. Because then you've left enough role models for my team, for some kiddos being born today who will be invested out by Blume Fund 10 or 11. So you set that stage, and I think that's the thrill of doing this ground-up in India as opposed to just plugging into a job in another VC firm. It's not like I didn't try, I tried in six-seven, but nobody wanted to hire me. So, I went to the media side and I fell in love with this idea. And when the opportunity presented itself, I went in and started, and then life takes note.
Pritish: What is your counterintuitive insight about venture capital?
Karthik: Actually, it's not counterintuitive, but I think that's how we have evolved. Anybody would've told us, and a lot of people did tell us, I don't think we believed them, is that the industry of venture capital as a mechanism of financing entrepreneurship is a very elite form of financing. You can't democratise that. Sad, not in the way it exists. You can have it like the U.S. has a small business loans program, and India has SIDBI, NSIC, and banks. Sadly, those will back traditional business models, even at the microscale. I gave money to a vegetable vendor, but I need the money back by evening. He's using it for intraday working capital, so that cannot ever be venture capital. What venture capital can do interestingly, is even innovate on those such models. It is what FinTech is trying to do at some levels, and I hope the government understands that, yes regulate them, but please see that only they can fix it because the cost of distribution, cost of managing the risk, cost of observing, cost of exit, etc, all these are not possible in small 99.9% of the enterprise. So, you can have millions of entrepreneurs and brag about it. How do they actually get better? How do they build capacity? How do they build scale? Very challenging. They will stay lifestyle entrepreneurs. So that we knew. What we didn't realise is how absurd the game can become in terms of the scale to which things have to be built for that to become meaningful for the venture capitalist.
So, your 20, 30, 40, and 50 million outcomes are not small. You think about a 300 outcome; it probably creates more wealth impact than, with no disrespect to the kirana shopkeepers, it creates more impact than hundreds of them put together. However, that still doesn't move the needle for venture capital because of the size of the outcome you require for it to become meaningful for the grid of capital that we have to manage. And if you want to build a firm and an industry, you have certain cost structures, you have to have certain aspiration levels, etc. People come and say, they want to manage so much money etc. So, you will not get the talent you want for something very difficult to do, if you don't set up all of those levers and can come ask people to come and work for free. So if you want to build a competitive industry, sadly, you have to right-size everything in the industry. By co-right-sizing funds, which are ambitious like us, you have actually pushed the needle further away, with every fund that I would argue knocked away, 40-50% of the kind of entrepreneurs would've backed to the previous. So, it's an elite sport. So, to be like the bar keeps getting higher. At least in JE if you have the same common skills, you can compete on this level playing field. Here the bar just keeps getting higher because it's not about entry level, it's about only exit level that matters. It's like judging the JEE student to say, “What would you become in life at 35?” admission would be given on the basis of that. And that is basically what the odds are like, which is unfair. A lot of kids come and say, “It’s so elitist, we can't pretend; we need a good recommendation to get introduced to a good fund. Yeah. All of it is true. What do you do? So, it goes against that one aspect of that idealism, which you know, can I help more? Can I do more? And you realise, no, you can't. You have to limit yourself. People deserve our time, your sanity, hours you can give to your family, and you serve the biggest godfather, the investors; that's why you exist. So, unless you make enough money through a viable model, you won't exist. You become a social service worker; no disrespect to them; they’re not for profit.
Pritish: That's fascinating. And I think that's very truthful. It's an elitist game. It's very hard to break it. Sub-question: You talked about people coming and saying they can't get in. When somebody walks into Blume for charity, what do you look for in them?
Karthik: I've answered this probably a hundred times in a decade, so it'll only be a variant of that, sadly, I think original. I think many of the other questions you asked had aspects of things that I may or may not have expressed in the same way ever before. So, thanks for those questions. This one is a cookie-cutter question, and sadly the answer is fairly cookie-cutter in the sense that it's not different from what I might have said over 10-12 years. It only keeps improving because you're a little bit more sophisticated in the way you pick. And it's often not very different from how most good VCs pick. They might have variants, but it's all about the same. So, what are those? I'll put it in my words, and another VC might put it in different words, but it's about the same.
So, we over-index on the origin stories of the problem. Why are they trying to solve this problem? All the entrepreneurship I grew up with in life was, how does it make money? That was important for a business to exist. That was the raison d’etre for business. I'm actually not looking for that initially. I'm looking for the reason d’etre of this business being built by this founder. So that's one. And. As much as we talk about multiple people in the co-founding team, et cetera, nobody sells it better than one person. Two people cannot sell it, equally well; that’s another realisation, a harsh realisation. So, who's that person? Because, you know, it's cool to have four-member founding teams; they might be a good, great, husband-wife equivalent in the team. That does not mean one doesn't wear the pants in the house. The wife might, but I need to know that it's the wife because we are backing that vision. That's the person whom we can conspire with, debate with, and who will make it memorable or not. Therefore, over-indexing on the key founder, seeing that they're not oblivious, they just don't have lackeys around them, but sit nice and quiet, but really don't actually add to the value or to them. That's why the co-founding team matters, not because they can all sell the same vision. And why are they solving this problem and how obsessed are they about the problem? The ones who fall in love with their solution are the worst founders to back. If you already know the solution, you don’t know the solution, it’s market retailing. If you know the solution then you are again doing a cookie-cutter. If someone comes and says this is the app, check if there are these features in the app. But on our stage, you can’t do this, which is why this will be very evident in B and C rounds. So therefore, we like this over obsession. I will tell you the second reason for this. We've realised that people get tired of the businesses they run. They get weakened by setbacks. They erode. Give up. Okay, good journey, but I can't handle it anymore. But the person who started it for the right reason discovers the problem and goes deeper and deeper, discovering the deeper and deeper problem. Sometimes I will admit, sometimes more obsessed with creating a large-scale impact on their farm, rather than actually the original problem they pitched us. But that resilience and that obsession is still intact in some capacity. So that's why I said they're all sorts of exceptions, but at least starting point, they should have the same obsession. That's what will keep them going. So otherwise, you can't build 20 farms. It's BS again, which is why most co-founders leave halfway. They don't stick around. Why is that? Not just because they're not being, they're being undermined or whatever. You get bored of either the job, their role, or the fact that they're not as passionate about building the problem to the next scale. Eventually, everybody should get bored because it becomes as monotonous as a job. The innovation has gone down to somewhere buried in the firm. And so, the cash cow firm, the public firm, et cetera, should be run by professionals there, right? It should be an autopilot, but this is the kind of DNA we're looking for. Cause even at that level, they should have instilled enough culture in the firm that you can hire so easily into that culture and never lose sight of the original culture build, continue to build a great firm, and they can still sit on the beach, 12 years down. A lot of asks of somebody you've met for 20 minutes. And so, we typically try to gauge as much of this using gut in the first 25-30 minutes. And if you don't get this gut feeling that I need to know more about this person, you should never do it. If you get it, you should try and poke holes in it for the next 10 hours if needed. That's the diligence of a founder. And the last very important thing, and I’ll finish, is you have to have a view of the market. The founder has a view of the market, but sometimes it's actually a more naive view than even the VC. They don't understand it from a TAM market perspective. They only understand the problem they're obsessed about. But I need to have a view on whether that problem becomes large enough as a marketer. And if they might say, no, I don't know that, but I'll go build something else and extend that market. And you have to have that courage. But they should have that knowledge as well. And so, your view on the market is, I think, what makes the journey again, the memorable outsize bets come from a combination of the two whenever we have looked back. I'm not a genius, I'm not writing consulting reports on it. Again, you have an intuition on the market. That's what shapes an early-stage VC’s life. Every three years, every two years in my life, it keeps recalibrating, helps you stay young, but that's the only reason again, you are not killed in this job, because you have to reinvent yourself every two-three years, because what was relevant three years ago is useless today.
Pritish: That's brilliant! Maybe you have spoken about this previously, but I think reiterating it and giving it some more flavour, as you said, it's an evolution. Yeah. You keep evolving it as many times as you get that. Now, some quick questions. Three books or blogs that have influenced you the most.
Karthik: I'm never good at random-access memory, so these random-access memory questions always trick me. Not because I can't answer, but I'm sure I'm missing a lot of good answers of that to what I’m saying. So, I think I'm going to, I'm going to stick to the easy, idealistic ones. So BlackSwan by Taleb, has a very interesting chapter about how outsized outcomes come from these edgy, almost artistic bets in life. And again, a lot of my theory around why venture capital is why we do what we do comes from that, what I gleaned from BlackSwan. Everybody else took away very different things from it. But for me, that was very life-changing. I won't, it's not one or the other, I will just give credit for the philosophy was like Ayn Rand on capitalism in general. The very collegey answer, but the reality was that's what shapes your view; your belief in markets and just absurdly capitalistic views. Though I don't believe in what she said, these are important frameworks. The third I would say is, are these frameworks that I just described, maybe, so let's give them credit, came from adapting Mark Anderson's framework of product market team. And so I cited it a lot. I gave him credit when I wrote my Fund-II kicker blog. So, whenever we raise a new fund and launch it in the public domain, we accompany it with a blog. So, the fund-II blog will have all that to take Anderson's framework and adapt it to an Indian context. So that informs my day-to-day life.
Pritish: Three productivity tools; it could be an app, a mental model, an actual trait (?), or a physical trait.
Karthik: Simplifying the concept of returns and why we do venture capital is like this notion of 25% IRR. When things have to compound a 25% IRR, how scary do they look in terms of multiples? So that allows me to, you asked me about risk, and that allows me to frame all risk. So, I will reveal it here. Everybody knows it, but a two-bagger in three years is 25% IRR and a three-bagger in five years is 25% IRR. You do every combination of two Xs and three Xs and a number of years, and you can actually do the maths very quickly on how this, how outsize this outcome should be. So, I know what it should be in seven, eight years, or what 25% means compounded over ten years. So that one tool, which I use all the time to frame my decision-making around risk, let's just say, life hack. So, this framework is enough. Then it allows you to distil backward on how big the revenue should be. The tool that I would like is not geographic optimisation, has not been built. I've tried to actually custom-build it. Using a team in the middle of Blume, I backed the company, which I thought would build it for me, which hasn't happened. I'm an optimization geek, so my geography is probably like one top, one-in-a-million kind of geographic optimization in the country. And nothing solves even for me, for anybody who wants to be top one and hundred. There are no good tools for geographic optimization. They're all very laborious. You can map your whole life on Google Maps, but I don't like it, it doesn't stitch together contacts or geographic contacts, so I hate them. So, I use all sorts of hacks. I go to LinkedIn, sort by geography; if I'm going to Chicago, do I know anybody there? So, between LinkedIn, maps, etc., they're all disappointing. For productivity, I use something like a Google Keep Note usefully. My team of people who can assist me has increased and shared the assistance, so that way, it's allowing me to be more prolific. I would like to give more credit to something like an Otter, which I also use, but I'm not disciplined about leaving voice notes. A lot of tools, to summarise, require you to adopt them with a passion and be very disciplined about using that. Otherwise, they lose their utility. And so, for me, I think the time thing, I am a geek in that sense, and I can be, but if I were relegated to a desk job, it would've been much better. Now I'm not. So, I find it difficult to be loyal and super-tuned to tools.
Pritish: Brilliant. Before we close, two questions. What is the kindest thing that anybody has done for you?
Karthik: Same thing. My random-access memory is really bad, so I'm going to go with the relevance of something that I said in the course of one macro generalist thing and one micro thing that came up in today's conversation so that people can contextualise. One is, I think, innumerable people have stepped up; ten times more people have said no when you go to raise money; as an entrepreneur, you can't count that as anything but an incredible gesture of kindness because it's the belief in you. I don't think they thought it was a quick scheme, and I'll make ten times their money. So, everybody who backed us through those early days is one or another type of gesture of kindness, to be honest. They simply saw a face; they trusted us, believed in this mad mission, and just gave us money. So, it's too large an amount. It's like a hundred crores. It's not a small amount of money. And nobody believed; no institutions believed in us. It was all individuals. I think there's a long list. The other is for some strange reason because I'd applied for an MBA loan. The embassy rejected me twice. And that bans you from actually applying again. So, there was someone who, because of his business influence in the US, actually had enough clout to at least put in a word. And so, they tried two angles, and the first one failed there too, and then eventually a sealed envelope was presented somewhere, and that's how I made it to the US. And sometimes, I tell my wife what all fate had in store to make that meeting happen. They didn't do that. It's so easy to say, what can I do for you? Don't get away. But it changed the course of my life.
Pritish: Brilliant. And what advice will you give to your younger self?
Karthik: You tend to project a little on your child. I have a fourteen-year-old now, and I think the advice has always been to experiment much earlier in life with as many things as possible and try to find what you love much earlier in life. I think mine came from just slowly eliminating more things I didn't like, not having the opportunity to test what I like, and my conventional upbringing, a little rigid on both conservatism in upbringing and not having the capital to experiment. Now, my kid can't complain about that. I'm willing to sponsor the experimentation, but I like initiative. So that's what I would tell my younger self. I think I had the initiative. I don't think I had the capital, so I ran to the North. I needed to go and see the country. I needed to go and do things. I had two admissions in the South but wanted to break away. So, I think it happened much later. Now the world's getting so fast-paced. You need to be so current with the times that I think you need to start thinking in that fashion, not about a job or an education, but generally playing that out much faster. Then I might have chosen the mad passion that I'm trying to run venture capital. I might have chosen a very different track. So, I was a sports buff, but I didn't do enough of it as an example. Everything is tough. We all know that anything is tough if you want to be at the top of your game. But I didn't experiment enough. I would've loved to be a sports commentator, roam the world, and be the best. And that's what I would tell myself. And I tried even as early as my brother was five years behind me, I would tell my parents just let him go and enjoy football or whatever he wants to do and become a commentator. I think there's a profession in there and somebody who started in the nineties, it could've looked absurd, but you could have been. So, I think you have to test yourself constantly. Today, there are much more opportunities, but it’s much more crowded. There are opportunities, but ten thousand people are buying for it, more than in the nineties. More opportunities and those privileges have become more normalised, which means you have to work doubly hard to discover that, and that's what I would tell myself.
Pritish: That's brilliant. Before I close, I want to say that a few days ago, I told somebody that I wish Harsha Bhogle could come on the cast.
Karthik: It was meant to be mentioned.
Pritish: Karthik, this was an excellent conversation. Thanks for being on the show.
Karthik: Thanks for having me here. Pleasure.
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