“We did our first investment where we didn’t meet the founder physically”

2020 has surprised Sajith Pai, a senior member of the investment team at Blume Ventures, in many ways. One, how quickly the venture industry and start-ups adapted to the upside-down world. Two, the direction in which money has flown, and three, the willingness of users to pay for services they had never paid for before. Pitches and deals are being made faster than before, angels and super angels are swooping in, and it has become easier to convince parents to pay for edtech. If you think about it, why wouldn’t they pay, if the tech can keep the brats occupied for an hour longer and productively? Edtech is one area the VC seems bullish about. In fact, this November, Blume participated in a Rs.200-million, Series A round in Uolo, a platform that helps schools and parents communicate. Pai shares what else is keeping him pre-occupied.

How has 2020 changed venture investing?

Initially, in April and May, there was a lot of worry as the lockdown stopped business for several of the start-ups in our portfolio (non-essential products and services). This was a period when we all had to focus intensely on our existing start-ups and address any concerns they had, therefore we stopped evaluating any new pipeline. But June onwards, we saw extremely high quality pitches and faster movement of pipeline since it became easier for founders to meet multiple VCs (as most meetings were virtual). We did our first investment where we didn’t meet the founder physically. 

In hindsight, most of our (and our fellow VCs) fears were misplaced. All of us have done more investments than anticipated. Two VC funds, I hear, have done 10 in this period, and in all cases, they have gone beyond their traditional norms of valuation — they have paid more and at higher pre-money valuation. It has become easier for high quality and second-time founders to pitch to multiple VCs and, therefore, deals are getting very competitive. Also, since physical meetings are not possible, reference checks on founders are becoming more important.

Edtech has been the biggest beneficiary of COVID because its users are now showing a willingness to pay. Globally, there is an interest in edtech, fintech and SMB SaaS, as adoption and trials shoot through the roof. Lots of international investors are taking interest in Indian companies and are open to investing. In fintech, there has been growth, but the value capture hasn’t been as strong since the unit economics in payments isn’t as good. In it, big growth has been in free products, so it remains to be seen how it will be monetised. There is a clear opportunity in lending but will people be able to build a large and profitable business? In our portfolio, SMB SaaS companies such as Instamojo (which helps small businesses go online), Classplus (which helps tutoring centres go online) and LoveLocal (which enables delivery from neighbourhood stores) have seen sharp growth. Just as demonetisation spurred digitisation of cash transactions, this has been another positive shock pushing digital adoption faster at the SMB end.

How have your portfolio companies dealt with the upheaval?

Two of them decided to shut shop after COVID impacted their business. The founders decided to use the upheaval to think through what mattered to them and took a break. We welcomed the decision because the founders had given the business their all for the past three to five years, and it was important for them and their families that they took a break.

That apart, the others have all done well. A few of them, especially e-commerce dealing in non-essentials such as Purplle or Spinny, did get hit, but they have recovered and even done better than usual. This is on the back of rising demand and lower cost of customer acquisition, which has gone down to a fourth of what it was. This has led to better unit economics. As a thumb rule, number of users using the service free-of-cost has gone up 4-5x and the number of subscribers has gone up 2x. The revenues are up by 25-50% at least.

Has a certain caution crept into venture investing, with people moving away from early-stage?

Not at all. In fact, most of us early-stage VCs have done more investments than we expected to, and often at higher valuations than we usually do. Early-stage investment activity is at a high. While, I don’t know if at an overall level the number of deals will be more than what it was last year, the per-deal value has certainly gone by 15-25%. This is thanks to the emergence of micro VCs, angel syndicates and super angels who are funding these deals. I was surprised by how deal activity and meetings continued, if anything at a faster clip, since founders were able to e-meet more VCs. We believe this buoyancy will continue into 2021.

Which portfolio company are you most excited about?

Classplus has emerged as one of the fastest growing edtech companies. It has done well and done good by helping smaller tutors survive and thrive as physical classes were shut down. It helped these smaller tutoring centres move online, and helps run as many as 7,000 live classes a day.

Which sectors do you think are seeing waning investor interest and seem headed for consolidation?

Though it isn’t a start-up sector, over-the-top (OTT) platforms will consolidate. There are over 40 OTT players in India. About 10-15 of them survive on (soft) porn. With the OTT regulation moving to Ministry of Information and Broadcasting, these platforms will be forced to stop showing salacious content and this will take away their selling point. This will spark a process of natural consolidation as the top three to four players emerge. 

Regulatory risk is something that gets mentioned regularly now for dominant tech companies. Will that be considered by venture investors in 2021 even while funding start-ups?

At the very early stage, we would worry less since the start-ups can pivot fast if there is any sudden regulatory change. But yes, as the start-ups move into Series A and beyond, we would make sure that they take advice covering all regulatory risk, and more importantly, follow it.