Private and Confidential

Early Stage & VC Investing

Sanjay Nath,Co founder & Managing Partner

Blume Ventures

November 9, 2013

Overview of PE and VC

Private and Confidential

Private equity (PE) The provision of equity capital by financial investors – over the medium or long term – to non-quoted companies with high growth potential

Venture capital (VC)Is a subset of private equity and refers to equity investments made for the launch, early development, or expansion of a business.

It has a particular emphasis on entrepreneurial undertakings rather than on mature businesses.

Often and especially in Silicon Valley, and now in India, many VC investments are into technology & technology-enabled businesses

India – VC Landscape & Evolution

Private and Confidential

Many VCs in India have moved upstream, into the realm of Growth VC and PE. Compared to the US which has several angel groups (with Silicon Valley alone having close to a dozen) -- India has only 2 large groups and a few angel funds

A majority of VCs have moved upstream

Seed Angel Series ASeries C / pre-IPO

Pre -Series A

Series B / Growth

• Angel groups• Individual angels • Angel funds (Blume, Kae, India Quotient) • Incubators & Accelerators

• Inventus• Accel• Helion• Sequoia Capital• IDG Ventures• Saama (formerly SVB) • Kalaari (formerly IndoUS)• Matrix• Nirvana• Omidyar • Qualcomm

• Nexus • Canaan• NEA • Bessemer• Norwest • SAIF• Lightspeed• Fidelity• Tiger • Vertex• Intel• Cisco

Blume Ventures

Phase I: Seed & Angel Investing

Private and Confidential

Seed AngelPre -

Series A

•Seed financing is designed to research, assess and develop an idea or initial concept before a company has reached the start-up phase.

At this stage, investors are mainly business angels. They often have operating experience i.e. entrepreneurs or former directors who join a project to help get it off the ground and also contribute some of their personal funds (act like individual angels).

• Start-up (or Angel) financing is used for product development and initial marketing.

Businesses may still be in the creation phase or have just started operations and have not yet sold their product commercially.

When the product has taken shape, forming the basis of a real “business plan”, a certain number of venture capital professionals will join the entrepreneur and assist him with setting up the business.

Blume Ventures

Phase II: Growth / Expansion Investing

Private and Confidential

Series ASeries C / pre-IPO

Series B / Growth

Expansion/Development (or Growth Stage)

In the case of expansion, the business has reached or is approaching breakeven.

This is a period of high growth and capital is used to increase production capacity and sales power, to develop new products, finance acquisitions and/or increase the working capital of the business.

Getting through this period often requires many rounds of financing, during which the company has to ensure that its growth is balanced.

Professional investors are most attracted if a significant amount has already been invested in a company, if the company already has a history of development and if it is already operating with a robust structure in place.

Blume Ventures

The Holy Grail – the Exit

Private and Confidential

The EXIT is the end goal of every VC firm

How is exit value maximized?

• Revenue growth • EBITDA / Operating margins• IP (Intellectual Property)• Quality of Customers • Quality of Management Team• Competitive Advantage

Most successful Exits are either thru Trade Sales (eg M&A) or IPOs. Sometimes also happen outside India, e.g. on the NYSE / Nasdaq but equally on the BSE or sales to Indian MNCs.

More importantly, the exit results from the “total package” of how the company is valued, not just a single part eg only revenues

Is VC right for your company?

Private and Confidential

• Are you prepared to take on the responsibility of being an entrepreneur, i.e. to run a business with a method and structures, to delegate responsibilities to a team and know how to motivate them, to develop your knowledge outside the business and bring this knowledge into your company, to take on the legal responsibilities – in a word, to take the plunge?

• Are you prepared to give up part of your company’s capital to a private investor?

• Does your business operate in a growth market? •

• Are your company’s development prospects sufficiently ambitious?

• Is your team prepared to follow you? Does it have the necessary experience?

It is a personal, case-by-case decision. It is NOT a formula, or a one size-fits-all

Is VC right for your company?

Private and Confidential

• Are you prepared to take on the responsibility of being an entrepreneur, i.e. to run a business with a method and structures, to delegate responsibilities to a team and know how to motivate them, to develop your knowledge outside the business and bring this knowledge into your company, to take on the legal responsibilities – in a word, to take the plunge?

• Are you prepared to give up part of your company’s capital to a private investor?

• Does your business operate in a growth market? •

• Are your company’s development prospects sufficiently ambitious?

• Is your team prepared to follow you? Does it have the necessary experience?

It is a personal, case-by-case decision. It is NOT a formula, or a one size-fits-all

When is VC right for you?

Private and Confidential

When you want to:

• create a business;

• improve and develop your export performance;

• exploit the creativity and innovation of your team;

• recruit highly qualified personnel;

• change the size of your business and take over one of your competitors;

• launch a new product or range of solutions

VCs like to invest in businesses that are rapidly scalable,have an exponential growth curve, and have somewhat of a clear exit path (even if longer term)

Angel investing

Private and Confidential

• Art or science?

• Gut or rigorous due diligence?

• What are the key investment criteria?

• How does the investment process really work?

• How does it differ from VC and also PE?

Early stage (seed and angel) investing is an art AND a science, it’s the yin with the yang

What makes a good VC

Private and Confidential

• Smart money

• Operating experience

• Bringing the Network / Ecosystem Effect

• Acting as advisor, mentor, guide

• Ability to connect to partners, customers, eventual acquirers

Good VCs as stratecic partners and advisors – NOT just sources of pure capital

India – Shift from 2009 to 2013

Private and Confidential

Seed Angel Series ASeries C / pre-IPO

Pre -Series A

Series B / Growth

• Burst of accelerators, seed funds, super angels (& their quasi-funds)

• Blume was first of its size in this cycle – at least a dozen more emerged in last 24 months

• Reduced attractiveness of the 2006-08 vintage angel groups

• Fragmented angel networks don't work well as yet (close-knit networks only)

• Lack of a network / marketplace of mentors, advisors, domain experts, service providers (we may build it like FRC / @500)

• Almost NO change in the set of Series A / B / C players

• Some wind-downs, some rebranding, some splits amongst larger VCs

• Most of them on new funds + limited exits => large active portfolios

• IPO market as dormant as ever in tech, focussed only on exceptionally large cash-flow or gross rev biz models

• Trickle of M&A; we need a flood

Blume Ventures

Lack of transparency around VC performance

India – the Nuances

Private and Confidential

• RedBus (Bus Ticketing)

• Tally (Accounting Software on CD)

• AppsDaily (offline App Store)

• Gharpay, Delhivery (e-comm Only Logistics and Payments)

• JustDial (yellow pages on Voice)

• MadRat Games (Indic language, local character design – board games)

• Large Cash Economy, cards underpenetrated, payment infra highly regulated

• Do-it-for-me > DIY

• Transport Infrastructure creaking –overburdened as its being built

• Every City’s Tech culture is quite different

• Broadband Infra well below optimal

• Mobile Service Providers have too much control over app economy

Blume Ventures

Some Localized Startup Ideas Localized problems that Investors need to be aware of

India The “Mobile First” Digital Economy will kick in (very) soon

Source: Qualcomm, KPCB Report

Representative Investments & Sectors Blume Ventures

HR / Skills / Employability

Internet + Mobile - Infra & Platforms

Ad Tech / Marketing /

Mkt Research

Consumer (other)

Consumer (e-Com -Goods

+enablers)

Content / Publishing

SaaS

Internet / Mobile /

Digital Media

Life Sciences

Consumer (e-Com –Svcs

+enablers)

Education

The “core” of many technology focused VC firms is around Mobile, Internet, New Media and related sectors – that are capital efficient, have a strong ecosystem already built in, and can scale rapidly

India – some big ideas & themes

Private and Confidential

• Mobile First (device and access penetration much higher)

• Fix the SMB problems (35-40 million small businesses)

• Location tracking and services

• Fixing e-commerce backends – B2B commerce, payments

• Video bigger than text?

• Audio / Video Indic languages content bigger than English

• Gaming – will leapfrog consoles to Mobile and Tablets

• Crowdsourcing – Surveys, Information, Tasks, Capital

• Reimagine traditional plays – travel, jobs, housing, dating/marriage

Blume Ventures

China

India

ASEAN

USEU

(2.0)%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5%

2012

GD

P G

row

th

Population Growth (2012–14)

…is Expected to Propel Consumption to New Heights

Source: The World Factbook and Economist Intelligence Unit.

High GDP Growth, With a 1.1 billion & Growing Population…

India Continues to Have a Favourable Macro-Economic Profile

Bubble Size Current Population

156222

378

756

1556

0

200

400

600

800

1000

1200

1400

1600

1800

1985 1995 2005 2015F 2025F

Agg

rega

te C

onsu

mpt

ion

In U

S$

bn

Source: McKinsey Global Institute Consumer Demand

Aggregate Consumption to Quadruple

1,556

Calendar Year

FDI flows in India continue to remain strong(US$ bn)

43

36

27

34

25

2008 2009 2010 2011 2012Source: Economist Intelligence Unit.Note: Figures in US$ bn

There are Concerns – but also Confidence

Currency devaluation Political uncertainty given general

elections in 2014 Lack of political consensus Uncertain tax environment That said, Growth projected to be 5-

6%+, and if the above concerns are alleviated and a more investor-friendly Govt is in Power, this could be higher

Attractive Economic & Demographic Trends…

2010 World Population(mm of People)

Real GDP per Capita Growth(2011 – 2020 CAGR)

Source: US Census Bureau (2010).

Total Population: 6.9 Billion People

6.6%

6.1%

4.1%

3.5%

2.1%1.9%

1.4% 1.4%1.1%

0.9%

China

India

Russia Braz

ilGerm

any US

Japa

n

France UK

Italy

Sources: The Economist Intelligence Unit, CIA Fact Book and Citi Investment Research as of March 2011.

China18%

India (1.2 bn people)17%

Africa15%

North and Latin America14%

Europe8%

Indonesia4%

Pakistan3%

Asia (Other)14%

Others7%

Just this month (June 2013), Fitch upgraded India’s Rating Outlook to Stable – driven by Government steps to contain the deficit, stabilize the rupee and other positive reform-oriented actions

Attractive Economic & Demographic Trends (Cont’d)…

Projected Shift in Composition of World Economy2010 / 2030E Global GDP Composition

Projected Evolution of the Global Economy($ in trillion, purchasing power)(1)

Total

Emerging Economies

70%

Developed Economies

30%

Total

Emerging Economies

52%

Developed Economies

48%

Rank Country 20101 US $14.122 China 9.983 Japan 4.334 India 3.925 Germany 2.916 Russia 2.207 Brazil 2.168 UK 2.169 France 2.1210 Italy 1.75

Rank Country 20301 China $38.492 US 24.623 India 23.274 Japan 5.555 Brazil 5.286 Russia 4.827 Indonesia 4.288 Germany 4.059 UK 3.6710 Mexico 3.20

Developing Asia27%

CEE4%

CIS4%

Latin America9%

Middle East4%

North America22%

Western Europe19%

Aus & NZ1%

Japan6%

Africa4%

Developing Asia44%

CEE3%

CIS4%

Latin America8%

Middle East4%

North America15%

Western Europe11%

Aus & NZ1%

Japan3% Africa

7%

Sources: The Economist Intelligence Unit, CIA Fact Book and Citi Investment Research as of March 2011.(1) “PPP” stands for Purchasing Power Parity, which is a theory of long-term equilibrium exchange rates based on relative price levels of two countries; the purchasing power of different currencies is equalized for a given basket of goods.

…Driven By Rising “Middle Class” and Domestic Consumption

87 109158

220290

350

590650

1961 1971 1981 1991 2001 2010 2030E 2050E

India is One of the World’s Youngest Nations…

. . . With a Rapid Increase in Urbanization(in millions)

… With the Most Diverse Society

2010A – 2030E CAGR: 2.6%2030E – 2050E CAGR: 0.5%

64%50%

26% 15%

31%35%

40%

32%

4% 13%25%

29%

6%17%

3% 7%1% 2%

1%

2000 2008 2020E 2030E

Annual Household Income (USD)

<$2,000 $2,000 - $5,000

$15,000-$25,000 >$25,000

$5,000 - $15,000

46% middle class by 2030

0-411%

5-912%

10-1412%

15-1910%20-24

9%

25-4427%

45-6414%

80+1%

65-794%

Over 300mm People Within the Target Age Group

AoAssameseBengaliGujaratiHindiKannadaKonkaniKashmiriKhasi & GaroMarathiManipuriMalayalamMizoNissi/DaffiaOriyaPunjabiTamilTelegu

Jammu&Kashmir

Punjab

Haryana

Rajasthan Uttar Pradesh

Delhi

Uttaranchal

Bihar Assam

West Bengal

OrissaMaharashtra

Madhya Pradesh

Andhra Pradesh

Karnataka

Tamilnadu

NepalBhutah

Arunachal Pradesh

Nagaland

Manipur

MizoramChhattisgarh

Kerala

Mahe(Pondicherry)

Gujarat

HimachalPradesh

Sikkim

MeghalayaBangladesh

Tripura

Andman & Nicobar Island

Jharkhand

Yanam (Pondicherry)

Karaikal (Pondicherry)

Pondicherry (Puduchcherry)

A Growing Middle Class

Sources: Street Research, Mckinsey Estimates and The Economist Intelligence Unit

India is Among the Most Attractive Internet Markets Globally Low Internet Penetration Presents Further Upside

Unique Internet users in India India: 2nd Largest Wireless Market Globally

Source: Internet World Stats, as of December 2011.

Internet Penetration (%), As on December 31, 2011

121 140190

273

376

10.0%12.4%

15.3%

21.7%

29.5%

2011 2012E 2013E 2014E 2015E

Unique Users (mm) % Penetration

(Wireless subscribers as of December 2011, in millions)

245 61 79 513 2,267 1,016 121# of Internet Users (mm)

78%

44% 39% 38% 33%26%

10%

US Russia Brazil China World Asia India

984.1893.8

333.4246.4 242.5 216.8

125.6

China India USA Brazil Indonesia Russia Japan

Source: WCIS and TRAISource: Street Research

Rapidly Growing Smart Phone PenetrationSmart Phone % of all Cell Phones

Source: TomiAhonen Consulting Analysis December 2011, Citi Investment Research and Analysis.

Active Internet Enabled Smart Phones(1)

Source: KPMG in India Analysis.

1024

58

105

166

264

0

50

100

150

200

250

300

2011 2012P 2013P 2014P 2015P 2016P

(Milli

ons)

60

107

26

10

2012E 2013E 2014E 2015E

Early 3G numbers are encouraging and point to medium-term upside

Analysts project a c.8% 3G penetration by 2015, which we believe is conservative

1% 2% 8%5%Penetration

3G / 4G Adoption a Key Growth Driver…(2)

…Supported by Increasing Smart Phone Penetration

(Subscriber base in mm)

8%

12%

14%15%

2012E 2013E 2014E 2015E

0%

10%

20%

30%

40%

50%

60%

Sing

apor

e

US

Aust

ralia

Sout

h Ko

rea

UK

Fran

ce

Isra

el

Ger

man

y

Sout

h Af

rica

Mal

aysi

a

Japa

n

Chi

na

Indi

a

(% o

f Cel

l Pho

nes

that

ar

e Sm

artp

hone

s)

Source: Analysys Mason, IDC

Notes: (1) Includes Wi-Fi and 3 / 4G enabled smart phones. (2) Includes 3 / 4G enabled smart phones.

Q & A