Blume Ventures Treads Cautiously: Why VCs Are Playing Safe Amid IPO Surge and Liquidity Crunch

Blume Ventures, an investor in well-known Indian startups like Battery Smart, Purplle, and Unacademy, has decided to take a cautious approach with its next two funds. This move comes despite a wave of public share offerings (IPOs) and ongoing liquidity challenges in the startup ecosystem.

Blume’s Fund Strategy

Blume’s latest fund, Fund IV, is its biggest yet, with $290 million—nearly three times the size of Fund III ($102 million). However, for the next two funds, Blume plans to keep the size around $290 million, without increasing it.

“We are being careful because even $290 million is a lot of money to manage for an early-stage fund,” said Blume co-founder Karthik Reddy. He explained that the size of the fund helps tackle two issues: whether the startups they invest in can grow into strong late-stage companies, and whether venture capital firms can confidently back their portfolio winners.

VC Firms Becoming More Cautious

Blume isn’t the only venture capital (VC) firm taking a step back. Other VCs are also more cautious, struggling to sell their startup investments at favorable prices due to the post-pandemic drop in valuations. For example, Peak XV Partners recently reduced the size of its growth fund by 16% and changed its fee structure to lower overall profits.

Blume, which raises new funds every three years, achieved five times the returns on its first fund, raised in 2011 with $22 million. However, the firm is now focused on returning the principal amount to investors by the 6-8-year mark of a fund’s lifecycle.

Exits and IPOs

Investment exits, such as mergers and acquisitions, IPOs, and secondary sales (selling stakes to other investors), are key for VCs. Many VC firms are concentrating on two or three startups in each fund that might go public in the next three years.

Reddy noted that about 80% of portfolio sales happen when companies mature to the point that they are close to an IPO. He gave examples like Dream11 and Lenskart, which have secured over a billion dollars from secondary sales alone.

Although more Indian companies are going public—234 did so last year, a 56% jump from 2022—Reddy said profitability and predictability are more important than size when companies list. However, the number of IPOs may not be enough to ensure funds are returned to investors.

Secondary Sales on the Rise

Startups are working hard to reduce expenses and focus on sustainable growth, leading to more reasonable valuations. This has sparked a surge of fund managers looking to sell through secondary transactions for quicker exits.

Oister Global, which has invested in firms like Stride Ventures and Filter Capital, launched a $500 million India-focused secondary fund last month. Secondary sales allow investors to enter mature companies before an IPO and offer shorter investment periods, typically 3-5 years.

Continuity Funds for Longer-Term Investments

Oister’s first secondary investment was in Blume’s continuity vehicle—funds designed to hold onto portfolio companies from older funds nearing the end of their lifecycle. These funds let VCs continue backing strong-performing companies while offering an exit for limited partners (LPs).

Such funds have become more common, with firms like Lightbox, India Quotient, and Kae Capital using them to support promising startups that need more time to reach their full potential.

Focus on Real Returns

LPs are paying closer attention to a fund’s ability to generate liquidity, measured by distributions to paid-in (DPI), rather than internal rate of return (IRR), which measures overall profitability. Oister co-founder Sandeep Sinha emphasized that investors want GPs (general partners) who have a strong track record of delivering real returns, not just high IRRs.

“The whole idea of secondaries comes in when GPs are ready to let go of some part of their investment in a good asset to deliver liquidity,” said Sinha.