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Aspirin start-ups will always attract VC funding, even during a downturn: Prime Venture’s Sanjay Swamy

Sangeetha Chengappa Bengaluru | Updated on October 08, 2019 Published on October 08, 2019

Sanjay Swamy, Managing Partner, Prime Venture Partners

Notwithstanding the economic slowdown and the consequent dip in angel or seed stage funding in the first half of 2019, early stage aspirin start-ups will continue to attract Venture Capital funding, says Sanjay Swamy, Managing Partner at Prime Venture Partners, in a conversation with BusinessLine.

Excerpts from the interview:

Will the economic slowdown led by dampened consumer sentiment affect early stage investments in the country?

Historically, downturns are the best time to get started. Typically from an entrepreneur’s perspective these are times to focus on building products and teams that are validating the solutions and hitting a level of product maturity just as the market is seeing an uptick.

Start-ups have always been a part of the DNA and culture of our country. However, tech start-ups that are venture funded are a recent phenomena. I don’t think investments in early-stage tech start-ups will slow down - but later stage investments could slow down, as people will focus on companies with real revenues and unit economics. As you may have noticed, investments in tech start-ups have been a bit overheated recently. Some of that will stabilise and come back to a new normal.

For us at Prime Venture Partners, an early-stage fund and typically the first institutional investor in a tech start-up, this is also the best time for us to invest in early-stage start-ups because only serious, committed and passionate entrepreneurs start in difficult times. And they go about their business with a long-term view to solving a problem, they are passionate about, rather than a short-term mindset.

What kind of tech start-ups would you invest in?

At Prime, we have focused mostly on companies that are not caught up in a hype cycle. For example, companies like MyGate, KredX, NiYo or mFine that are adding long-term sustainable value, regardless of the latest trends and market dynamics. These are companies that are good, whether they are built in 2015, 2018-19, or during a downturn. I always tell entrepreneurs to worry about creating value not valuation, as valuation is temporary and goes up and down but value is sustainable.

I also believe that start-ups work very well when they are singularly focused on solving one problem. So, as long as they pick a real meaningful problem to solve for a large set of customers – an aspirin solution to a problem and not a vitamin, we are always interested in investing in them; such companies rarely have trouble raising follow-on investment.

What is an aspirin solution?

Assuming there is a downturn, an aspirin will always find takers as customers need it to solve their immediate pain point, whereas, a vitamin may not be seen as a dire need, and customers will say, “I don’t need it right now.” We like to fund start-ups that are creating aspirins - solving for real customer problems. Ideally such solutions rarely have a problem getting fair value from customers and this automatically solves the monetisation problem too.

In the case of OTO Capital, a start-up that we recently funded with ₹10 crore, we did it because people do need to get new vehicles, the auto industry (car and two-wheeler) in general needs to sell vehicles. OTO offers an EMI plan that is two-thirds of the regular EMI plan which makes vehicles more affordable and solves a pain point for all. At the same time, in such a market, a new paid loyalty program might not be seen as a priority by the same customer but could be nice-to-have when the going is good.

How many start-ups do you invest in every year and how much?

Prime is now in our third fund –₹500 crore fund. The first fund was much smaller at around ₹50 crore and the second one was about ₹300 crore. We invest in three to fivestart-ups per year and this involves meeting about 500 start-ups. Some of our recent investments include mfine, Recko, SurveySparrow, Perpule, OTO Capital and larger portfolio companies include Ezetap, Happay, Synup, Moneytap, HackerEarth, NiYo, KredX and MyGate.

Our core value proposition is that all three partners - Amit Somani, Shripati Acharya and myself, work closely with all our portfolio companies. We focus on Fintech, SaaS and Digitisation in other areas like healthcare, education and logistics across B2B, B2B2C and B2C start-ups.

In the seven years since we started, we have invested in 25-26 start-ups. Our median investment is about ₹7.5 crore however, we have invested as little as ₹2 crore to ₹3 crore and as high as ₹12 crore to ₹14 crore in the first cheque. Of course, we also reserve money for follow-on capital. In the life of a start-up (typically a seed and a Series A round), we usually invest between ₹20 crore to ₹35 crore.

Besides Zipdial which was acquired by Twitter for $30 mn-40 mn, any big exits coming up from your portfolio start-ups?

Our focus is on building large companies. So, while we manifest ourselves as Venture Capitalists, we like to think of ourselves as partners in company building. Our primary focus with every company that we have been working with has been to build a $50 million -100 million revenue company over a period of time from 5-7 years and eventually for such companies, exits will come in different ways.

The dream for all entrepreneurs is to go public on the stock exchange. However, in many cases, the companies will be acquired. What is really encouraging is that the vast majority of our companies are tracking their plans very well and we’re happy to be patient. Entrepreneurs also recognize that they have the responsibility to provide us with an exit at some point in time. But, broadly speaking we are patient capital.

How many of your portfolio start-ups will grow to be large $50-100 million companies, by when?

I would expect that anywhere from 25-40 percent of these companies will be large companies, some may happen in three years, others may take seven years, but really the beauty of being a start-up and being private is that you are not worried about the next quarter and can think over a longer horizon. You are building it brick by brick and sometimes they may have to go back to strengthen the foundation and need to slowdown. It’s like a car journey, you can’t say I’ll get to sixth gear and keep going as fast as I can, you have to go down to third and second gear because you come out stronger - it’s the right thing to do. And at the end of the day, you have to get to the destination. Some start-ups might reach earlier and some later. It’s not a race, getting there in good health is very important.

All in all, it’s an amazing time to be an entrepreneur in India. These large market opportunities are starting to happen in India due to the focus on Digital India and India Stack (Aadhaar, UPI, Sahamati, GST, etc.), penetration of smartphones and an Indian middle-class that has very strong aspirations. Start-ups have indeed got a great opportunity to garner a huge share of the $1Trillion Digital Economy and we’re excited to play a small part in this ecosystem.

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Published on October 08, 2019
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