As the initial public offering (IPO) season saw major start-up unicorns grabbing the limelight, venture capital (VC) firms and institutional investors rushed to revel in the shimmer and sparkles. Orios Venture Partners, an early-stage investing firm known for its bets on PharmEasy, Country Delight, BeatO and Battery Smart, among others, found its next calling in pre-IPO companies. It has invested in Nazara Technologies, MobiKwik and Ixigo, and is currently gearing up for PharmEasy’s long-pending IPO. Managing partner Anup Jain outlined to BusinessLine the benefits of funding companies ahead of listing, the sectors to watch out for, and the returns to expect.

What is your rationale for pre-IPO funding picks?

Team, total addressable market, dominant market share and capital efficiency remain the guiding principles for late-stage IPO investments. We are looking for leaders in their segments, a differentiating story, and a clear path to profitability. We see areas where we find a genuine problem, a large market to solve for, and the company should have already done a great initial job to perfect the model.

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What are your investment sizes and how long does Orios plan to stay invested after the companies get listed?

We invest $1-5 million in a pre-IPO company. We come in early rather than later, so that we get access to some of these big opportunities. Our conversations happen much before these late investors come in, which are newly set up. We invest in companies 12-18 months before they go for IPO. We come prior to filing the prospectus.

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How long we stay invested depends on the comparable returns. The companies which are galloping away in a big market and are dominant will continue to produce very good returns, and we will stay invested as long as possible. It’s a portfolio strategy. If the returns start tapering off, we harvest and give back to our limited partners (LP). We look to stay invested for three to five years. We are long-term investors.

What kind of benefits and returns do you expect from pre-IPO funding?

Future liquidity is the single biggest benefit of investing in a pre-IPO company. The other part is that capital gains tax is lower for a listed company compared with unlisted companies — around 10 per cent against 20 per cent in the longer term — which helps our LPs. Once companies get listed, they are self-sufficient and won’t be looking at private investing. They are out of that risk zone.

We are expecting 3-4X returns on the overall pre-IPO portfolio in the next five years.

After Nazara Technologies, MobiKwik and now Ixigo and PharmEasy, which are your other bets?

We have a long list of about 60 companies that are progressing in that direction (IPO). We are continuously looking at them, filtering and getting access to the founders. At this point of time, it would be difficult to reveal names, but there are themes. We are looking at logistics, marketplaces, tech-based infrastructure, and SaaS companies for investments in the coming year. We will filter out two to three companies from these.

For Orios, predominantly an early-stage investor, will pre-IPO be a significant segment in the coming years?

Yes... In the next three to four years, I think, 20-25 per cent of our portfolio will be pre-IPO companies. Early-stage funds do give superior IRR (internal rate of return) because the risk is equally high. We stay invested in early-stage companies for seven to eight years, giving us around 30 per cent return. In comparison, for pre-IPO we are looking to stay invested for three to five years.

Orios is the first domestic early-stage fund that has started to participate in pre-IPO companies and created a special section for it. In terms of market potential, I see investment in pre-IPO tech-based companies growing to at least $1-1.5 billion per year.