More an overheated summer than a funding winter in FY23: Prime Venture's Swamy

Founded in 2012 by Sanjay Swamy, Shripati Acharya and Amit Somani, the homegrown VC fund (formerly known as AngelPrime) floated its first fund with a corpus of $8 million. The firm is currently deploying its $120 million fourth fund that closed in 2022. A backer of startups such as Cred, MyGate, Ezetap, Affable.ai, Niyo Global, Tracxn and MyCointainer, Prime is a sector-agnostic firm with investments ranging from fintech to software-as-a-service (SaaS) segments.

In an interview, co-founder Swamy spoke about the firm’s investment thesis, why it has continued a focused portfolio and how it handles founder-investor relations. Edited excerpts:

What is Prime Venture’s investment thesis?

All the founders come from a tech background. As a result, this approach of investing in tech comes naturally to us. We believe investing in early-stage startups is an area where our experience can play a big role.

We would want to work alongside the founders as much as possible, unlike other early-stage players who look at things from a volume perspective. As a result, we are also actively engaged in our portfolio companies’ regular operator-type activities, which would be a hard thing to do in a large portfolio. As for the future, not much will change fundamentally. We will continue to make four to six investments every year. It leaves more capital for follow-on rounds.

What is the sectoral split of the investments made so far?

We have traditionally been strong in the fintech space due to our backgrounds. We’ve had some good companies in the SaaS space as well. I would say about 30-40% portfolio contribution comes from fintech, 25% from SaaS, and then the rest is a collection of other sectors like gaming, electric mobility and logistics.

How much have you deployed from your fourth fund so far and how much is earmarked for new and follow-on investments?

We are approximately halfway through new commitments in Fund IV. At a median level, the fund typically invests $1.5-2.5 million in the first investment and about 1.5-2x of that amount in follow-on rounds. Fund IV is consistent with our philosophy of investment.

Contrary to many early-stage operators, you have a very concentrated portfolio. Why is that so?

Good companies will always raise capital but sometimes even a small difference in strategy or direction can make a material difference for a company, especially in the early stages. We try to make sure that we provide entrepreneurs with an opportunity to maximize their long-term potential by doing the right things when they are younger. Also, interaction is important. Sometimes, the case is that one partner from the VC firm ends up interacting with one startup. We try to ensure that all partners are actively engaged with all companies. Of course, this isn’t possible if we are doing 10-12 deals a year. Therefore, we end up doing four to six deals a year. We have made investments in 40-42 companies so far and have exited five.

How do you maintain founder-investor equilibrium?

Collaboration. In the case of a good entrepreneur, he/she will always look at suggestions for the company but may end up having a tunnel vision about the startup’s future roadmap. So, we try to be collaborative.

Do you plan to raise a new fund?

In general, we raise new funds on a three-year cadence. We raised the first fund in 2012, the second in 2015, the third in 2018, and Fund IV in 2021. Therefore, we are likely to raise Fund V in 2024.

What is your time horizon for exits? How many exits did you make last year?

Our main strategy for exits is that we try to stay with the company until it goes public. But this may not be a recurring scenario. When things are going well, investors are not in a hurry to exit. However, in some situations wherein there is a strong inbound offer that is beneficial for the company, for instance, in the case of Happay and Cred or Ezetap and Razopay, we are happy to make an exit. In cases where a larger VC is eyeing an investment, we haven’t actively considered taking a partial exit so far.

Having said that, as we approach at least five or six years of investment, if there are opportunities for a secondary or a partial exit, we will consider.

Another option is not selling stakes in portfolio firms (to retain the board seat) but at the same time, offer limited partners (LPs) an exit. For instance, we gave a return of 4x to all our LPs from the first fund. This practice helps the recurrence of LPs for future funds as well.

What was your investment strategy in FY23 amid the funding downturn?

We stuck to our thesis of making four-six bets in FY23 as well. So, it wasn’t an unusually slow or fast year for us. We feel some companies were arbitrarily funded in the past two years. More than a funding winter, I believe what we saw was an overheated summer. If you compare the situation to five years ago, it’s not as bad as it seems.

In the last two months, three of our companies have raised further rounds. Of course, the terms are not like 2021 where you could randomly raise $50 million, but they are right-sized for the state of business and to go to the next stage.

How crucial is profitability as a metric for your portfolio bets?

I think profitability is out of the window for us. But the path to profitability is required. Founders should have a point of view on things like the type of customers they are acquiring, where revenue will come from, and validation of that revenue. Subsequently, as they get to a certain scale, profitability will arrive.