Exit options fade when startups raise too much money: Prime Venture's Sanjay Swamy

Prime Venture Partners, an early-stage investment firm started in 2011, aims to bring more than just money to the table. Its three founders are serial entrepreneurs and have sought to pool their vast experience to work closely with entrepreneurs and become ‘high-support’ investors. It’s also why Prime doesn’t invest in more than three to five companies a year.

Seven years on, it has racked up some notable investments across fintech, financial services, software-as-a-service, enterprise solutions, healthcare and education sectors. ZipDial, a ‘missed call’ marketing platform which it backed, was acquired by social networking giant Twitter in 2015. 

After Prime closed its third fund at Rs 400 crore ($60 million) earlier this year, co-founder and managing partner Sanjay Swamy tells TechCircle what next is on the agenda. Edited excerpts: 

What are the broader themes that Prime Venture Partners will look at for funding interesting startups?

It is obvious to everyone that digitisation is going to happen on a large scale. The government is serious and sincere about it. The situation on Aadhaar as a bedrock of digital identity is not as bad as reported in the media. 

The rest of the world is raving about [unified software platform] IndiaStack, which is a wonderful initiative along with GST, e-way bills, UPI payments. These are all great initiatives that are moving us ahead of developed markets. 

We are talking about digitising healthcare and toll collections, and everything and everyone will have a unique ID. Data is going to revolutionise things and we can now have unconstrained growth. 

What is the significance of data?

Once Reliance Jio launched [in 2016], data consumption in India went up significantly. Video consumption has grown rapidly and a number of startups have come up in the space. Music streaming is growing. Access is commoditised and smartphones are available for Rs 3,000. Now, we have the possibility of connecting the dots. 

Startups have offered services on top of existing products. For example, Uber used GPS and Google Maps and many others have used location services to deliver products. The innovation is connecting the dots. We will see this happen increasingly in India in multiple sectors.

Many startups founded over the past decade have grown significantly but are still not in a position to give exits. Is this cause for concern?

Maybe it is a generation thing  The market was still maturing then. These startups will all reach $100 million in revenue in the next few years. Once you reach that stage, you can go to the public markets. Infibeam's initial public offering (IPO) happened when it had revenues of $30 million.

What is your funding philosophy?

We make our decisions on first principles. So that often means not much background. We follow our convictions on the ideas we see. The decisions to invest in Happay, Niyo or KredX happened in that manner. For KredX, we took only one meeting. 

We look at the entrepreneurs’ background and their conviction about the idea and their own confidence on whether they can pull it off. We don't look at whether the idea will work in the US or not.

Prime’s model involves closely working with portfolio startups. How does that work?

When the company in our portfolio is doing well or the business model is fixed, we detach a bit. Whenever there is an issue in scaling up, they come back and talk to us. 

We handle four to six startups in an active involvement stage at any point of of time. In other words, two startups per partner. At most, we do two deals concurrently.

Will you look at consumer companies in the future?

It will not be the majority of our portfolio but we are constantly looking into it. It is just that sometimes we are traditional and want to see some sensible unit economics. 

As far as these companies are concerned, we look at whether they have a differentiated distribution. We are not saying not to invest in product or customer acquisition. But you cannot be losing money in every transaction at all times. There has to be a path to sustainable revenue.

How is it that you never really bought into the funding boom?

Probably because we have all been entrepreneurs. We have struggled with no money in the bank. As a founder, if you can’t meet payroll, it is the hardest day of your life. I have taken money from my personal account to pay salaries.

The startup team usually will be full of people who have sacrificed better career opportunities. Some of those guys believed in us more than we did. We have all seen layoffs and hardships at the companies we (the partners) founded.

What advice do you have for other entrepreneurs?

My advice to entrepreneurs would be not to raise too much money. Raise only what is enough. When you raise money, you will have to spend it. You have to find areas to deploy the capital in the most frugal way possible. It also eliminates the exit options. 

If you raise $300 million, someone else needs to buy you at $1 billion. How many can do that? That leaves you without much choice. If you become too aggressive, it will come back and bite you. 

Don't be greedy but look for a fair valuation, lest you will end up hurting the long-term prospects of the company. The value of the business is always in fundamentals. I am not saying don't raise money at high valuations, but don't get too far ahead of yourself.

Do you think the funding sentiment has improved this year?

There has been a move towards quality rather than volume. High quality startups are not facing any difficulties in raising big money. 

This interview is part of our InvestorSpeak series in which leading angel, seed or venture investors share their insights on the startup ecosystem in India.