Despite downturn, Prime Venture Partners to not cut deal sizes

Bengaluru-based early-stage venture capital (VC) firm Prime Venture Partners which recently closed $120 million for its fourth fund said that it is unfazed by the ongoing economic downturn and price correction among tech stocks in the public markets. Despite a large array of layoffs and downsizing coupled with multiple start-up shutdowns in the Indian ecosystem, the early-stage VC fund said that it will commit to closing at least 6-7 new deals this year across seed to the pre-series A stages.

Amit Somani, managing partners at Prime Venture Partners told FE in an interaction that the fund is actively scouting for new early-stage investments although the bar is higher this year in terms of scrutinising ideas and the quality of the founding team.

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“We will also keep selectively supporting existing portfolio companies that are essentially great businesses stuck in a bad time…We’ll definitely help them through the downturn. But our advice to the existing portfolio is not to be dependent heavily on external capital and have a modest growth approach instead,” said Somani.

After closing its fourth fund in February 2022 worth $120 million, the total capital under management across all Prime Venture funds stands at over $250 million. Across the four funds, Prime has made a total of 44 deals to date and plans to give out average cheque sizes between $500,000 to $3 million this year. This cheque size is higher than its 2020 average size of $700,000 to $1.6 million.

Start-up funding in the Indian ecosystem continued to plunge in the second quarter of CY2022 due to a major ‘funding winter’ amid a decline in investor confidence. Indian start-ups raised just around $6.9 billion in Q2 2022 (April-June) across 409 funding rounds, a decline of 33%, compared with $10.3 billion in Q1 2022 (January-March). In the same quarter last year (Q2 2021), Indian start-ups raised around $10.1 billion, private deal tracker Tracxn said in a report last month.

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Several large tech start-ups that hit the public markets before the current slowdown have been haemorrhaging in with the erosion of market caps which has seemingly spooked private market investors. Fintech start-up Paytm which hit the markets in November last year with a `1 trillion market capitalisation (m-cap), lost almost half this value ad is currently trading at `50,891 crore m-cap. While food tech start-up Zomato which had hit a `1 trillion market m-cap on listing in July 2021, also lost more than half of its value. It is currently trading at `42,036 crore m-cap.

Somani, however, said that although there could be some arbitrage or overlap between private and public market pricing of tech start-ups, they don’t necessarily “move in sync” due to higher liquidity available to public market investors.

“The delta in valuations between private and public markets, can from time to time become stark because the public markets are liquid. So, in public markets, the pricing can change regularly, whereas in private markets until there is an extra round of financing, or there’s some sort of an internal valuation exercise the valuation will remain stable. But eventually, the private and public markets don’t necessarily move in sync,” added Somani.

Nevertheless, with the Securities and Exchange Board of India (Sebi) liberalising listing norms of loss-making tech start-ups, exit opportunities for early-stage VC funds have just expanded beyond the traditional secondary deals and M&A exit routes. The VC and private equity (PE) investors earned around $5.3 billion in exits from tech start-ups that went public during CY2021, said a recent report by consulting firm Bain & Company. IPOs accounted for almost 40% of the overall $14 billion exit value in 2021, Bain & Company added in this report.

Somani added that Prime may step out of its traditional early-stage investing cycles, and dip into a few later-stage deals especially if the company is proven to be IPO-ready.

“Right now, in some exceptional companies, we may raise further capital to invest in subsequent rounds, like a Series B or Series C or a pre-IPO round. But this is only in certain exceptional circumstances. But generally, when a (portfolio) company enters the IPO, we may be looking to exit not enter, because we may have entered the company seven-8-10 years ago,” Somani.

Prime claims that its Fund I had delivered a 4X return to all its limited partners. Over the past decade, Prime has been the first institutional investor and built up one of the largest portfolios of fintech start-ups including Niyo, Ezetap, Freo, KredX and others. Additionally, during the past 12 months, three of Prime’s early fintech investments were acquired by marquee brands. These include the acquisition of business expense, payments and travel management platform Happay by Cred for $180 million, financial operations start-up Recko by Stripe, and retail-technology start-up Perpule by Amazon.

Founded in 2011 by Somani, Bala Parthasarathy, Sanjay Swamy, and Shripati Acharya, Prime usually invests in disruptive technology start-ups across the fin-tech, ed-tech, health-tech, consumer internet and global SaaS segments. In terms of new areas, Prime would likely explore investing in start-ups across start-ups using AI/ML for business transformation, global SaaS models, decentralised finance using Crypto/Blockchain, EVs and Infrastructure plays around Web 3 gaming.