Bengaluru based Prime Venture Partners started backing early stage fintech startups about eight years ago, long before the sector became fashionable in India’s venture capital industry. Today, 45-50% of the firm’s investment portfolio is made up of fintech startups across the spectrum of businesses from payments and expense management to online lending.
Founded in 2011 as AngelPrime by serial entrepreneurs Shripati Acharya, Bala Parthasarathy and Sanjay Swamy, the firm started up with a startup incubator model and later evolved into a seed fund. It rebranded to Prime Venture Partners in 2015 when it raised a $50 million second fund. Parthasarathy moved on from the firm and former MakeMyTrip chief product officer Amit Somani got on board as a partner.
The firm hit the final close of its third fund at $60 million last year. With the slightly larger corpus, the firm has started to look at Series A stage deals, though seed investments remain its mainstay. It prefers to close 3-5 deals a year.
Overall, Prime has concluded 25 deals so far across its three funds and apart from fintech, it also focuses on technology startups that offers enterprise, healthcare, and education solutions. The firm has had two exits so far. Mobile marketing startup ZipDial was acquired by Twitter and women’s health app Maya was acquired by social community platform Sheroes. Its most recent investments include retail automotive leasing company OTO Capital and artificial intelligence (AI) powered digital transactions reconciliation startup Recko. Prime’s other investee firms include cloud-based customer experience platform SurveySparrow; mobile payments firm Ezetap; invoice discounting platform KredX, and online recruitment platform for engineers HackerEarth.
In an interview with TechCircle, managing partner Sanjay Swamy spoke about the multiple nuances of the fintech opportunity, Prime’s investment strategy and shifts in the overall startup ecosystem.
As an entrepreneur first and now as an investor, what are some of the big shifts that have marked India’s startup ecosystem so far?
Fundamentally, I notice three big changes that have occurred over time.
First, the maturity of entrepreneurs is substantially higher now. Many of them have worked in startups or have seen what it takes to build large scalable companies. We now have a number of examples such as Flipkart, Ola, and OYO. The exposure has improved the quality levels. Also, the social perceptions about starting up have become positive. It’s a glamorous career option now. The maturity of business plans, the pitches, and the thought processes have greatly improved. Compared to our earlier days, we are now getting a large number of high quality deals. Entrepreneurs are now aware that they are building a corporation from day one and that they can’t run a startup like a proprietorship. We are starting to see real exits. Companies are getting acquired for the value they have created or getting ready to go public. The secondary markets are picking up. The government is recognising this sector as well.
Second, there’s a credible domestic market now. Companies are chasing real revenue and real growth. The Indian market is becoming a real opportunity. That was not there in the past. In the past, especially in the enterprise software market, the attitude was always to prove it in India and go international. Or directly go international because India was a small market. It might still not be a huge market, but it has become a solid market for enterprise products. You can establish a very strong foothold here and in some cases, build a company exclusively in India.
That’s a big change for all of us. It’s largely driven by the combination of smartphone penetration, data creation, and public digital platforms like India Stack.
Third is the access to and availability of late stage capital. When we started out, we had to be very cautious about what bets we placed. Now there’s growth capital available. Some of the largest global corporates and venture capital firms are backing smaller firms emerging out of India. It was not there earlier.
Prime chose fintech as a core investment sector early on, much before it became a buzzword. What were your reasons?
I was a fintech entrepreneur and my partners have similar experiences. We saw this big digital India revolution emerging. And therefore, fintech was a focus area when we launched Prime, though it was not the only one. Fintech is disproportionately higher for us today because we have always wanted to be the premier fintech focused fund in India. After eight years, it’s still a very core area as our most recent investments show. Fintech and financial services will continue to be about half of what we do.
The second biggest area is SaaS (software as a service). We have also done a couple of deals in healthcare. We are now looking at education as another area for investments.
What are some of the specific opportunities that you find exciting in fintech now?
In fintech, there are opportunities across the board whether it is variations of neo-banking, remittances, banking infrastructure upgrades, and intersection of financial services with other domains including healthcare and logistics. We don’t generally do any horizontal plays. Whatever we do are either infrastructure or verticalized positions which might bring in some element of a particular domain and some element of fintech.
We are also seeing a lot of startups helping the smaller banks. While smaller banks cannot afford the kind of technology investments like their larger peers can, the customer expectations are very high for everyone. So they have to make themselves viable, need to move their processes to actually state-of-the-art structures.
With cloud, AI and ML (machine learning) technologies, many startups are creating affordable and viable solutions for smaller banks and it’s a large opportunity.
Neo-bank as a concept is becoming popular with entrepreneurs and investors alike. What’s a neo-bank for Prime?
By definition, a bank is an institution that takes deposits from the consumer and lends it to someone else. There is a difference in the interest you give the consumer and interest you get back from the loans. If you are not doing all of that, you are not a neo-bank. There could be some features that you offer to customers to give a better experience for a vertical product, but to call yourself a neo-bank you have to do the whole thing. If you are not opening savings accounts, not taking deposits, not using these deposits to lend it to customers, then you are not a bank.
We believe that neo-banking as a new-age experience to banking without necessarily having the regulatory licence is the right way for startups to do it. Regulatory licence is a fairly heavy overhead for a startup.
Lending startups are mushrooming across the country. Do you see reasons for concern?
Obviously, this is a starved market, heavily underserved. There is a need for many more lending and credit products. In the past, because of the infrastructure issues, banks had to be very careful about whom to lend to because you need to get the money back. Now because of products like Aadhaar, India Stack, digitisation and GST, a lot of data is being created. Once the data is created, lending becomes much easier and the cost of KYC, underwriting, disbursement, repayment, everything gets reduced.
Businesses can measure repayment patterns now. Obviously there is a huge void. Lending will continue to be a huge focus areas for startups, but one has to be careful of each problem you are trying to solve.
Lending and credit companies can only be built at a certain pace. There are no shortcuts in lending. You cannot buy your way out to the top here. You have to have a strong foundation. Capital is not a weapon in this particular segment, it’s a tool. You need to analyse and understand a lot of factors here, especially the repayment patterns.
It is going to take time and we (Prime) are going to be very patient about it. It’s very early days for online lending. We have no doubt that there is a huge opportunity and if we execute and don’t do anything stupid, we should be able to build big companies here.
Why is Prime cautious about betting on B2C (business-to-consumer) startups?
Rather than pure B2C, we focus on B2B2C (business to business to consumer) models. We think pure B2C makes sense in certain segments but in a lot of other areas, the customer acquisition costs require companies to raise a lot of capital.
Generally, we have not favoured companies that require large investments without any visibility into profitability or at least a profitable unit economics. We have only funded where we felt there’s a viable way to make it work without requiring massive capital investments. We have stayed away from those businesses. More power to those trying it, but we are a small fund and it’s not our cup of tea.
What’s your approach to startups creating products around data and AI?
We look at emerging technologies like AI and ML through a different lens. We feel that everything we do is AI and yet, nothing we do is AI. It is not about the algorithms anymore. It is about creating and owning proprietary data on which you can apply the algorithms. That is where digitalisation plays a big role. You are digitizing something which was lying in a register somewhere. Now you can potentially analyse the data over a period of time and give a valuable service back to the users.
We will not back companies which say ‘data is everything’ but monetise this data by sharing it with others. Our philosophy is that the value of this data should be provided back to the customers. It has to be completely privacy protected and completely optimum. We are very sensitive to anyone who tries to give away products for free to generate data because they will have to monetise it elsewhere.
We like startups and ideas where we are monetising the primary product and if it generates data, we can use the data, with the consent of its customers, to deliver more value to the same customer. It might come through partners or through the same company itself. This our philosophy here.
Should startups be worried about an imminent economic slowdown?
The startup ecosystem will autocorrect itself in the event of an economic recession. Here, people are not stuck in their ways. They are not locked in their own ideas. Those that are stuck will not survive and we see that quite often. Startup can autocorrect very quickly, better than other segments. Therefore, startups will have the least impact. Startups are more flexible in exploring where the opportunities lie. Even for a pivot, it’s much easier for startups than a large traditional corporation. In fact, people in this ecosystem looks at it (a recession) as an opportunity.