Product Market Fit - for a VC Fund?

#TenYears@PrimeVP #Blog1 - VC_PMF

Today we announced that Fund 1 has returned top decile (4x+) returns through a secondary exit to our LimitedPartners from Foundation Private Equity (FPE), Singapore late last year. All stakeholders involved are delighted by the outcome we have provided. It is very humbling to see this strong validation of our model of a concentrated portfolio with active involvement, atypical for Seed funds that typically try and maximize shots on goal.

Prime Venture Partners was started in 2012 as AngelPrime with a vision of working closely in the early stage with a small portfolio of companies and to be available for founders at all times in their quest to build some of the iconic companies of the future. Our areas of focus have always been two-fold; companies solving some of the biggest challenges in India through digitization, and companies leveraging India’s business software expertise to go global.?

Raised in 2012, our first fund was a modest ~8M (50cr) with anchor investors such as Mayfield, SocialCapital, Jerry Yang, and others who trusted us with their dollars. We gingerly started this new journey of being VCs and learned a lot as we started interacting closely with founders. The biggest learning was that investing other people’s money is really hard and more difficult than being an angel investor. We've subsequently raised three additional funds;? Fund 2 ($46M/300Cr) raised in 2015, Fund 3 ($72M/500Cr) raised in 2018, and the current Fund 4 ($100M/750Cr) raised in late 2021, and have a portfolio of 45+ category-creating companies.?

Our own recipe

From the first day, Shripati Acharya, Bala Parthasarathy, I, and later Amit Somani had a simple philosophy of doing a few things but doing them very well. We chose the strategy of investing in a concentrated portfolio and spending substantial amounts of time with our founders, bringing all our operating experience and know-how to bear - for all companies. This is a stark deviation from most classic VC models where the lead partner is typically the only person who interacts with the startup. There was always a temptation to change the strategy and invest smaller checks into a larger pool of companies but we stuck to our chosen path and in the process built deep relationships with our founders. While there is no one right approach, it suited our backgrounds of being entrepreneurs and company-builders and we wanted to be there for our founders in whatever capacity they needed.We were also fortunate to have some high-quality advisors and well-wishers including several others from the Indian VC ecosystem who guided us selflessly. While we had been entrepreneurs and had raised Venture Capital, the first part of the journey was about understanding the new profession.

How do VC funds work?

VCs typically raise funds that receive commitments from Limited Partners who are HNIs, Foundations, Trusts, University Endowments, Fund of Funds, etc., and deploy this capital to back companies at different stages, geographies, verticals, etc. Funds typically have a life of 8-12 years and at the end of that period, the VC fund has to liquidate all its holdings and return the profits to its Limited Partners. As an investment manager, the VC fund usually stands to make an annual management fee and a percentage of the profits (known as Carry or Carried Interest).?Ultimately VCs only make money from returns which may come in multiple ways depending on how their portfolio companies perform:

Primary Exits

• IPO - (eg. Zomato, Nykaa, or the upcoming listing of Tracxn) essentially allows shareholders to sell some or all of their holdings in the public markets.
• Merger/Acquisition - (eg. Happay to Cred, or Recko to Stripe) where a public or another private company may acquire a portfolio company, typically in an all-cash or cash+stock transaction.

Secondary Exits

• Company-level - where another investor (typically a growth-stage investor) may acquire the fund’s shareholding in a startup.
• Fund-Level Transactions - where an entity may acquire some or all assets of the fund itself ideally without disturbing the shareholding of the portfolio companies in the Fund.

India has witnessed several examples of Primary exits and Company-level secondaries when a large player may invest in a company and partially or fully buy out early shareholders.

Today’s announcement was an example of a Fund-Level secondary transaction, with FPE acquiring 100% of the interest of our LPs and extending our Fund life by a further four years. The portfolio in Fund 1 (Quizizz, Happay (acquired by CRED), Waggle, HackerEarth, Synup, Vidgyor, and SmartOwner) is now quite mature and the companies are all well funded and or profitable - so we are quite excited about the next four years as these companies go public or exit through M&A.

For Prime, as we enter our tenth year of existence in 2022, we’re delighted to start the year with news that essentially establishes “Product Market Fit” for our atypical model of a seed-stage fund with a concentrated portfolio and an active involvement model. We are grateful to our LPs who backed us when we had never had any investing experience, those who backed us in subsequent funds, as well as to all the founders across nearly 40 companies who have placed their trust in us and partnered to build some amazing companies. Of course, there's been a lot of hard work and difficult times, and we've tried to balance it with light-hearted moments.

Yes, it is our tenth year, but it’s really Day One at Prime.?

Our mission now is clearer than ever, and one of our entrepreneurs put it best:

PrimeVP - Partners in our Journey to attain Escape Velocity!        

I guess we could say, Product Market Fit is established! Onwards!

We’re looking forward to sharing some of our learnings in our #TenYears@PrimeVP Chronicles. If there are any areas you’d like us to dive into, do share in the comments section below.