VCs Now Avoid Founders Who Chase Growth At All Costs: Prime Venture Partners’ Sanjay Swamy

Early stage investments continue to be a small solace amid the funding winter. After the peak of 2021 when records were broken and new funding heights reached, this is an unprecedented slowdown for VCs. But for Prime Venture Partners, pretty much nothing has changed, claims managing partner Sanjay Swamy.

“From a VC point of view, 2021 was the year of extremely overheated summers. It was probably as irrational a time in this ecosystem as there ever will be in the foreseeable future,” Swamy told Inc42 in a no-holds barred interview.

Having launched four funds and seen the ecosystem from a nascent stage since 2012, Prime Venture Partners have seen the rise and receding of the investment tide across several cycles.

Led by managing partners Swamy, Amit Somani and Shripati Acharya, Prime has been a key partner for a number of red-letter startups across fintech, edtech, SaaS, mobility and now even generative AI-led models. While its current fourth fund saw a final close last year, its first fund delivered 4X returns to its limited partners, Swamy added.

Some of its other investments are Quizizz, PlanetSpark, Sunstone, MyGate, Dozee, WheelsEye, Niyo, Freo, KredX, OTO, Zuper and SurveySparrow. This week, it led an INR 4 Cr round for Bengaluru-based generative AI startup ZuAI.

Sanjay Swamy and more than 40 of the top VCs, private equity investors, family offices and angel investors at Inc42’s MoneyX on July 20, 2023.

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It has also seen key exits from its portfolio such as Happay which was acquired by fintech unicorn CRED in December 2021, Recko by Silicon Valley fintech giant Stripe, and Perpule by ecommerce behemoth Amazon.

Swamy believes that given the firm’s experience, Prime VP is perhaps in an enviable position and therefore has been able to get these high-profile exits. It’s also a factor of Prime Venture Partners sticking to its strengths over these past 11 years. Other VCs do not have the years behind them to have an investment rigour like Prime, something Swamy is proud of.

So what’s his view on the messy situation in 2023 with Indian startups amid corporate governance issues galore and the heightened focus on sustainable business models. And how has this changed early-stage investing?

Edited excerpts

Inc42: Everyone was bullish about the startup ecosystem after 2021, but now everyone also claims it was an anomaly. How did VCs lose sight of this now-obvious aberration? 

Sanjay Swamy: Drawing comparisons to 2021 is the wrong place to start anyway. We have gone from one end of the pendulum’s swing in 2021 to another extreme today, so we’re not in an equilibrium state, even now. Things will settle, even though for us, it doesn’t feel like a different year.

Having said that, we can see that there’s pain in the ecosystem across VCs and startups.

We are bearing the brunt of the sins of 2021 — I don’t think even the companies have benefited from a building perspective, because a lot of bad habits crept into this ecosystem.

We saw inflated salaries and a lot of talent is currently unemployable. And it’s hard for the startups or even these employees to scale back to more conservative ways.

Right now, since the timing of the next round is going to be uncertain in today’s market, the proof points that investors need are also changing all the time.

As VCs get conservative, they need founders who inherently have the mindset of not pushing for growth at all costs, but sustainable growth, especially at the unit economics level.

Inc42: In 2023, do you believe that founders are discarding some of those bad habits? 

Sanjay Swamy: Today, entrepreneurs have now come back to a position of rational thinking and reason. But the investor ecosystem has yet to firm up long-term thinking because people are not sure when it’s all coming back. And so that has brought in a lot more caution.

Companies that raised in the 2021 period did not necessarily have the performance benchmarks to justify their high valuations. They are the ones that are most screwed. And they have to use this existing money that they have got to better justify the valuation that they got, otherwise they will do what nobody likes to do, which is a down round.

This medicine, as bitter as it is, is necessary. And so I actually think it’s good for companies to suck it up and say they got lucky. They are climbing back down to reality. Nobody complains when valuations are inflated and everybody complains when it goes down.

Thankfully, the new startups starting out don’t have that luxury right or that pain of down rounds as well. So as a result, they’re able to start with the knowledge of this reality. They have more information — from talent to salaries to fundraising possibilities — to plan accordingly. The new crop of entrepreneurs coming in is more steeped in reality.

Of course, they all have the desire of breaking through and building a big company, but they know the constraints particularly when dealing with VCs, so there is a bit more rationale in their dealings with Prime Venture Partners and other investors.

Inc42: There is a lot of talk about sustainability and profitability, but can you actually get a clear view of this at the early stage? How do you assess their potential path to success?

Sanjay Swamy: Since Prime Venture Partners is a seed investor, it’s important to see what the company can achieve with the money we put in and will they be in a position to justify a reasonable next round.

At our stage, there’s hopefully a great founding team, there’s a huge market, there’s some proof point of the primary value proposition. And the goal of the round that they’re raising with us is to get from that early validation to a little more solid product-market fit. And that includes some level of commercialisation so that for the next round, we can point to the data and say, here’s the proof.

So anyway, coming back to our stage, we know they will not be profitable as a company. We’re not expecting that. But it’s more important to know for certain that their growth is sustainable and very scalable. And it is going to take an investment to realise the real upside of those businesses.

This is more clear when it comes to B2B or B2B2C, but can only be a hypothesis for B2C. It’s not as black and white in the case of consumer businesses, so the challenge of evaluation is higher on the B2C side for us at the early stage.

Inc42: Have you had to go back to the drawing board and rethink some of the parameters you evaluate startups on? How has your thesis or view on dealflow changed since the madness of 2021?

Sanjay Swamy: Look for Prime Venture Partners, almost nothing has changed. Because we have always been fairly thoughtful in our choices, even if I say so. Even in a year like 2021, we only did six deals and in a normal year, we do four to six. That was one of the peak years for us. So broadly speaking for us, even then we looked at what it might take to build a large sustainable company here over a period of time — so that hasn’t changed.

One of the questions we ask at the early stage with the low scale of revenue is — have the founders visualised success down the road. And what does that look like? We will slice and dice the data and talk to customers and all that stuff to verify their conviction. The most important thing is what does success look like? And here is where the founder and their vision play a big role.

Have they done enough to derisk, can they deal with situations that are going to arise and have they thought it through? We need them to prove with some reasonable conviction that this is a 10x better approach to anything else in the market. That’s a reasonable way for us to connect the dots between the potential of the idea and the founder.

Secondly, in my mind it’s easier to build a large company than a small company because large companies attract many suitors. Larger companies tend to attract a disproportionate amount of investment at the later stages, because everyone wants a piece of that success.

So we also look at where the founder sees the business in the next few years — are they content with a $10 Mn ARR business or do their ambitions include a $100 Mn ARR and then continuing to grow from there.

I like to use a sports analogy here. You know in football, even the goalkeeper can score from his goal, right? It has happened every now and then, but it’s a freak occurrence. If you want to increase the odds of scoring, you know, you’d rather take a penalty kick. However, infrequent a penalty kick might be, your chances of scoring are much, much higher than a goalkeeper.

So that is how I view the opportunities and that’s how we believe VCs should work. This is not a volume game at all, at least not for us.

Inc42: In the context of corporate governance debacles at various startups, everyone says this is the time for startups to learn and implement best practices. As VCs, do you feel like this is also the time for investors to relook at their processes and see where the gaps are? 

Sanjay Swamy:  Absolutely. Investors didn’t realise the amount of risk and liability that they are subject to, because they trusted a lot of founders. And in most cases, founders were not aware and perhaps not as competent as they needed to be. They had not hired the right resources. And in other cases, the founders were actually competent but did a lot of things that they shouldn’t be doing.

So the reality of this is venture capital is a cottage industry. It’s not a scale business. Every time you try to do things at scale you compromise on a few things, because some of these are just not scalable. But ultimately, there’s a personal and a human touch that matters a lot. Which means that you can’t just continuously keep finding new companies and investing in them.

The Prime Venture Partners model is literally the opposite of almost all VC funds and certainly seed funds in that we do very few deals in a year. Because fundamentally, we believe that outsized returns can only come if you’re actually derisking by being involved with the companies and helping them.

Now when it comes to corporate governance, we think it’s a foundational thing for startups. Of course, there is an element of proportionality that one has to factor in depending on the sector, but some things are non-negotiable.

We have fintech companies in our portfolio for instance and they can’t say we won’t do our books properly or get audits done regularly, because this is basic hygiene in fintech.

While early on, a startup may not have everything in place, the next round is always the opportunity to catch whatever mistakes and bad habits have crept in. Subsequently, it just has to be ongoing discipline, like having your finance team involved in reviewing the MIS and actually discussing it with the founders.

Somebody in your team will present $2 Mn of revenue in a board meeting but the collections are only $1.5 Mn. That sort of screws things up badly.

We ensure that we are very clear here with our portfolio. We get a clear definition of what revenue itself means — it can be so ambiguous in the tech industry.

We have tried over the years to come up with as balanced an approach as possible for the stage we invest in, but even at the time of funding, our default position is to make sure that these companies even early on have the right level of governance, a company secretary for all their filings, a good audit partner, a CIO wherever possible And that’s the part of the VC business that I say is not scalable. I can’t have 100 people looking into that.