266 / June 24, 2024

Reverse Brain Drain, Reality Of Venture Capital And India’s Next 10 Year Explained By Top Indian VCs

64 minutes

266 / June 24, 2024

Reverse Brain Drain, Reality Of Venture Capital And India’s Next 10 Year Explained By Top Indian VCs

64 minutes
Listen on

About the Episode

All Things Venture Capital: Successes, Failures and Everything In Between

Join us on this exciting episode of The Neon Show as Siddhartha Ahluwalia hosts an insightful conversation with Sanjay Swamy, Shripati Acharya, and Amit Somani, Managing Partners at Prime Venture Partners.

We discuss the past, present and future of Venture Capital in India. In this unfiltered conversation we cover the struggles, successes, opportunites and failures as well.

From MakeMyTrip IPO to the evolution of the Indian market. From why talent left India to why it is coming back now. From building a career in venture capital to the nuances people miss. And so much more

Don’t miss this episode if you want to gain a deeper understanding of venture capital in India from seasoned experts.

Watch all other episodes on The Neon Podcast – Neon

Or view it on our YouTube Channel at The Neon Show – YouTube


Siddhartha Ahluwalia 01:12

Hi, this is Siddhartha Ahluwalia. Welcome to The Neon Show. Today, I have three people on the podcast with me who I consider friends, mentors, and who I have learned investing from.

So I have today Sanjay Swamy, Shripati Acharya, Amit Somani, managing partners at Prime Venture Partners. Prime is an early stage fund investing across FinTech, SaaS, consumer, gaming, and they have some of the wild successes in India in their portfolio like MyGate, NIO, Wheels Eye, Dozee. And today we are going to talk about everything investing, everything what it takes to make big in the public market.

I’m so excited to have this conversation today. And Prime has 40 portfolio companies across these last four funds that Prime has built since 2011. Prime started as Angel Prime back in 2011-12.

So Sanjay, so glad to have you. Amit, so glad to have you. Shripati, so excited to have you today.

Sanjay, when you started Angel Prime, Fund 1, and today it’s Prime Ventures, Fund 4 has completed and now you’re on to your Fund 5 journey. How large has the India opportunity grown since then?

Sanjay Swamy 02:21

That’s an interesting question. I think, you know, as technocrats or technologists, you know, we’ve all been entrepreneurs, you know, Shripati and I worked on the Aadhaar program together. I think we always tend to underestimate, overestimate how big something is going to be in the short run.

But we all tend to underestimate how big it’s going to be in the long run, right? And I think that has held true in everything in India, right? Whether it is the impact of Aadhaar, whether it’s the reach of the mobile and the smartphone, whether it is the impact of UPI and what have you.

And of course, the size of the opportunity, right? So when we started out, we felt, wow, this thing is going to happen. The next five years is going to be, you know, extraordinary opportunity in India.

Well, that kind of didn’t happen. It was a lot of blocking and tackling and basic stuff that had to be put in place. And then you go through a phase where you think, well, maybe this is not that big an opportunity at all.

And now as you look at it, it’s, oh my gosh, this is way bigger than anything we had imagined, right? So without putting the specific numbers, however, you know, I don’t think any of us fathomed when we started out in 2012, you know, right from the time of companies like Zipdial and EasyTap and then the early Fund One companies that, you know, it was really going to be such a massive opportunity. And yet at the same time, it has taken a lot longer for the ecosystem.

And I think that has had, you know, a few challenges along the way. But I think it’s very clear to everyone now that, you know, the time is now, the opportunity is way bigger than one might have imagined. And it’s a super exciting time ahead of us for the next decade.

Siddhartha Ahluwalia 04:00

Shripati, the global macro outlook about India, what are the things that global investors, you know, still are unsure about or still don’t understand about India?

Shripati Acharya 04:10

Yeah, I mean, we all understand the excitement about India, the China plus one being, you know, one major one, of course, the tailwinds which we are getting for all the infrastructure investments which the country has made back in starting 2010, 14 onwards, right? The things which I would say as a private market venture investor, which people are still have question marks on, is around liquidity and exits. So of course, limited partners who are investing money in India, want to have a view of when they are going to get returns, in what timeframe are they going to get it?

And I feel that, that questions are being answered slowly. But still, the predictable, repeatable nature of that remains to be proven in India.

Siddhartha Ahluwalia 04:56

And Amit, you are one of the very few VCs that, you know, before becoming a VC, took a company public, right? So what has changed, right, since MakeMyTrip IPO? Can you describe that process?

What was the frenzy back then? And why was MakeMyTrip back then listed on NASDAQ and not in India?

Amit Somani 05:15

Yeah, thanks Siddhartha for having all of us here.

So I want to go back to your India macro question for a moment and then I’ll talk about the MakeMyTrip IPO and so forth. So I think the first trillion dollars of India’s GDP happened in about, you know, 50-55 years, right? Maybe 60.

The next trillion dollars of increase in GDP happened in about 15 years. The last trillion dollars happened in five years, right? So back to Sanjay’s point about so much has changed, and not just on your India stack, Digital India, you know, Jan Dhan, Aadhaar, etc., but actual growth, I mean, real growth, real consumption, etc., right? So I think it’s phenomenal what has happened from our early journey in 2012 to now, 2024.

In terms of MakeMyTrip, actually, very interestingly, the first discussion that happened in the boardroom in early 2010 on where the company should list, right, closed room discussion, almost unanimously, it was a pretty large board, and then there was the three founders and a couple of us on the management team that were there. It was like a nine is to one, like, you have to list on NASDAQ.

There was nothing else. Nobody in India understands, you know, this market. We were just barely profit-making. It was about 60 million in revenue, real revenue. At that time, there was no ARR, no GMV. We wish we knew GMV maybe the company would have been listed at a higher valuation, and about 8 million dollars in actual EBITDA, right?

And we said, look, nobody’s going to appreciate this company in India, even though it was a household name. And hands down, except perhaps one gentleman, Mr. Sanjeev Bikhchandani, the founder of Info Edge Naukri, everybody else was like, there’s not even a debate, like, why is this up for vote, right?

And now the word on the street is, and I don’t know, I have no direct connection to MakeMyTrip, still fond of the company, is that they might even think of coming back to India and listing there. And of course, everybody else is doing all the reverse flips, and so many other companies are going IPO from Zomato to Paytm to Nykaa to, you know, just our travel boutique online, another travel company that went IPO in India. So I think the market has definitely evolved.

I think the entrepreneurs have evolved. I think both the institutional and the retail investors’ appetite to invest in these tech-oriented companies has evolved. So I think it’s looking phenomenal.

Even we as Prime had a modest IPO, but a very successful company called Tracxn. And that’s a completely tech global company, SaaS company. I would suspect 70-80% of the revenues is abroad and they listed very successfully in India.

Siddhartha Ahluwalia 07:41

Amit, you live in Mantri Espana in Bellandur, which is a society known for expats in Bangalore. So have you seen the India opportunity attract a lot more expats and so many people have come back?

Amit Somani 07:54


I think it is, I would say on both ends of the spectrum, right? So obviously, kind of at my age group, a lot more people are coming back. And more interestingly, people, younger people who are graduating from the IITs and so on, so the next generation, even of the Mantri Espana kid, many of them want to stay back and think about entrepreneurship, which was never happening when I was growing up.

For me, the option was like only the US or, if I was at that time interested in my MBA or something, then go to one of the IIMs. But so I think on both ends of the spectrum, that is happening. And a lot more people are even at mid-career wanting to start up now because we have so many successful role models. So many folks, even in their 40s are beginning to start up, which was very rare earlier, right?

Siddhartha Ahluwalia 08:38

So one common thing among the three of you, besides many other common thing is that you all got your education in India, but moved to the US. And I say that India lost the brightest minds around 30 years ago, 25 years ago, because there were no opportunities, but you all came back and build an institution in India. So you see a lot of that happening right now.

At this stage, like people who have built careers in the US 20 years, now want to be in India in their 40s and early 50s.

Sanjay Swamy 09:13

I actually think many of them have missed the boat, right? And I talk to several of my peers, not just friends.

I think there was a time we were sort of the fortunate few, you know, three of us, maybe, you know, Bala, you know, from our first fund, few other colleagues that came out around that time, all of whom sort of chose that moment in time to come back between, I mean, I came back in 2003, I think 2006, 2007, that time frame right up to say 2012, right? And many of them actually, and many of us came back when the kids were young, and we said, okay, we may want to go back again. And some of our peers who came actually went back, we saw the opportunity here in India and felt it was actually better and easier for us or more attractive for us, both professionally and personally and from all other aspects to be in India.

That, I think, was one phase, right? Today, I think what people are realizing is they’re actually out of touch with India and India is growing in a very, what worked in the US is not necessarily experience that will translate to India, right? So they’re coming to India now and they’re actually, when we came, I would argue that we were kind of at an advantage because we had seen what had happened in the internet there and it had not yet happened in India.

But now the public goods, the digital public infrastructure, everything in India has leapfrogged what is there in the West and people coming in have a readjustment to make and the expertise around data science and AI and stuff like that. India is on par, if not ahead in many games, right?

So I think for people coming back, they really have to think about, can they actually quickly adapt back and actually bring some unique skills into this market. So that’s my view, it might seem controversial, but I actually think people who have gone are going to be disadvantaged coming back.

I don’t know if you guys agree, disagree.

Siddhartha Ahluwalia 11:05

What made you go to the US at that point in time? That is more interesting, like what were the opportunities available for people here?

Amit Somani 11:11

Sure. I can start. So I think that, look at that time, if you wanted to study in graduate school, like do a PhD or do a master’s or something, there weren’t that many options to be very honest, even though we’re all sitting here probably a few kilometers away from IISC Bangalore. Even now, I don’t know what is the program like for people who aspire to do PhDs and stuff like that.

So really there wasn’t an option if you wanted to go deep into the scientific world, not even academia, but even the industrial world. And I suspect that is definitely an advantage that still exists in the US, right? If you really want to go to academia or deep research, while it’s improving with all the IITs and IISCs and so forth, right?

So that was one option. The other was just, I mean, it was a much like quote-unquote, you know, socio-economically poorer country, right? Like, I mean, I graduated in 1993. I am dating myself. But you know, I think about the time I got my US grad school thing, the TCS job offer and whatever, like some 10,000 rupees a month, right?

So I was like, yeah, whatever, it makes no difference. So I think there weren’t as many opportunities. Now, in fact, I encourage a lot of young people that I meet who are thinking of going abroad, who have even the slightest entrepreneurial kind of gene or bone in them saying like, why would you do that?

Like find something here. Or even if you do always make sure you keep one foot in India, because the growth over the next 15 years here is going to be like anything else that you haven’t seen, right? Because we’re already the fifth largest economy in the world.

We’ll be the third largest in the next 10 years, right? That’s another $7 trillion of GDP, let alone market cap, right? Market cap probably be even higher.

So a lot more growth here, a lot more opportunities here. But yeah, I mean, even today, if you want to do deep science, you know, maybe there’s enough and more interesting things to do in the US. So I’m not saying US is not interesting.

I mean, US, like all the stuff in sciences, definitely US will be quite interesting.

Siddhartha Ahluwalia 13:07

But India deep tech ecosystem, especially from IIT Madras, your alum institute, right? It’s amazing, right?

It’s the Silicon Valley for deep tech startups.

Shripati Acharya 13:20

Yes, absolutely. I feel that the opportunity set is definitely increasing in India, which makes the opportunity for folks to actually do research, both in India and for people who have done research there to actually come back. The thing is that the difference between what was happening 25-30 years ago and what’s happening now, is that even the folks who are actually moving to the US to do research or whatever, are actually first looking at India to do and build their careers after that.

So I had the opportunity to meet many of the faculty, young faculty in IIT Madras recently. And there are folks who are doing deep research in batteries, in EV, in safety, in wireless charging, in looking at new materials for carbon neutral materials for building, you know, this construction space, EV, vertical takeoff and landing aircraft and things like that. So the scope of research in India and the opportunities has just exploded.

And so I feel that a lot of, you know, vectors are aligned for folks to actually either do research here, but I would say that, to be totally honest, the depth and facilities available outside are probably still a lot better than in India for a lot of things. And I think that’s true for US versus any other part of the world also, right? So some of the US educational institutions are just very, very well placed for that.

But the interesting and exciting thing about India is that I think that talent, which has an India connect, is looking to come and make their careers here. Even the folks who are in academia want to come and get into the IITs. And it is very hard to get into those positions in IITs because there’s just so much demand for it.

Sanjay Swamy 15:04

So actually, you sort of said some similar stuff, but I’ll give you a different example, right? If you take, you know, Zipdial, co-founder Valerie, right? She used to work at eBay.

And she came to work with me at mCheck, which is the pre-Aadhaar, you know, mobile payments attempt, pre-Paytm, pre-everything. And then later we started Zipdial together. She had a really good exit out of it, went back, you know, did very well for herself both financially.

And she was, I think, one of the pioneers of what Shripati was saying that the people, you know, India is, I keep telling all sub-35 year olds in the US, India is going to be a path to your career success, any which way you look at it. Come and spend five years in India now, because you’ll be at such a big advantage over everybody else, even if you go back and live in the US, right? And I think you see not just Indians or people of Indian origin, Indian diaspora, you know, friends, children, or actually Americans, right?

Caucasian Americans, you know, coming here and living in Bangalore as youngsters now, right? So what we were sort of, they’re probably the middle of the pool of Indians that went out and then they started going in the 60s and 70s. We went out in the late 80s and 90s.

Now I think you’re going to see the early version of the reverse happening because people realize that the big opportunity for the next 20-30 years is India. And even if you’re American, so what? You know, you better have some exposure to this market and I think you’re going to see the opposite happen.

And to me, that is really fascinating to see so many people coming here and as youngsters wanting to work. I have friends, I had a friend in France who said, my son is going through, he’s doing his undergrad, I want to get him an internship in India. And the boy came and worked in one of our startups for three months.

So, you know, I remember I met Tom Friedman once and we were talking about his book and you know, the famous The World is Flat title that was actually coined by Nandan, right? I told Tom, the sequel has got to be The World is Upside Down because the innovation is happening here and this is becoming the more exciting country to look at. So, you know, I think whatever happened in our generation was sort of the transition generation where it was clearly a lot more attractive to go for a variety of reasons.

I honestly did not think through all these things my friends were going, I’ll also go, right? But there was a time when I also came back the same, I said, oh, it looks interesting, maybe I should go back and check it out, right?

Amit Somani 17:32

To build on Sanjay’s point, I’ll give you three examples, three real, you know, people that were together, we were all together at Google.

And the India stint all helped them get to global growth. One is now the CEO of Grammarly. He was a product manager at Google India at the same time, doing Google News and so on so forth.

The other gentleman became the global CPO of Coinbase globally. And the third person became the global CPO of Uber globally, pre-listing, pre-IPO, since we talked a lot about IPO, all were in India from 2007 to 2010. And in every single case, since I know them intimately, they were like the India stint was a big deal because everywhere else, you know, they’re like, this is a large growth market, right?

iPhone now, fifth largest market in the world is India, fastest growing, BMW, Audi, right? Like and on and on and on, right? Like Grammarly, of course, we always have a lot more users, 1.4 billion people.

Sanjay Swamy 18:29

Who need a lot of help with grammar.

Amit Somani 18:32

Yes, right. And mobility and so forth.

But now, you know, the per capita is also increasing, right? So I think Sanjay’s very astute point that even if you spend five years here, whether or not you make it as an entrepreneur or VC or whatever can be debated. But going back to the US, you’ll be a lot more valuable to the parent company or whatever other company you go, because India will be a global big market for every company in the world.

Siddhartha Ahluwalia 18:57

So if acquisitions are happening in India, IPOs are happening in India. Why not, you know, global VC funds like A16Z, Greylock are setting up their India shops. If the opportunity is so large, right?

The current GDP is 4 trillion, probably heading in another 10 to 20 years towards a 22 or a 40 trillion dollar GDP, right? Why is there a pessimism from the largest global?

Sanjay Swamy 19:25

So I don’t think you should equate it to pessimism, right?

I think the reality is venture capital is a cottage industry, right? It is not a scale business, right? And it’s a long investment, you know, and it’s a big commitment, right?

I don’t think any of these would like to enter India sort of with a half-baked or a half-committed approach and then pull out after three years or six years and you will start seeing results after 10-15 years, really consistent sustainable results, maybe five, seven, eight years at least, right? So I think it’s an important decision. I have to say, you know, we have met a lot of them visiting from time to time.

I think the way it will happen is they will pick perhaps domains like Union Square Ventures has done one investment with us in the climate space, for example, right? And they’ve taken an approach, they’re going to invest globally, right? So they, so all of these will pick a strategy, everybody’s watching for sure.

Obviously, China was the big exciting opportunity, you know, 20 years ago and they’ve all had some involvement or another. So I, just because it has not happened so far, I would expect that over the next five years, many of them will have some activity in India, right? Now with Zoom and the comfort of investing over a video call, I think that’s going to happen faster than you might imagine.

But having said that, I think, you know, people are still watching very closely and it’s a matter of time that this will start happening more and more. They may start with growth stage where they’re more comfortable, where they might see companies that are already mature and eventually get number of listings.

Shripati Acharya 20:55

I’d also say that, look, India VC is a competitive market. And so it’s not easy for A16Z and Greylock to just parachute in and start getting deals. Because for an exciting and high quality entrepreneur in India, there are opportunities already because we have existing capital from very experienced folks who have run companies and who have had experience in venture capital.

The fact of the matter is there are very few pockets in the world where the venture capital industry is thriving and growing and India is one of them. Because in India, the venture capital market as we see now is actually going to keep expanding because the underlying entrepreneurial activity is going to expand and the existing players are going to continue to invest in there. So I think that any new entrants will also have to

Sanjay Swamy 21:42

I think they’ll have to look for gaps in the space.

I think as we all know, series B is probably a gap between B and C. So I could see some of those folks coming in as the first step here rather than coming after seed and series A, which to Shripati’s point is both very competitive. It’s also very unique.

So the way young companies look and smell in India are quite different from how they look in the valley. And so they will have to pick their spots.

Siddhartha Ahluwalia 22:11

And the other thing is, you are raising fund five at Prime.

Tell us more about that and how are global LPs thinking about it when you’re in your interactions about the India opportunity in general and what are the questions that they are still posing?

Amit Somani 22:26

Sure. So I think the kind of inbound interest into India is probably at an all-time high.

Even for Prime, we’ve had more LPs interest in the last year than perhaps the last three, four years combined. And very high quality people globally, not just the U.S., which of course is a big kind of LPs base into India, but U.S., Middle East, Asia, etc. A lot of interest.

So I think we’re past the like, why am I in India? And how do you park the elephant and all that stuff? That’s all done.

I think the questions and now there’s always this question of exits, which we’ve covered a lot today on the show here. So we’ll go into that. People are beginning to see exits, at least at a company level.

They’ll be like, well, even if you exit with an IPO, will it sustain its value? Okay, so that’s taken care of. Will Indian companies acquire?

Well, that’s kind of beginning to be taken care of. Will it only be U.S. acquirers? No, no, that’s taken care of, etc.

Do these founders have global ambition? Well, you’ve seen so many companies go out from here, right? And so on.

Sanjay Swamy 23:30

Can we get money out of India? Common Question.

Amit Somani 23:34

Yes, you can. And so on.

So I think a lot of those things and having stability in the kind of political regimes also kind of help. But that’s always a question about India saying, is it going to be, what’s going to happen with the next election and so forth? So I think now the real question is, can you make this repeatable?

Can this be a regular feature? Can you have 10, 15, 20 sustainable IPOs? Can you have half a billion dollar exits?

You know, hopefully there’ll be a lot of 50 million dollar exits, but can you have 2, 3, 500 billion dollar real exits, etc. Can you have a company with a billion dollars in revenue, not GMV? Sorry, I’m still not, we should have learned that at MakeMyTrip, right?

Can you have a company with a billion dollars in revenue, not just a 50 million, 100 million ARR? Do you have a repeatability of your process? Certainly from an LP point of view, they’re like, okay, do you have a unique edge?

I was going to say on the A16Z, Greylock question, like what is your edge and what is your repeatability of your process? Because you’re not like, oh, we got lucky and we got into company X and hopefully we’ll get lucky again and maybe, maybe not. So can you, what is your process?

What is your edge? What is your kind of read of the market, etc. So I think people are now past the, is India for real?

Like India is for real? Is it big? Yes, heck it’s big, right?

And it’s actually getting monstrously bigger. Like I said, the next trillion dollars will be three years, maybe not even five, like the last trillion dollars of GDP, not market cap. Market caps also crossed, I think GDP recently.

So now it’s like, you know, repeatability, consistency, ambition of founders, ambition of VCs, obviously capital access is always the question saying what happens in series B and C, like Sanjay said, from time to time you’ll have some hot pockets and some cold pockets. So I think that is what really is on people’s mind. I don’t think there’s any, I think some of the teething issues are over.

I think it’s like, like I’m a grown up adult now, like I’ll behave and like, I’ll do right things. I think we’re past that phase. Now we have to show consistency of results.

Like we have to show the equivalent of a, you know, not just a Zomato, but again, you know, maybe InMobi go’s IPO at a 15, 20 billion dollar market cap and becomes a large monster company, which kind of is, and so on. Like, is it just a one-off happens every few years or is it like you get five blockbuster IPOs, 20 other IPOs, you know, 50 other exits and these founders start coming back, you know, like even some of our exited founders, you know, maybe they start again and now they start with bigger, bolder ambition because they’ve taken care of the first shot. Yeah.

Sanjay Swamy 26:05

And you’re talking about, you know, parking the elephant, I thought we were going to address the elephant in the room, which is returns right from India, which is, which I guess is all related to, but we’re seeing these blockbuster IPOs happening now. So I think that question has kind of been answered. Now, it’s just a question of, will it be more repeatable?

I think the middle, mid-scale IPOs is still sort of early days that I think we’ll see over the next three years, you know, several of those. And then the smaller exits that Shripati was talking about, right. It’s still meaningful, both from a fund perspective, as well as from an ecosystem perspective, right.

Because an entrepreneur who slogs for 10 years to get a $30 million outcome, it’s probably burned out, right. And it’s just happy to go there. But an entrepreneur who works for three years and gets a $30 million outcome does two more, like we had in the case of Perpule, for example, which exited to Amazon, right.

That was very healthy, because now after doing three more years, if they wanted to, one of the three founders could step out and do another startup. And it’s still pretty young, right. And on its point, right, so that flywheel has to be more frequent, I think.

So now it’s not a question of whether it will happen, it’s a question of, is the perfect storm brewing here, right? Our belief is, if not right now, it’s very imminent. So from an LP perspective, this is the right time to enter.

Because also what happens is, if you miss the market, right, you’re, you can keep watching and watching and watching and watching and watching. Ultimately, you have to step in and play the game. And you might just miss the whole opportunity.

Because this is also the time where disproportionate returns are likely to be generated.

Siddhartha Ahluwalia 27:37

On talking about exits, right, the prime fund one was a buyout fund, right, across 10 years, right? The reported number is that it was an $8 million fund, you returned $40 million roughly to the LPs, right?

If I’m right, you can correct the numbers, right? And, but it was through a buyout, right? So is it 10 years still a short period for exit in India?

Sanjay Swamy 28:00

So the answer is yes and no. In the sense that, you know, that was also started in 2012, right? So the maturity of the ecosystem there, and just for you to know, then post that transaction, the fund has actually returned quite a bit, right?

Another 3x of what the original fund was. So timing wise, probably needed another two years, right? But you know, everybody got a good outcome out of it.

Both our original LPs and new LPs also will come in. I think the standard US model of 10 plus 2 is probably the right thing for India. You know, perhaps seed will, you know, seed only funds might take an extra year.

But broadly speaking, 10 plus 2 is the right thing. I think what would we also try to do is to provide some early liquidity so that, you know, in year 8 to, or so you get your original money back. And then after that, it’s all upside.

And that would be the ideal situation here. And I think that’s starting to happen also more consistently.

Siddhartha Ahluwalia 28:58

But are there like US LPs looking for some specific IRR numbers?

Like Chamath has been one of your, you know, social capital has been one of the earliest LPs in prime. And Chamath has laid out quite transparently across social capital 1 to 5, what has been the returns, right?

Sanjay Swamy 29:15

See, the thing is, you know, I think there’s a combination of, do you want to multiply money by a large number, or do you want to get good returns frequently?

And every LP has different outcome goals here. So typically, if you’re a fund of funds, because you’re also in the fundraising cycle, you know, IRR matters a lot. But if you’re a primary capital, you know, you can be patient, you can wait and getting that extra 3x multiple in year 12 versus getting, you know, there’s a big difference between the 2x fund and the 6x fund for someone like that, right?

So I think everybody has different goals. And the challenge for all of us as GPs is to try to balance these out and to have a blend of LPs as well, some of whom are, will keep us honest and say, no, you need to start thinking about some of these companies that aren’t doing well. And some will say, no, be patient, you know, we don’t want to take early returns, you know, we’re here for the long haul.

And the ideal, the dream for all GPs is of course to have LPs that are really in it for the long haul and really want to multiply because from our perspective, you know, IRR doesn’t matter, you know, multiples matter.

Amit Somani 30:28

Yeah. For early stage, I think, you know, the LP coming in or whatever, they have to take like a 15 year view. It’s not of a fund, but of a fund family, because you’re getting in, getting your feet wet, right.

Understanding the lay of the land, understanding the kinds of companies, companies are also getting built faster, right? I mean, fund one was like Sanjay said circa 2012. Now there are companies, you know, like getting to 10 million ARR was a huge celebration.

Now that has become like 25, 30 million, maybe five years from now, that’d be like, yeah, yeah, that’s fine. Like when you get to a hundred million, I remember when Google India reached a hundred million dollars of ARR for Google India, we went for an offsite to Sri Lanka. It was like a hundred million ARR for Google.

We had like 95% market share. Right? Like this is like back in 2009, like it was a big deal, right? So, I think that if you take a longer view, not a one fund view, but a two or three fund view, then you will potentially get to see large disproportionate outcomes. So, I’m not saying, shying away from the 10 plus 2 model, like I think that’s fine.

Companies do need some velocity, maybe the portfolio construction has to be such that you can return some money, maybe some creativity like, you know, you know, these buyouts, you know, maybe some secondaries that you can take for your later stage company. We’d have to all learn to return capital like sooner, but I think if you really want a 10 bagger, like for a fund or a five bagger or whatever, some large number, to build companies it takes time, right? It’s not an instantaneous, not like a instantaneous thing.

And I think the people who are thinking about it in that way, I think will really, you know, make out because I mean, even the US market is 45, 50 years old, right? In terms of venture. I mean, we are arguably maybe 15 years old, right?

I mean, in a real way, right? Like 17, maybe 2007, 2008, something like that. mchek days, that’s probably like, you know, like the real, you know, kind of.

Sanjay Swamy 32:20

I love how everybody points to me saying, yeah, you must know everything because you’re so old. But I’m getting to the point where I’m forgotten.

Shripati Acharya 32:30

I mean, if you look at, see, the other thing is that some of the largest multiples in the return come in the outlier years for these companies.

So, that is something important to understand. And so, when you actually go ahead and cut off the journey at one particular point, you’re missing out on the tail returns. So, we’re talking today of Zomato, right?

Of how well it has done, and it’s outstanding, and how well it’s actually poised to do. I think we’re talking about Blinkit and the opportunity behind it, etc. The company was founded in 2008.

So, this is 17 years, 16 years in, into the journey of the company. Compare that to a fund life of 10 years. What I’m trying to say here is that you are actually in one sense sacrificing a lot of return potential when you truncate things too early.

So, the art here, and that’s why permanent capital is so important, which recognizes that it takes time to build. It’s not just true in India, it’s true everywhere in the world.

Something good takes time, and it takes a lot of patience to actually get those really outstanding companies.

Sanjay Swamy 33:35

And there are no guarantees, right? I think that’s the balance you’re going to say, okay, I could get something here. Like, you know, someone who chose to exit Zomato at the IPO probably been waiting 14 years, and got out at a certain price, or you know, three months later, got out at perhaps even lower price.

But, and this was true in Square’s case. Like Square IPO, and then, you know, it dropped for quite a bit. And today, it’s like, you know, orders of magnitude higher, right?

So, I think this is not… or Uber, for example, right? I mean, with all the chaos that was going on in the company, today it’s a $150 billion market cap. So, I think a lot of the value accretion happens post.

Siddhartha Ahluwalia 34:15

So, you’re saying that the ideal value of holding the capital should be 12 to 15 years then?

Amit Somani 34:20

No, like I was saying, you know, at a fund level, we all have fiduciary responsibility to return. But my point is to get like Shripati also said, to get outsized returns, right?

It is going to take time. And, you know, because LPs are not thinking like, well, let me buy stock in one company, right? Or in one fund.

You know, you’re betting on the market, you’re betting on an asset allocation, they’re going to do public market in India, which is also doing phenomenally as India will do, right? They’re going to do private markets in other markets, right? They’re going to do, you know, whatever other, you know, buyouts, they might do other things, right?

So, venture, early stage, India, that’s one pocket. So, if you’re going to make big returns there, which is the, which is your back to your IRR point, excuse me, like you want to have a large return pool, that’s got to be one of the most exciting pockets of what asset allocation you want to do. But it’s going to take some time, right?

So, it’s not like, oh, you need to think 15 years for one fund. But you need to, like I said, think 15 years for a fund family, perhaps, right?

Sanjay Swamy 35:18

And you’ll get some early returns, right? But the big outcomes will take time. I think that’s what we’re saying.

Siddhartha Ahluwalia 35:24

And now coming on to careers in VC, because right now I’m seeing like, especially all the top engineering grads, MBA grads, thinking of Bangalore, like people used to think about Bollywood in 90s-2000s, right?

Shripati Acharya 35:37

Now they think about OTT that way.

Siddhartha Ahluwalia 35:41

Hey, Let me go to Mumbai and I’ll become an actor. So, we are thinking like, let me go to Bangalore and I’ll become a VC. So, what’s the reality of a VC?

Sanjay Swamy 35:50

The venture capital, you know, when we started, I remember Shripati, I even know literally where I was when he told me, Sanjay, this is a get rich slow scheme. And to this day, I keep telling you, we’ve proven the slow part and now we’ve to prove the rich part, right?. But you know, it is, you know, to do it right, just like, you know, to get huge rewards from the companies you back, there is no guarantee that it’s going to happen.

There’s no guarantee of your second fund after the first fund and after the second fund, there’s no guarantee of the third fund. And over a period of time, hopefully things mature and stabilize and you’ve got the whole flywheel working. But as we said, it takes 8 to 10 years at least for that to happen, right?

So, second part is, you know, while we met all the VCs, there’s a difference between Neon Fund and Prime and Accel and PXV or, you know, whoever, everybody has their own signature. Yes, we have a product called Capital. But outside of that, which is the only commodity in some ways, but how we work with founders, you know, what our mission is, what our charter is, what stage we come in at, in our case, you know, all three of us engage with all the founders that we back, at least for some period of time, the support infrastructure that we provide, the help with, you know, next round of fundraising, the operating metrics review that we do outside of board meetings, or the product, we all use all the products, etc. That’s what distinguishes one firm from another, right?

Now, there’s no right or wrong in this business, but it’s certainly different, right? So, even finding out exactly what is, how well do we work together, because most often people have not worked together, right? So, all of that, putting all that in place takes probably one or two funds by the time you really got your flywheel going, right?

Now, if I’m a youngster coming into a firm, a big difference between joining the firm, when it’s very young or joining the firm when it’s established, where something is already established and, you know, you’re trying to build your role. Secondly, the business itself is not an easy business, right? Here you are really managing somebody else’s money and that could be a foundation or that could be an individual, that could be a university endowment, it could be IFC, which is the World Bank’s money, which is also a huge responsibility.

Managing it professionally, looking for companies, identifying companies, getting to meet founders, getting to, you know, the best founders have a choice of whom they take money from, so getting to work with each other to feel that this is the right fit, especially at seed, you know, you’re stuck with each other for the longest time, right? I jokingly tell founders that there’s a known path out of marriage, but there isn’t a known path out of your seed round investor that you get to work with. And then just that whole understanding, that whole process, I mean, there’s one thing about saying, oh, I found this deal, it’s a completely different thing.

I’ve worked with this company, worked with the founders, you know, through board meetings, through, you know, good times, bad times, founders fighting with each other, business model having to be completely changed, there were competition raises, a huge round, we are struggling with our fundraising, all the way through perhaps an exit that may happen, may not happen or it might even be a shutdown. You have to see that whole cycle, right? And honestly, if I knew all this stuff, we would have probably not started.

Some of it has to be a bit of a mystery that you discovered over a period of time. And so all of these aspects, you know, not to mention dealing with LPs and then, you know, knowing how to report to them, you know, doing that in a fiduciary responsible manner, etc. It’s a very multifaceted profession.

And it takes years of apprenticeship to really, you know, say that you’re good at it, and then you got to do it consistently, right? So to quote Chamath actually, he once said, look, yeah, it might take, you know, in three years, you can find out if you’re a bad VC, but it takes 10 to 12 years to know if you’re any good at it. And it takes 20 years to prove that you’re consistently good at it, right?

So for youngsters, this is a, you know, this is better be something that they’re willing to either say, look, I’m not good at it in three years, or willing to wait 10 years to know if they’re any good at it. So that that is how I feel, you know, youngsters have to be thinking and not everybody is tuned to that. So it sounds very glamorous, because I’m in the business of giving money, of course, everybody’s going to want to come and meet me, but that’s really not how it is.

Amit Somani 40:13

So I have a contrarian point of view, I don’t think young people should get into VC, especially of the, you know, just coming out of IIT, can I come join, you know, Neon or Prime or whatever. Because I think, and certainly the way we practice the boutique art form here at different strokes for different folks. Because I think unless you actually built something or sold something or being in an environment of utter chaos, which is the environment that you’re going to invest into, you’re not investing in public markets, right?

You’re not buying shares in ICICI bank or, you know, SBI card or whatever, right? Mahindra and Mahindra, where you can read every annual report, this, that, run Monte Carlo simulation, do what if analysis, you’re like, you’re meeting human beings, you meet Siddhartha and Siddhartha says, I’m going to start Neon fund and would you please fund me? And it’s going to be the largest, you know, thing, you know, podcast fund in the world, you know, I have to be able to connect with that founder to be able to understand that thing and be able to evaluate it, etc.

So I feel there’s too much like glamor about VC, like Sanjay already talked about a lot of the hardship, there’s many more that I think it’d be kind of nice not to say, but I would say go work for some place, you know, like, I mean, the

Sanjay Swamy 41:19

You mean getting up at 3 AM because some founder’s system crashed and he wants to talk to you.

Amit Somani 41:24

Absolutely. Or not being able to make payroll in two weeks and you’re sitting on Diwali day. And you have no idea because you’ve never seen it, right?

You went to B school or you went to IIT and maybe you crammed for an exam last minute, but you’re like, no, I have 30 people in my company, I can’t make payroll. And this is Diwali, now what am I going to do? So therefore, I feel like just go get some real hard work experience, right?

Like work somewhere. One of my early bosses, one of my first bosses told me either learn to build stuff or sell stuff, right? But you know, whatever, like do something, right?

I mean, you’re a creator, right? Nansi is a creator, we do something. We have some appreciation for like, okay, what is this art, how does it take, what does it mean to make payroll?

What does it mean to, you know, manage vendors, employees, etc. At least that’s the way we have kind of, that’s our bias to kind of investing. I mean, there may be many other ways to do it.

I know some investors who are just phenomenal, like born investors, right? Like, you know, at 11, the dude went and bought Apple stock. Like, okay, if you’re one of those, then okay, maybe start a fund and invite us, maybe we can become LPs in your fund.

But for most, I don’t think it is going to be like that, right? So you have to find what your age is going to be in investing. It’s not just that you went to IIT X or, you know, you’re a young, hustling, you know, punk.

Shripati Acharya 42:34

Maybe one thing, which is where people might think if they do want to join in VC right after college, with some of the comments that Amit made, you know, being true, is that the nature of the work depends and changes from the stage of the VC, which you are actually looking to join. So for instance, if you’re joining a seed stage, the nature of the work is very different. If you’re joining a growth stage, a Series A or B company, the work is very different.

It’s even more different if you’re joining a PE, private equity fund, right? So it actually changes. And if I were to put a continuum between early stage to all the way to private equity, it becomes more and more a financial evaluation game versus a business evaluation game as you start going later and later.

So the skill sets required are different. It is still a hard business. Every stage is, you know, VC is hard because ultimately you’re in a competitive market and you have to deliver above market returns.

That is the expectation. And so you need to understand that piece of the business before you actually get in as well, that which one suits your skill sets and your interests.

Siddhartha Ahluwalia 43:46

The few things that I have observed are, that being a great investor is not being equal to a great VC, right? Amit, you are one of the few only fantastic angel investors with hit like five balls out of thepark. And then being a VC almost for now 10 years, right?

I have seen fantastic angel investors, 100-200 companies, few unicorns in their portfolio get into VC. Once they are doing one or two deals a year, they’re seeing no action, right? And even those one or two deals, they are not the hottest deals because now you have to have certain ownership to return the fund?

These people just go back to being operators again. There’s so many examples in the ecosystem. The other observation that if you haven’t tasted failure previously as an operator or a founder, you don’t know how to react to failure, right?

And you will see companies failing day in day out, fail multiple times. And

Sanjay Swamy 44:43

I have the opposite problem. I don’t know how to react to success.

I have seen so much of failure. I have done a Phd in that. You know, one thing I have said is I stopped using the word failure. I use the word unsuccessful because I think if you learned a lot from it, it is never a failure, right?

Because you’ll have another opportunity to do that. And so I’ve started using the word unsuccessful founders. Because I mean, I would say I learned everything about payments from my m-Checks stint.

We didn’t have an outcome there or a good financial outcome. But it really set us up for a lot of what we’re doing here at Prime and you know, we’re also working on Aadhaar and all of that. So yeah, you know, it was certainly a hard pill to swallow.

We walked away after four years of slog and half salary for with nothing. But I wouldn’t trade that experience for anything because it set us up for the next big phase of my life. So I think it’s important for founders also to know that just because the business didn’t pan out, you know, it’s not a failure.

It is unsuccessful and they have learned so much from it. And many of the founders in our portfolio also are actually second time founders who didn’t have a big hit the first time. So everybody asked, are you seeing a lot of second time founders?

I put them in two buckets. Yes, there is someone like a Kunal Shah who had an amazing outcome the first time and is going to have, you know, a couple of orders bigger outcome, you know, perhaps the second time around. And certainly one order more. And then there are others who had an unsuccessful attempt the first time but learned a lot about it.

Learned that, you know, the co-founder is very important. Having the right, having a CTO as a co-founder was important. They didn’t have last time, the culture fit, the long term goals with the founder. Because they probably had some formal disputes that didn’t work out.

They may make new mistakes but at least they’ve learned a lot of the mistakes that they would have made. So I think failure is the wrong way to look at it. Learning from, you know, all experience in life at any point in time.

I always say enjoy the journey. If you’re in it for the outcome, it’s unlikely to be a good outcome. If you’re in it for the journey, high probability good things will happen.

Siddhartha Ahluwalia 46:48

But probably if you haven’t tasted let’s say, dirt as a founder or operator it is very, very hard to become a good partner to a founder as a VC.

Amit Somani 46:58

Yeah, because there will be a lot of theory versus practice, right? And having that empathy index.

Siddhartha Ahluwalia 47:10

And some of the things now, right?

Sanjay Swamy 47:14

Actually, sorry Siddhartha, I want to get back to what Amit had more to say on that. I think there is so much of nuanced stuff about saying, oh, these are operators turn VC, right?

It’s everything from saying, look, you know, you’ve got to cut costs, you’ve got to be frugal, you’ve got to do this, you’ve got to do that. And you have to practice it as a VC also, you know, and at least founder should say, you know, once upon a time you were doing exactly that, right? You weren’t going and staying in an IBIS hotel or an OYO.

Today, you might be staying at a slightly better hotel or you do take the 5.30am flight because it’s 500 rupees less than the 7am flight, which is really the one you want to take and you sacrifice that extra 90 minutes of sleep because it’s the right thing to do, right? So I think those things, right? It sounds very sort of, you know, it’s really entitled to say, I think you should cut costs here.

Why are you taking this expensive flight? So all of these things matter to entrepreneurs a lot because they’re out there busting their asses, you know, trying to make something happen and the last thing they want is somebody who just worked at a consulting firm and now happens to have a Rolodex and, you know, drives up in a chauffeur-driven car and says cut costs. So it just sounds very things, that’s where our philosophy has been, you know, either you don’t do that or if you have done it before then you can talk to people and you know, and they will understand that you’re not judging them, you know, it’s the right thing to do, right?

So that’s where I think operators turn, VCs will have a lot of empathy. There’s the downside of that where people say, well, you guys perhaps have too much empathy for the founders. When things are not going well you show them the mirror and say, you guys are, you know, I won’t use any expletives here, right?

Where you guys have to get your act together and I think that’s where the balance comes.

Amit Somani 48:57

If I may quote your own example, right? So from Babygogo to 100xEntrepreneur to, you know, Prime Ventures, Amazon and now Neon Fund, there’s a richness of learning there across so many things, none of which you can fast forward.

You can go back and say, well, let me just go back 10 years and start Neon Fund. It’s not going to be Neon Fund, it might be some other kind of fund, right? Because you’ve seen that, right?

You had that thing, you had that exit, what all happened there. Even 100xEntrepreneur itself, which is how we all first met you, right? It was just like, look, I want to learn about VC.

How do I learn about VC? Let me go interview 100 VCs, boom, right? Like, I don’t know what number we were at, but Sanjay was on the show, I was on the show in the previous avatar.

Now that is actually doing some and figuring it out, right? And saying, okay, now what? So anyway, and maybe I was too harsh on like, don’t be a VC, but I would just say like do something, right?

Like you earn your chops as opposed to, I’m going to just like, you know, go online and search for deals and go to the frat party and HSR or whatever, you know, booze party and like try to hunt the deals. It’s going to be a long, long road ahead from there.

Siddhartha Ahluwalia 50:06

And the other question that I ask that people who are interested in going into VC is that do you have the chops to raise money?

Because if you don’t have to do that, you’re only looking at the part where you are cutting checks and what you said, telling entrepreneurs to cut costs, right? You have never gone on to the other side.

Amit Somani 50:26

Yeah, so we used to, we used to say this earlier, now it’s become a little bit easier, I wouldn’t say like all the way there in terms of fundraising, but like the first fund is only on the reputation of the partners, right?

What is it that you’re doing before? Like, why do I trust you? Like you said, other people’s money.

Then it starts a little bit being on the portfolio, like how is the portfolio? What kind of founders have you picked? What kind of teams have you bet on?

Then fund three onwards is going to be around the returns. As a young person starting up in VC or joining a VC, I mean, it was just, there’s a long, big brick wall that you have to scale to be able to do all that, right? So I think there is, like Sanjay said earlier, fundraising, exits, dealing with the portfolio, subsequent fundraising for the portfolio, there’s so many different things you have to do.

But anyway, I mean, it was an exciting, privileged position that we’re in, but I wouldn’t say it’s easy.

Siddhartha Ahluwalia 51:16

Yeah, I think one way why all of a sudden, it’s a multi-dimensional learning, right? As a founder, I say it’s always a horses kind of a learning, where you’re always looking straight and you have blinds on your eyes.

Sanjay Swamy 51:30

Yeah, I would elaborate a little bit on the word Amit uses, privileged position we’re in, right? And that comes from two aspects, right? I think one of the opportunities coming back to the India opportunity per se, right?

We are in this rare point in time where we are solving and we have an opportunity to solve some fundamental problems in India, right? Access to credit, for example, which we know is going to, you know, improve the livelihoods and lives of number of MSMEs. We have a company doing, you know, solar rooftop financing and returning to more of a solar sort of platform for MSMEs in rural India, right?

These people are going from diesel straight to solar, right? So it’s both environmentally friendly, it’s a much lower cost for the factory, it’s much more reliable power, it’s green energy, right? Renewables, right?

And yet it’s a huge financial opportunity, that’s how we see it, right? So we have an opportunity, I always say, look, quite often you have something that the heart wants to do but doesn’t make business sense and then suddenly the brain says, well, I need to do this but it’s just we’re making money, right? And in India, we have this moment today where the heart and the brain are aligned.

You can do good and make a lot of money doing that, right? So that is also a privilege that we’ve got as VCs and we have to use that very carefully, right? So it’s not just about saying, well, I just want to maximize all the money, it’s actually, I mean, also going to solve some real problems in the process and that’s a really exciting time from that lens if you look at it, right?

And if you see a lot of the investments we make, yeah, we should do financially very, very well but if you look at a Wheeleye that is, you know, digitizing 300 million kilometers of trucking data every day, something like that will lead to knowing where are the accident zones in India and where do we need to actually have some, you know, better lighting perhaps because accidents are happening at night, things like that.

So the company will do financially very, very well but it will also solve some inherent problems in the country and I think that’s a great opportunity for all people wanting to work in venture capital, right? The real motivation is saying, yes, the financial success will be an outcome but the journey will also solve some real problems.

Siddhartha Ahluwalia 53:45

Shripati, since Prime has a concentrated portfolio, right? So while you are reflecting on your wins, what made that win happen, you’re also reflecting on your losses, right?

Why didn’t this particular company not work out? Without taking names, like what are the lessons that you have learned across those set of companies, some stories, right? Why some of those companies, beside timing, that didn’t work out?

Shripati Acharya 54:06

Yeah, some of them are, we come in early stage and we are actually making, we’re imagining the future. And when you are imagining the future there are a lot of unknowns and what happens typically is that the overwhelming reason why a particular company, you know, doesn’t end up doing well is that some of your assumptions around the size of the market do not work out. I would say that just happens to be the overwhelming, I would say, majority and what happens is that the reason the size of the market might not work out is a number of reasons. If it is a consumer company, it might be that the consumer acquisition just never came down, the cost of consumer acquisition.

Now, the assumptions at the time would have been that, hey, look, once I reach a certain scale, there’ll be a certain brand and then the organic kicks in, et cetera, et cetera. What you find is that, well, you built a certain brand but the retention wasn’t good enough and as a result, you had a high churn and you just couldn’t actually do it. That’s one way in which the economics don’t work out.

Another way might be that the competitive dynamics change and when the competitive dynamics change, your ability to charge gets very much compromised and that actually changes. This is all related to the business environment. One other reason why companies fail is their inability to raise funds and that could actually be said as luck because you have to understand that in order to succeed at the end of all the skills, there’s a huge element of luck and timing and when companies are unable to raise because one has to understand that the venture capital does go through cycles and there can be periods of time when certain sectors are going to have a hard time raising funds and other sectors are going to get easier to raise funds. It’s absolutely impossible to predict that and the founder might justifiably have thought and we would have thought as investors that this is an area which is going to get funded but the company still has some ways to go before becoming profitable and the funding isn’t available which puts a whole host of constraints around the business which makes it difficult.

And one thing wherein it is an area which is under founder control which sometimes results in companies not being successful is their inability to create a good team and I think we don’t talk about it that much but actually a lot of that wound I would say in one sense is self-inflicted where the opportunity is there, the product is there but they’re just unable to create and recruit and that might just turn out to be a whole host of reasons maybe the culture is not that such that it’s not able to attract or the founders and the executive team is not able to be the right level of sales to attract the right people. So, you have seen all kinds of them but probably those are the ones which come to the top of my mind.

Amit Somani 56:56

I’ll add one more which is should we talk a bit on the consumer side on the B2B side or the business side the unwillingness of the customer to pay or not being able to do the right kind of price discovery. So, I have a pain point but how deep is that pain point and how much am I willing to pay for it. I may be willing to pay one dollar for a cup of tea but I may not be willing to pay 15 dollars but for this product to be viable from a unit economics perspective it requires for it to be at least 10 dollars.

Now, you have a problem. I don’t mind a cup of tea but I’m not willing to pay 15 dollars for it. So, I think people don’t do enough of this willingness to pay experimentation early on in terms of what will it take to get to it. So, I think that there are a lot of different things but I think on the flip side like the reasons companies succeed is often like one or two.

It’s really deep customer empathy, rapid iteration in terms of product velocity, business model discovery, collectively seeking the truth and therefore not having like an ego in the way with it. It could be in all the failure modes that Shripati also pointed out. It could be that one of the founders or co-founders is not scaling up and they have to be willing to take a step back and hire the right set of people to take care of that. They are still a large equity holder in the company, they need to think about the company but typically these are the ones that that make companies succeed.

I believe quickly iterating, being sort of more open-minded, etc.

Sanjay Swamy 58:27

I have one comment on this. We have a very interesting founder in our portfolio, I won’t name him.

He approaches everything with, you know, I need to get the best people on my side. So, he actually has gone into investor meetings and said, I’m a dilution insensitive founder. I found that really irritating.

We’re on the cap table, we don’t want to be diluted. But when he said it, I thought about it some more and I said, you know, he actually has walked into the meeting and any entrepreneurs listening, please don’t use this line on us if you’re negotiating with us. But well, what he basically has said is, I want to get the best person who’s going to help me build my company, right?

And let’s keep the negotiation part aside for now. He’s actually put the burden of justification as to why I’m worthy on the investor on the other side and said, you tell me why you should be on my cap table, right? And I think quite often founders also need to have a little bit of that edgy behavior and a little bit of, you know, arrogance, cockiness is a very fine line between that and confidence, right?

But I think founders have to always have the attitude, this company is going to happen. Whether I raise money or not, I’m building this company, right? And that’s how they have to be running at all times.

And I think sometimes founders sort of get a little nervous if the fundraising doesn’t go very well and sort of get into the shell and that’s actually the kiss of death because now things start slowing down and it starts becoming sort of a domino effect here, right? So I think the best founders will always be, you know, extremely confident. A founder is a very tough job.

VC is the next hardest job but as a founder is the really, because you’ve got to be on the external, you’ve got to be confident, you’ve got to be, you know, telling your team everything is working well, you’ve got to be talking to your investors very confidently and yet at the same time you have to be honest with yourself and say things are not working out and then perhaps with your seed investors, you’ve got to be having these conversations. What we find is when things are not going well in the companies is when we spend the most amount of time, right?

So there’s a famous quote, I think you used to tell me, I don’t know who you ascribed it to but you make your money on the winners but you make your reputation on the ones that don’t pan out, right? And so we end up, you know, it seemed like an expression but today 15 years into this journey, we really spend a disproportionate amount of time with the companies that aren’t panning out and trying our best to see how we can make something happen out of it and eventually, you know, try to get some exit for the founders.

Siddhartha Ahluwalia 1:01:07

So now my question is to all three of you. And maybe I’ll start with Amit first, right? What is the secret that you think that you know Prime knows or the best top decile VCs know that others don’t know?

Amit Somani 1:01:11

Yeah, so I think you know, everybody has their own approach to solving this VC problem, right?

In terms of how to fund companies, how to work with them or not and then how do you kind of get to exits. I think one thing that we’ve been told, you know, quite a lot by our LPs is your consistency of strategy. What you said you would do, you would do, right? So we believe in our concentrate portfolio. We believe in you know, being high support or actively engaging with our founders and kind of working with them in whatever they need help with I think you know, there are certain sectors we like, we like FinTech. So I think consistency of strategy I know you have a different strategy for Neon Fund. Are you staying consistent to that across Fund 1 and Fund 2 and you know, somewhere there Fund 3 and so forth?

So that is one. The other is where is your edge, right? What is your unique kind of x-factor to be able to evaluate deals, to source deals, etc.

And is that sustainable? Is that repeatable over, you know, multiple fund families, right? I think that’s really really important because Like we’ve discussed earlier, early stage is a lot about nuance judgment and like figuring out what could become, right?

I mean Airbnb was said no to 30-40 times and even one of our star portfolio companies Wheelseye many VCs passed on it. Meesho was passed on 40 times or whatever, some large number. So I think those are two, I would say consistency of strategy and just knowing what your circle of competence, what your edge is going to be I think that’s probably going to be common to many VC. Certainly it’s very important for us.

Siddhartha Ahluwalia 1:02:47

What you’re saying that LPs see this as a differentiator when they’re thinking of Prime, that hey, across all your funds, your portfolio has been you know, high support, it’s a concentrated portfolio across all the four funds.

Amit Somani 1:03:04

Yeah, and there’s a certain set of companies that we back, there’s a certain set of founders we back, there’s a certain approach we take to what we invest and so on, right? So that approach, you’re making a bet on that approach. Right, like you’re doing on second time founders or you know repeat successful founders and so on. And we are agnostic to that as a factor in our investing. We have some, you know, good repeat founders but a large portion of our founders are first time founders. And we are comfortable with that because we think some of the next set of stars are going to emerge from that, right? So it’s more like saying what you said you would do, you’re doing and then obviously time will tell and the results. Because by the time you get to 1, 3, 4 and 5, you start generating results, right? So you can see that strategy pay out.

Siddhartha Ahluwalia 1:03:49

So Shripati, do you think that’s the same edge that or you have a different definition of an edge or a secret in VC in top decline funds?

Shripati Acharya 1:02:49

I would say that there are top decile funds also. I mean, that’s actually one key ingredient that Amit talked about which is how do you enter companies? And the benefit of actually having a point of view which you are consistent with is that it enables you to refine it and get yourself conviction on whether that’s working or not and make it better.

The other piece of VC is that you are actually in the money management business, which means that you have LPs who you are answerable to and you have to provide returns to the LPs because they are answerable to folks from whose money which they are managing which means that an understanding of what the exit atmosphere looks like and when to take exits.

Because as we had said earlier about companies which want to… which have an M&A and founders have a decision to make. Whether to continue or to or to sell. Similarly in from a LP, from a GP standpoint or the VC standpoint you have your best companies in which you’ll actually have opportunities to exit, right?

And those opportunities you might be under under you know the dilemma whether you should continue to hold it or you should actually exit these companies. So I think that very conscious and disciplined approach to evaluating exits because the opportunity to exit comes infrequently in companies even for VCs.

And it has to be done very thoughtfully. So I feel that you know good VCs are able to understand that piece and manage that properly. So I feel that’s another key part, a third aspect here, which is not much talked about. I would also say it is around LP construction which is how do you actually construct choose your LPs to participate in the fund which you are starting.

And the reason for that is that if you are creating a firm which is an ongoing firm then you need folks who are who understand your strategy who are backing your strategy because not every time you’ll continue to have stellar returns and everybody hopes for that. But we have to understand that side business cycles and other elements which you don’t control the macro factors do have a fairly significant bearing on the returns that VCs will provide to their LPs. So having LPs who actually are both understand your strategy and believe in it is important for you to have an ongoing firm. So I believe that if you look at the successful firms, which really have been ongoing and in a franchise so to speak have a very consistent set of LP base as well.

Siddhartha Ahluwalia 1:06:45

Got it. So you are thinking… just to summarize you a VC before entering has to think thoroughly about the exit, right?

And probably some of the best US VCs I have seen is they would if they’re investing in SaaS they would maybe talk to Snowflakes of the world because they have some secret, you know. Access to information that people would have or LP who is the CXO of Snowflake and they’ll run a portfolio company by 10 of these that if this company grows to this number would it be a possible candidate to get bought?

Shripati Acharya 1:07:19

Yeah, having relationships at that level right with the corporate dev, biz dev, etc Is really key part and Sequoia for instance has been very good with that, right? Many of their companies have gotten acquired by folks who had actually, you know, ex-portfolio founders of their own companies who are in these kinds of situations. So having a really a network which you can leverage to manufacture exits is very important.

Siddhartha Ahluwalia 1:07:44

Sanjay, what’s your definition of an edge?

Sanjay Swamy 1:07:46

So it’s everything between the two what both of them said, right? I mean talked about how do you choose companies, how do you enter companies, the stage you enter, having a consistent strategy Shripati talked about what happens when you want to exit the company, but there’s six years that happens in between, right? Which is how do you work with the company, right?

And I think that also it plays a huge huge role, right? Because as I said, look, you know, the journey is guaranteed. The outcomes are not, right?

But I think in many cases you can shape the outcome, right? Not necessarily for the company but certainly for the fund, right? So for example If you work closely with the companies you’d be probably early to realize that things aren’t going to plan, right?

And there is an opportunity to course correct, right? And this is where you know, we once had a situation where in fact in Happay where the founders wanted to spend you know 25 lakhs on marketing and I said can you start with 25,000 and see if this strategy works? Right, and they would have blown the bank at that time. It was a lot of money and they both came back and said, ” Thank god we tried with 25k because we learned that this is the wrong way to do things, right?

So some of this, you know at a 10,000 foot level and then you know VCs are staying only with board meetings once a quarter, you know, you miss some of these things but if you have that bandwidth and the operating experience to spend time with the founders. Help them construct you actually will realize that this company You know a you can help shape the outcome for the company and b you do realize sometimes that phone regardless of all our putting our best efforts as was the case perhaps in the company we mentioned earlier Perpule, you know, great company great team great product pandemic hit offline retail went to zero. There was no forceeable outcome for this company. The right thing to do was not to raise a series B which they were getting offers for and actually find a smooth exit, right?

So I think the best performing funds also realized early on and this is something that we have talked about in a sort of a half-life concept. How soon can you find out if this company is really going to be a big one or not go anywhere? And in both cases play a different game, right? Now that’s not to say that you give up on the on the second one but you know probably don’t pour in a whole lot of dollars till they figure out their product market fit. Drip feed a little bit let them find out here.

Let them not try to build uh something very big until they’ve sorted out this stuff, right? So I think a lot of what happens during that period of time is critical and so you know, we are very proud to say that, you know, we may have a loss ratio of x but our dollar loss ratio Is actually 0.5x or 0.25x, right?

Because we have not poured in a lot of follow-on capital just blindly because we own so much the next round is happening. Let’s do, you know, we have to do our support, right? So things like that are strategies different VCs take. Of course we back good companies because we want to make them go all the way. Sometimes you’re doing the founder a disservice by backing them in the next round when the business isn’t going anywhere, right?

So these are things where again having open transparent communication with the founder in both directions is sort of really having a lot of trust with each other. And I think picking the right strategy, sticking to it, working very closely with the companies throughout that period of time helping get the best outcome possible. And then of course being very pragmatic about when do we take some chips off the table?

When do we hold? When do we exit completely? These are all sort of different parts of the journey and we are I would say far from you know masters of it. But you know, at least so far, you know, it has been very promising and I think we all have to constantly keep refining.

That’s the other thing the market changes a lot. So we have to be on top of this all the time, right? You know the new stuff happening in AI we can’t be burying our heads in the sand and saying yeah, but that’s that doesn’t matter. It does matter, right?

So Uh, I think all of this is needed to have your A game and the last part is the team, right? We see the team that we have the culture that we have within the organization getting people who are thinking long-term. Even if we are turning down a deal doing so in a timely manner again, I can’t say we are perfect at it.

But we do feel bad if we if something falls through the cracks and giving a thoughtful response to the founder, right? Saying you know you know or after six conversations you tell the founder. Well, we somehow don’t like the TAM. That’s something that really irritates founders and we see some of our founders getting those rejections. And they say but that would have been known in the second meeting, right?

Or at least should have been debated early right for it to show up like the obvious things. So I think that’s where you have to, I think be empathetic towards founders, you know, all founders are awesome. Anyone we meet we hope they succeed. A small percentage of them will hopefully will be part of the journey and do it, right?

So I think all that plays a role and and last but not least, you know we are also a company, right? Compliance, governance all the things that we want our startups to do we also have to do. And you know institutional LPs certainly demand a lot of that and you know, we always have looked at such inputs from institutional LPs as an opportunity to get better.

Amit Somani 1:12:48

Hey, congratulations on all the success that Nansi and you had for Neon Fund and it’s been great to be partners with you.

Siddhartha Ahluwalia 1:12:55

Thank you so much Amit. Thank you.

Amit Somani 1:12:57

Absolutely all the best.

Siddhartha Ahluwalia 1:12:58

Prime is like a family to me and Nansi. Enjoyed the conversation today. So so much.

Sanjay Swamy 1:13:03

Likewise, and we hope you are locked off, you know having 20% of your LPs come through this podcast also shows up and we get 20% new LPs. Cheers buddy, cheers!

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