VC Insights | Issue# 2 [July 28, 2024]
A recent article by Inc42 sheds light upon Prosus’ investment strategy and its evolution over time. Prosus has been a major investor in Indian startups such as BYJU’S and Swiggy. However, the Dutch VC giant is now shifting its attention towards early-stage investments in India after experiencing considerable setbacks with its high-value investments. This strategy includes overhauling leadership and entering seed-stage investments, representing a significant shift in its investment focus in India.
Background
According to data from Inc42 and Tracxn, Prosus has invested over $7 Bn in Indian startups, primarily through substantial investments in unicorns like Swiggy, Meesho, PharmEasy, The Good Glamm Group, and Urban Company. More here. However, there has been a notable reduction in large deals since 2021, with just one in 2024 compared to ten in 2021.
Early-Stage Investment Focus
In 2023, Prosus ventured into seed-stage investments with Kratos Studios as a part of an INR 160 Cr funding round. Further investments include early-stage companies like Lyscraft ($26 Mn seed round) and the AI-driven EMA platform ($35 Mn seed round). This shift is part of a broader strategy to pursue early-stage investments across regions such as Australia and the US.
Leadership Adjustments
Ashutosh Sharma has been in charge of investments in India and Southeast Asia since April 2024. Fabricio Bloisi, previously CEO of iFood (part of Prosus’ portfolio in Brazil), became the CEO and head at Naspers and Prosus in May 2024, and will lead global operations.
Challenges with Large-Scale Investments
It is imperative to say that the Indian startups that Prosus backed through large-scale investments faced significant challenges in terms of growth, scale, and profitability. Such unfavourable outcomes forced the leading VC firm to rethink its investment strategy in India and focus on early-stage bets instead. Some of Prosus’ top challenges that came up with the large-scale investments have been outlined below.
Investment Underperformance: Let us look at some of the top underperforming startups that are a part of Prosus’ portfolio of Indian startups.
- Prosus has written off its $500 Mn+ stake in the beleaguered edtech giant, BYJU’s.
- Other investments facing losses include Swiggy, PharmEasy, Meesho, and The Good Glamm Group, with Urban Company being the one exception.
- Pharmeasy’s valuation has dropped by 90% since the Prosus invested $118 Mn in 2021, leading the VC fund to engage in a rights issue at a significantly lower valuation.
- Prosus was one of the leading investors in the $100 Mn funding round of the fashion platform Fashinza in 2022. The startup, however, intends to return investor funds after its business model did not succeed.
Operational Hurdles: Startups plagued by operational hurdles have also hurt Prosus’ India bets. See below.
- Prosus wrote off a $38 Mn investment in ZestMoney, as the fintech startup shut down in 2023 due to operational challenges.
- Agritech startup Dehaat, where Prosus 11.1% stake, is grappling with cash flow issues and internal control problems, with losses increasing by 94% in FY23.
Expectations for IPOs
Potential IPO Outcomes: Prosus is looking forward to the IPOs of Swiggy, Eruditus, and PayU India, and expects positive outcomes.
- Despite high revenue figures, the aforementioned startups are yet to achieve profitability.
- PayU India is considered ready for an IPO, aiming for a listing in late 2024.
- Prosus has a 33% stake in Swiggy, which is expected to list on the bourses later in 2024. The food tech major aims to exceed $1.25 Bn in revenue for FY24, but is likely to remain unprofitable, despite claims of profitability in its food delivery segment in FY23.
- Prosus holds a 12% stake in Eruditus, which is reversing its domicile to India before a potential IPO, having reported $400 million in revenue and reduced EBITDA losses in FY23.
Exit Strategies
For a traditionally late-stage investor like Prosus, the investments come with an anticipated exit timeline of 4-5 years. With late-stage investments, the possibility of exits through secondary sales is limited and that creates a stronger dependency on public listing. As an example, Swiggy was given a deadline of 2024 for public listing and that paved the way for a number of cost-cutting measures introduced by the food tech major in FY23 and FY24. With early-stage bets, however, Prosus would have to be patient as the startups grow and provide with opportunities for exit, (e.g., through the sale of secondary shares, a public listing, or through a M&A).
Evolving the Playbook
Prosus, like other major investors, is currently in the process of evolving its investment strategy in India. In 2023 and 2024, detailed due diligence and focus on profitability have delayed funding timelines, with a push towards IPOs, and investor rights protection over dilution and lack of proper corporate governance. The meticulous scrutiny, including conditions on founder exits, hiring and M&A strategies, and data sharing, is essential for Prosus when acquiring significant stakes in late-stage companies.
Thoughts
Prosus is revising its investment strategy in India, shifting its focus from large, late-stage deals to early-stage investments, following significant losses from its investments in unicorns. This new direction, alongside leadership changes, and a focus on potential IPOs, aims to stabilize and diversify its investment portfolio. It is important to add here that apart from Prosus, the likes of Tiger Global, Peak XV Partners, Accel and others have also shifted attention towards early-stage bets. More here.
We think it is safe to term this as strategic shift as a pivot. Well, the move will definitely encourage the growth-stage Indian startups to create sustainable businesses that focus on profitability. This will make it easier for an apprehensive, late-stage investor like Prosus to back them. Additionally, this shift in Prosus’ strategy indicates more opportunities for the Indian seed- and early-stage startups to impress the investment giant.
If you are interested to learn more, feel free to check out this blog post by Inc42.
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Acronyms used in the blog that have not been defined earlier: (a) Venture Capital (VC), (b) Billion (Bn), (c) Indian Rupee (INR), (d) Crore (Cr), (e) Million (Mn), (f) Artificial Intelligence (AI), (g) Chief Executive Officer (CEO), (h) Initial Public Offering (IPO), (i) Financial Year (FY), (j) Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA), and (k) Mergers and Acquisitions (M&A).