Elev8 Venture Partners, which launched India’s first pro-rata fund, believes that pro-rata investing is still in the very early stages of adoption in the country, as the market has just begun to evolve and large funding rounds are gradually gaining traction.
“It’s still early days for the Indian market. A couple of years ago, there wasn’t enough substantial value in the preemptive rights of seed funds because the funding rounds were smaller. However, with funding activity picking up in 2021 and 2022, seed funds are now missing out on substantial preemptive rights, sometimes as high as $20-$5 million per company. This creates a timely opportunity for such investments,” Navin Honagudi, Managing Partner at Elev8 Venture Partners, told DealStreetAsia during an interaction.
Over time, more funds will start to view preemptive rights as a valuable investment strategy, he added.
The venture firm partners with India’s micro funds and angels to invest in their winning portfolio companies, leveraging preemptive rights to access oversubscribed rounds.
Preemptive rights are contractual rights that give existing investors (often in early funding rounds, like seed funds) the first right to participate in future funding rounds. However, high valuations in later rounds can make it financially challenging for seed-stage VCs to exercise their pro-rata rights.
This is where pro-rata funds like Elev8 step in. These funds leverage their capital to acquire the pro-rata rights from seed-stage investors, allowing them to invest alongside top-tier growth funds in later-stage rounds.
By doing so, they help seed-stage investors retain their ownership stakes without the financial strain of large investments at elevated valuations. This not only supports seed-stage VCs in protecting their equity but also provides pro-rata funds access to promising growth-stage opportunities.
Elev8 has so far invested in two Indian startups—Astrotalk, which provides digital astrology consulting services; and integrated identity platform IDfy. However, both were direct deals.
Honagudi said, “About 65-70% of our investments will be direct deals, while the remaining portion, where direct access isn’t possible, will be through exercising the preemptive rights of some of these seed funds.”
“I’ve been active in this market for about 16-17 years. As most seed funds can attest, missing out on preemptive rights represents a significant loss. For instance, I spoke with one of India’s top five angel investors, and he mentioned that he has missed out on close to $100 million in preemptive rights. The potential value of those missed rights could have been as high as $500 million,” he explained.
“Given this context, our goal is to work with seed funds that are losing out on their preemptive rights. While this model has gained traction in the West, it has not yet been explored in India, which presents an opportunity we are looking to leverage,” the executive added.
According to a report by Venture Capital Journal last week, up to 98% of pro-rata rights go unused by early-stage VCs globally, amounting to a $50-100 billion unused pro-rata market opportunity.
Backed by KB Investment, South Korea’s largest financial conglomerate; and Venture Catalysts, Elev8 launched its debut $200-million fund in 2022 to invest in growth-stage, technology-driven companies. The fund hit its first close of $67 million in August last year and expects to achieve the final close by the end of this year.
Elev8 Venture Partners aims to invest $10-15 million in about 12-14 companies over the next two years, in sectors including enterprise software, fintech, and consumer Internet.