Partners of 3one4 Capital, a venture capital firm in India, recently went on a roadshow to raise a new fund. Within two and a half months, at the height of the deteriorating global economy, they had raised $200 million. It is the fourth major fund for the Bengaluru-headquartered fund whose portfolio includes four unicorn startups.
The fund, sixth overall for 3one4 Capital, was oversubscribed to $250 million, but the company is only accepting $200 million to keep itself lean and disciplined, said Pranav Pai, co-founder and partner at 3one4 Capital. The company’s decision to limit the size of the fund is typical of its strategic choices, which sets it apart from other Indian venture firms.
“We are known for getting good returns. Our performance has been compared to the best performing funds in the space. So we asked ourselves the difficult question: Can we continue our performance with a bigger fund? Do we even need that much capital for the initial phase?” said Pai in an interview with EntertainmentCab.
In recent years, a wave of venture capital firms in India has raised unprecedentedly large funds, raising concerns about the responsible allocation of this capital, particularly for early stage startups. Critics question whether there are enough viable companies in the Indian market to absorb and effectively leverage such significant investment.
Pai, pictured above, claims there is plenty of room for more Indian companies to pursue IPOs as the country’s IPO market has proven to be successful and well-regulated for institutional investors. He expects a transformation in India’s stock index, with an increasing number of technology companies, apps, services, fintech and payment solutions joining the index.
A look at how the S&P 500 Index and Nifty 50 Index have evolved over the decades and projections for the future. (Image and analysis by Mirae Asset)
Despite this, Pai acknowledges that the Indian market has not yet fully realized its M&A potential. While there has been growth in M&A activity – three to four times over the past five years – it remains below expectations. For the Indian market to flourish, Pai emphasizes the need for a more robust M&A landscape.
Over the past five years, numerous Indian venture capital firms have shifted their focus to early stage investments. Despite this increased focus, the market remains dependent on international investors to support mid- and growth-stage deals, highlighting the need for further growth in India’s venture capital ecosystem. “We have well-performing mutual funds and PEs. We hope more of these companies will launch dedicated funds for Indian startups,” he said.
Half of the capital in the new fund for 3one4 comes from Indian investors, another aspect that sets the company apart from many of its peers. All systemically important Indian banks and the five largest local banks by market capitalization have invested in the new fund. Eight of the top 10 mutual funds are also LPs in the new fund, Pai said. “We are also proud to have leading global endowments, governments and insurance companies as LPs,” he said.
“We aim to be India’s leading homegrown venture capital firm. We are based here, we invest here – we don’t want to invest in South East Asia – and our fund size and strategy are aligned with opportunities in India. As our companies have gone public over the years, we have recognized the importance of having India’s largest institutions partner with us to help build those companies. It would be hard if we didn’t have banks to help our businesses with everything from revenue collection to payroll. And mutual funds are buyers, bookrunners and market makers for IPOs and buying the stock gives a vote of confidence to the market,” he said.
3one4, which focuses largely on early-stage and in industries such as direct-to-consumer technology, media and content, fintech, deep technology and SaaS and enterprise automation, today manages approximately $750 million in assets under management and its portfolio includes the HR platform Darwinbox, business-to-business-focused neobank Open, consumer-focused neobank Jupiter, Licious, a direct-to-consumer brand selling meat, local social networks Koo and Lokal, entertainment service Kuku FM, fintech Raise Financial, and gaming company Loco.
3one4 Capital has earned a reputation for its contrarian investment approach, as evidenced by its early investment in Licious. Just over five years ago, the prevailing view was that India’s price-sensitive market would not pay a premium for online meat delivery. Since then, however, Licious has grown to become one of South Asia’s largest direct-to-consumer brands, with a presence in about two dozen cities across India.
Another example of 3one4’s bold investments is Darwinbox, a gamble made at a time when most investors questioned the ability of Indian SaaS companies to expand internationally or garner enough local business subscriptions.
3one4 Capital’s contrarian approach also extends to the investments it has deliberately avoided. In 2021, amidst a wave of investment activity in the crypto space, almost every fund in India has been looking for opportunities and supporting crypto startups. However, 3one4 Capital has chosen not to invest in crypto after thorough evaluation of the sector.
The company, which employs 28 people, is also focused on setting new standards in transparency and governance for itself. It is the first VC to sign the UN PRI, it said. “We have to report, behave, act and look in a certain way. We need to look like the fiduciary of the best institutions in the world, and then and only then can we tell our portfolio founders that this is how we want to create the best companies with you,” said Pai.