An Indian venture capital firm called 3one4 Capital recently sent its partners on a road trip to solicit money for a new fund. At the height of the rapidly deteriorating global economy, they had raised $200 million in just two and a half months. The Bengaluru-based firm, whose portfolio includes four unicorn businesses, has raised its fourth notable fund.
According to Pranav Pai, co-founder and partner at 3one4 Capital, the fund, the sixth total for the company, had a $250 million oversubscription, but the company would only accept $200 million to maintain its discipline and leanness. The company’s determination to restrict the size of the fund is representative of its strategic decisions, which have distinguished it from other Indian venture firms.
“We are reputed for providing high profits.” Our performance has been compared to that of the top-performing funds in our industry. We thus posed the challenging issue to ourselves: Can we maintain our performance with a larger fund size? Pai questioned, “Do we even need so much money at this early stage?”
Concerns concerning the responsible distribution of this funding, particularly for early-stage entrepreneurs, have been raised recently as a result of the boom in venture capital firms raising previously unheard-of sums of money in India. Critics question whether the Indian market has enough healthy businesses to take in and properly use such big investments.
According to Pai, who is shown above, there is plenty of potential for more Indian firms to undertake initial public offerings (IPOs) since the country’s IPO market has proven profitable and well-regulated for institutional investors. He predicts that the Indian stock index will change, with more IT firms, services, applications, fintech firms, and payment solutions joining the index.
Pai agrees that despite this, the Indian market has not yet reached its full potential for mergers and acquisitions. M&A activity has increased three to four times over the previous five years, yet it is still below forecasts. Pai emphasizes the need for a stronger M&A environment in order for the Indian market to prosper.
Numerous Indian venture companies have focused more on early-stage investments during the past five years. Despite this increasing attention, the sector still relies on foreign investors to finance mid- and growth-stage deals, emphasizing the need for the venture capital ecosystem in India to expand. “Our PEs and mutual funds perform well.” We expect that more of these companies will introduce funding specifically for startups in India,” he added.
Another feature that sets 3One4 apart from many of its competitors is that Indian investors contributed half of the funds to the new fund for the company. The top five local banks overall by market capitalization and all systemically significant Indian banks have each invested in the new fund. According to Pai, eight of the top 10 mutual fund managers are also limited partners in the new fund. He said, “We are also delighted to have significant global sovereigns, endowments, and insurance firms as LPs.”
“We aspire to be the top domestic venture capital business in India.” Our fund size and investment approach are in line with prospects in India because we are located here, invest locally, and don’t intend to do so in Southeast Asia. We have learned how crucial it is to partner with India’s biggest institutions in order to expand our firms as they have gone public over the years. Without banks to assist our businesses with everything from revenue collection to payrolls, things would be challenging. And for initial public offerings, mutual funds act as purchasers, bookrunners, and market makers; their purchase of shares, he added, boosts the market’s trust.
Today, 3One4, which focuses primarily on early-stage investments, manages about $750 million in AUM. Its portfolio includes the HR platform Darwinbox, the business-to-business focused Neobank Open, the consumer-focused Neobank Jupiter, the direct-to-consumer meat retailer Licious, the local social networks Koo and Lokal, the entertainment platform Kuku FM, and the fintech Raise.
As demonstrated by its early investment in Licious, 3one4 Capital has developed a reputation for using a contrarian investing strategy. It was widely believed more than five years ago that India’s price-sensitive market would not pay more for online meat delivery. Nevertheless, Licious has developed into one of South Asia’s greatest direct-to-consumer companies since then, having a presence in about twenty Indian cities.
Darwinbox is another example of 3One4’s risky investments. This bet was taken when the majority of investors questioned the potential of Indian SaaS startups to grow abroad or get enough local company subscribers.
The contrarian mindset of 3one4 Capital also applies to the assets it has purposefully shunned. In the midst of a flurry of investment activity in the cryptocurrency sector in 2021, almost all funds in India looked for opportunities and supported crypto companies. However, 3one4 Capital decided against investing in cryptocurrency after carefully examining the market.
The 28-person company is also concentrating on raising the bar for its own transparency and governance. According to the statement, it is the first VC to sign the UN PRI. “We must report, act, conduct, and seem in a specific way.” According to Pai, the only time we are ready to tell our portfolio founders that this is how we want to build best-in-class firms with you is when we seem to be the fiduciaries of the top institutions in the world.
