partners of 3one4Capital, a venture capital firm in India, recently participated in a road show to raise a new fund. In two and a half months, at the height of the global economic downturn, they had raised $200 million. It is the fourth major fund for the Bangalore-based fund, whose portfolio includes four unicorn startups.
The fund, sixth overall by 3one4Capital, is oversubscribed at $250 million, but the company accepts just $200 million to stay nimble and disciplined, said Pranav Pai, co-founder and partner at 3one4 Capital. The company’s decision to limit the size of the fund is emblematic of its strategic choices, which have set it apart from other Indian venture firms.
“We are known for giving good returns. Our performance has been benchmarked against the best leading funds in the space. So we asked ourselves the hard questions: can we continue our performance with a larger fund size? Do we need that much capital for the initial stage? Pai said in an interview with TechCrunch.
In recent years, a surge of venture capital firms in India have raised unprecedented 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 effectively absorb and use such large investments.
Pai, pictured above, claims there is ample room for more Indian companies to do IPOs as the nation’s IPO market has proven successful and well regulated for institutional investors. He anticipates 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 yet to fully develop its M&A potential. Although there has been growth in M&A activity, which has grown three to four times in the last five years, it is still below expectations. For the Indian market to flourish, Pai stresses the need for a stronger M&A landscape.
Over the past half decade, many Indian venture firms have shifted their attention to early-stage investing. Despite this increased focus, the market continues to rely on international investors to support growth and mid-stage deals, highlighting the need for further growth in India’s VC ecosystem. “We have high-yield PE and mutual funds. We expect more of these companies to launch dedicated funds for Indian startups,” he said.
Half of the capital in 3one4’s new fund comes from Indian investors, another aspect that sets the firm apart from many of its peers. All systemically important Indian banks and the top five local banks by overall market capitalization have invested in the new fund. Eight of the top 10 mutual fund traders are also LPs in the new fund, Pai said. “We are also proud to have the world’s leading endowment firms, sovereigns and insurance companies as LPs,” he said.
“We want to be the leading local venture capital firm in India. We are headquartered here, we invest here (we don’t want to invest in South East Asia) and our fund size and strategy is aligned with the opportunities in India. As our companies have gone public over the years, we have seen the importance of India’s largest institutions working 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, bookbrokers and market makers for IPOs and buying shares gives the market a vote of confidence,” he said.
Focusing primarily on early stages and sectors including direct-to-consumer technology, media and content, fintech, deep tech and SaaS, and enterprise automation, 3one4 today manages around $750 million in AUM and its portfolio includes Darwinbox HR platformbusiness to business focused open neobank, consumer-focused neobank JupiterLicious, a direct-to-consumer brand that sells meat, local social media outlets Koo and localKuku FM entertainment service, fintech fundraiseand crazy game company.
3one4 Capital has earned a reputation for its contrarian investment approach, as evidenced by its early investment in Licious. More than five years ago, the prevailing view was that the price-sensitive Indian market would not pay a premium for online meat delivery. However, Licious has since grown into one of the largest direct-to-consumer brands in South Asia, with a presence in approximately two dozen cities across India.
Another example of 3one4’s bold investments is Darwinbox, a bet made at a time when most investors doubted the ability of Indian SaaS companies to expand internationally or get enough local business signups.
3one4 Capital’s contrarian approach also extends to investments it has deliberately avoided. In 2021, amid a flurry of investment activity in the crypto space, almost all funds in India sought opportunities and backed crypto startups. However, 3one4 Capital, after a thorough evaluation of the sector, decided not to make any investment in crypto.
The firm, which employs 28 people, is also focusing on setting new standards in transparency and governance for itself. It is the first VC to be a signatory to UN PRI, He said. “We have to report, behave, act and look a certain way. We have to look like the trustee of the best institutions in the world, and then, and only then, will we have the quality to tell our portfolio founders that this is how we want to build best-in-class companies with you,” Pai said.
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