Pranav and Siddarth Pai started studying India’s investor ecosystem in 2012 to figure out how to structure a venture capital (VC) fund that builds a good track record quickly. Then, in 2016, the sons of T. V. Mohandas Pai, chairman of both asset management company Aarin Capital and multinational educational organization Manipal Global Education Service, started early-stage investment firm 3One4.
The Pai brothers have since raised three early-stage funds, one dedicated seed fund, and one dedicated opportunity fund. In September, they announced the first close of their third early-stage fund, which has a target corpus of USD 100 million. Their newest fund will take their total assets under management to USD 210 million.
3One4 has written checks for startups like online meat ordering app Licious, neo-bank Open, antibiotics-focused developer Bugworks, media startup YourStory, HR software platform DarwinBox, peer-to-peer lending platform Faircent, fintech firm Jupiter, ride-sharing company Yulu, and short video app Mitron. Backed primarily by Indian and US-based limited partners (LPs), the Bengaluru-based VC firm currently has over 55 active portfolio companies.
In a candid interview with KrASIA, Pranav talked about how the Pais set up the fund, the strategy they follow, and how the startup ecosystem has changed over the last six months.
The following interview has been edited for brevity and clarity.
KrASIA (Kr): What’s the investment philosophy that you follow at 3One4?
Pranav Pai (PP): We started as a seed fund in 2016. Our focus is on new asset creation, which happens at the seed stage. We are now an early-stage VC fund, backing companies until Series A. We write checks ranging from USD 250,000 to 5 million. Our goal is to make sure that we are in the first two to three fundraising rounds.
We have gone very deep in five investment areas—consumer, enterprise SaaS, media, fintech, and deep tech. Depending upon specific investment areas that companies are in, we have tolerance for business models.
Kr: You recently announced your third early-stage VC fund with the target corpus of USD 100 million. What’s your strategy for this fund?
PP: All of our early-stage funds create a new portfolio of 20–25 companies and invest in their follow-on rounds. The only exception is our opportunity fund, which is designed to invest in Series B and beyond in our best companies from the combined portfolio.
At present, our first two early-stage funds have capital reserved only to do follow-ons. For the third fund, we have already raised 40% of the target.
It only makes sense to launch a new fund to build the next portfolios when the older fund is done with its portfolio construction, meaning it is not investing in new companies. This is how our fund cycle works. We are a little bit faster than the typical VC cycle.
Kr: 3One4 has a lot of Indian family offices as investors. How did you convince them to invest in your funds?
PP: We did three things right. As partners ourselves, Siddarth and I are large investors in our own funds. We put our own capital up for the same risks, under the same terms, and are paying the same fees. This gives a measure of confidence to Indian investors. It doesn’t usually happen in India today, as most funds raise outside money.
Secondly, we studied the LP ecosystem very intensely to understand how investment decisions were being made. We learned from a lot of other funds in the market about how portfolio construction was not being done correctly.
Lastly, we have gone to the market with a very strong track record, which we were able to build due to the work we did before we launched the fund. So when we are compared to all the other options that family offices have, we usually hit all the criteria that they look for in a relationship that lasts ten to 20 years.
Kr: What were the key lessons that you gleaned from the LP ecosystem in India?
PP: Many VCs in the country complain that Indian investors don’t take risks, they are not sophisticated, and they do not understand technology. But we knew from our work that it was not true. We understood that there is a big gap between understanding how venture fund partners or general partners think about raising a fund, and how LPs want to invest in this asset class.
Then there were many VC funds with a tenure of 12 to 13 years, which people were not comfortable with. They also didn’t have justification for their high fees. The design of VC funds did not make sense for Indian investors, and we felt that these were legitimate concerns. In a very bottom-up manner, we changed how a VC fund should be structured.
Kr: A lot of things have happened in the last two quarters with the pandemic, the economic slump, and the border conflict with China. What are your takeaways for the startup ecosystem?
PP: There are four big lessons. First, during the lockdown, grocery, electronics sales, communications, HR, along with so many other things moved online quickly, and now India’s digital story is fundamentally established. There are not many doubts left. The only question is how fast it can grow from here.
Coincidently, with the China border issue, which resulted in gated investments and app bans, this is not only a digital story in India, it is also the indigenous digital story. There will be more Indian apps doing things that are proven in other markets. Earlier, if a company was competing with Chinese apps, the fundamental question to ask was, “Your Chinese competition has already raised more money than you, how will you compete with that?” There is no answer to that. Now, since that is removed—although we don’t know for how long—many companies are using this time to take over the market share. That’s an interesting opportunity.
Thirdly, many observers of the Indian startup ecosystem used to ask how first-time entrepreneurs, who only have seen good times, would react if a down-cycle happens. Now that we are in a pandemic situation, most of the startups have reacted maturely. The founders made tough decisions, protected their employees and their balance sheet, and adjusted their businesses, while investors stepped up and supported the companies. These founders were able to prove that they know how to run a company and they can make it work over the entire cycle. There is more confidence in these companies now since they know how to deal with a crisis. That is already causing an attitude shift, which is a good thing for the ecosystem. These startups will now be able to raise more money, much more confidently, and grow to a level of sustainability more quickly.
Finally, the crisis has been a great way to test which business models are sustainable. It has been a rare filtering event, which happens once in a generation. That has helped many founders think differently about the categories their businesses are in. The companies that didn’t come out of it lacked competitiveness. Those who came out of it are resilient, sustainable companies, and they have stronger claims to success.