3one4 Capital, driven by contrarian bets, raises $200 million new fund

The partners of 3one4 Capital, a venture capital firm in India, recently held a road show to raise a new fund. In two and a half months, at the height of the worsening global economy, they had raised $200 million. It is the fourth marquee fund for the Bengaluru-based fund, whose portfolio includes four unicorn startups.

The fund, sixth overall for 3one4 Capital, was oversubscribed at $250 million, but the firm is only accepting $200 million to stay lean and disciplined, said Pranav Pai, co-founder and partner at 3one4 Capital. The firm’s decision to cap the fund size is emblematic of its strategic choices, which have set it apart from other Indian venture firms.

“We are known to deliver good returns. Our performance has been among the best performing funds in the space. So we asked ourselves the tough questions, can we continue our performance with a larger fund size? Until and do we all need that much seed-stage capital?” Pai said in an interview with TechCrunch.

In recent years, a surge of venture capital firms in India has raised unprecedented funds, raising concerns about the responsible allocation of such capital, especially for early-stage startups. Critics question whether there are enough viable companies in the Indian market to absorb and effectively use such significant investment.

Pai, pictured above, says there is plenty of room for more Indian companies to pursue IPOs, as the country’s IPO market has proven successful and is well-regulated for institutional investors. It foresees a transformation in India’s stock index, with a growing number of technology companies, applications, services, fintech and payment solutions becoming part of the index.

A look at how the S&P 500 index and the 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 reach its full M&A potential. Although there has been growth in M&A activity, which has increased three- to four-fold in the past five years, it remains below expectations. For the Indian market to thrive, Pai stresses the need for a more robust M&A landscape.

Over the past half-decade, numerous Indian venture firms have shifted their focus to early-stage investments. Despite this growing 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 high yielding mutual funds and PEs. 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 company apart from many of its peers. All Indian systemically important banks and the top five domestic banks by market capitalization overall have invested in the new fund. Eight of the top 10 mutual fund operators are also LPs in the new fund, Pai said. “We are also proud to have world-leading endowments, sovereigns and insurance companies as LPs,” he said.

“We want to be the leading local VC firm in India. We’re based here, we invest here, we don’t want to invest in Southeast Asia, and the fund size and strategy is aligned with the opportunities in India .As our companies have gone public over the years, we’ve seen the importance of India’s largest institutions working with us to help build these companies. It would be difficult if we didn’t have banks to help them our companies, 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 to say.

3one4, which primarily focuses on early stages and sectors including direct-to-consumer technology, media and content, fintech, deep technology and SaaS and business automation, today manages about $750 million in AUM and its portfolio includes the platform of human resources Darwinbox, companies business-focused Neobanc Open, consumer-focused neobank Jupiter, Licious, a direct-to-consumer brand that sells meat, local social networks Koo and Lokal, entertainment service Kuku FM, fintech Raise Financial and the company of Loco games.

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 held that India’s price-sensitive market would not pay a premium for online meat delivery. However, Licious has since become 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 commercial subscriptions.

3one4 Capital’s contrarian approach also extends to investments it has deliberately avoided. In 2021, amid a frenzy of investment activity in the crypto space, almost every fund in India looked for opportunities and backed crypto startups. However, 3one4 Capital, after a thorough assessment of the industry, chose not to make any crypto investments.

The company, which employs 28 people, is also focusing on setting new standards of transparency and governance. This is the first VC to sign the UN PRI, he said. “We must report, behave, act and look in a certain way. We need to look like the fiduciary of the best institutions in the world, and only then can we tell our portfolio founders that this is how we want to build best-in-class companies with you,” Pai said.