Domestic venture capital (VC) firm 3one4 Capital has closed its fourth early-stage fund with $200 million, adding to the accumulation of undeployed VC money amidst one of the worst funding winters in recent times for the world's third-largest start-up ecosystem.
The VC, an investor in unicorns like Open, Darwinbox, and Licious, got its fund oversubscribed to $250 million, but it decided to maintain the fund's intended size, its Founding Partner and Chief Investment Officer Pranav Pai told Moneycontrol in a virtual interaction.
Pai also said that the VC managed to close the fund in two-and-a-half months since its launch, despite weak market sentiment, thanks to its track record over the last decade. Before this, 3one4 Capital has invested through five fund vehicles, including three early-stage focused funds. Pai said that while Fund I has given investors a 5x return on their investment, Fund II has returned 6.5x.
“It was definitely challenging,” Paid said, when asked how it succeeded in raising capital in the current environment.
“It has always been challenging to raise funds as an Indian VC firm. But since we have built our relationships directly with our LPs (Limited Partners) without any intermediaries like bankers and distribution placement agents, the LPs know us and have seen our disciplined approach and our very consistence performance over the years, and that’s an invaluable asset,” he added.
A majority of 3one4 Capital’s existing LPs invested in the fund, Pai said. According to him, 90 percent of the LPs are institutional investors.
The newest fund for 3one4 Capital also marks the VC’s debut at GIFT IFSC (Gujarat International Finance Tech-city), which is India’s first International Financial Services Centre. This will enable the VC firm to work with global LPs and let them enter via GIFT IFSC. 3one4 Capital is amongst the first homegrown Indian VCs to go live in this domicile.
The fund will also be 3one4 Capital’s first offshore vehicle, highlighting its dedication to the growth of the Indian financial ecosystem and support for the establishment of an international financial centre for start-ups, the company said.
Through the fund, 3one4 Capital plans to invest in 30-35 companies with cheque sizes ranging from $500,000 to $6-7 million, Pai and Anurag Ramdasan, Partner at 3one4 Capital told Moneycontrol. The median cheque size would be between $1.5 million and $3 million. The two further said that 3one4 Capital marked the first close of the fund in March 2023 and has already deployed a part of the capital in over five start-ups.
While the fund will follow a sector-agnostic strategy, it will look at start-ups in sectors like consumer internet, software-as-a-service (SaaS), fintech, and enterprise and small and medium business (SMB) digitisation, while increasing investments in newer areas, such as digital health, climate tech, and more, Ramdasan told Moneycontrol.
3one4 Capital is one of India’s largest homegrown early-stage VC investors and the company has backed more than 105 start-ups to date. With the Fund IV, the firm will manage $510 million of committed capital and over $750 million in assets under management (AUM), the VC claimed. The company said that the cumulative market cap of the companies in its portfolio is over $7.5 billion.
3one4 Capital’s new fund comes at a time when a number VCs, especially early-stage investors have raised large sums of money in the recent past, but a large part of these funds remain undeployed thanks to macroeconomic headwinds across the globe. Since 2022, VCs like Sequoia Capital, Accel, Elevation Partners, Nexus Venture Partners, and Matrix Partners, among others, have either raised or launched India-dedicated funds.
The last 18 months have also been difficult for India’s start-up ecosystem, which is currently the world’s third-largest, as a few start-ups, including some heavily-funded ones, have come under fire for alleged corporate governance lapses. Pranav Pai said that 3one4 Capital has built an in-house team of specialists who work on corporate governance and reporting of 3one4 Capital and also assists its portfolio companies.
“We invest at a stage where there are two guys and a laptop, but from then on we assist them in how to do reporting, employee stock option plans (ESOPs), revenue recognition, CSV filings, and indexing. All of these are done in a very specific way from the beginning,” Pai said.
“I think, founders appreciate that because the best founders are not legal experts, they are not lawyers, they are not CS (Company Secretaries) mostly, and we can’t expect them to know those things, we have to help them learn how to build a company,” he added.
In February, Moneycontrol reported how VCs will resort to stricter due diligence processes to quell corporate governance lapses at start-ups at a time when at least five companies of Indian origin came under fire for such issues.
“There's fraud everywhere, in the US, Germany, Japan, China, wherever. India is not special. But, I think, it boils down to being aligned correctly and having the right foundations in the start and having continuous monitoring to help avoid mistakes,” Pai added.
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