By Salil Panchal
At a time when Sars-Cov2 was tightening its vice-like grip on business activity, early stage venture capital firm 3one4 Capital was structuring a deal for a then potential portfolio company in the B2B space. However, while it was being finalised, the lawyers for the Bengaluru-based firm misconstrued the economic rights construct, which would have meant the investors gaining above and beyond what the parties agreed during negotiations. It could have resulted in a potential “triple dipping” if and when 3one4 Capital planned an exit.
“It meant that we stood to gain, contractually, a much higher windfall than what we were supposed to,” says Siddarth Pai, founding partner and CFO of 3one4 Capital. “The agreement had been approved by the company’s promoters, founders, other investors and their counsels—everybody except us. “
“[After the deal was done] the founders and lawyers were grateful that we stood by the spirit of the letter of the contract,” says Siddarth. This is the ethical standpoint which 3one4 Capital stands for, while maintaining its ‘founder-first philosophy’.
A ‘founder-first philosophy’ means not only impressing upon promoters that the investor is batting for them, but also ensuring that dilutions are kept at a minimum, so that the founder gets an outsized reward when the investor exits. Practices like these make 3one4 Capital, founded by brothers Siddarth and Pranav Pai (also CIO)—sons of former Infosys CFO and Manipal Global Education Services chairman TV Mohandas Pai—the go-to investors for potential entrepreneurs.
“Why did we choose not to remain silent? If we had gone ahead with the contract in its original form, it would have left a bitter taste for all, deprived the founders of their hard-won gains and possibly even jeopardised our exit,” Siddarth, 27, tells Forbes India.
Pranav launched the firm 3one4 (a play on the mathematical formula π and the family name Pai)—along with Siddarth in 2016—after working with a Silicon Valley startup EdCast from 2013 to 2016; he completed his electrical engineering from Stanford University prior to that. The brothers had a stiff professional legacy to match: They had seen what a curated team Infosys had built. “The bar was set high for us,” says Pranav, 31.
At the start of this decade, the private equity space in India was starting to heat up. Till 2015, there were record-breaking years in terms of venture capital (VC) deals. Tiger Global had invested into Flipkart and, in 2016, Facebook founder Mark Zuckerberg and his paediatrician wife Priscilla Chan invested in ed-tech startup Byju’s. But there were other great ideas which were not getting funded and those that were getting access were in companies based out of Mauritius or Singapore.
“So we decided to build a platform ourselves,” says Pranav of the time when the brothers were among the youngest partners in the VC industry. 3one4 also chose not to follow the beaten path or where the sustainability of business models was not clear. Accordingly, they picked various non-mainstream companies, which include Licious—an online meat and seafood ordering company; Darwinbox—an HR software as a service (SaaS)-based startup; Yulu—a micro-mobility platform to make commuting in cities sustainable; and Habbit Health —a nutrition focussed FMCG startup. Missing from its investment portfolio are the ever-popular food delivery engines, pure payment wallet platforms and horizontal ecommerce ventures—the favourites of VC investors.
In the first week of September, 3one4 Capital announced the first close of its Fund III, which will see its assets under management nearly doubling to ₹1,550 crore. The company has raised capital in each year of its existence (see table) and now has 55 active companies in its portfolio. “We use a bottom-up approach based on primary research to predict trends which will be seen in two years. You can’t just rely on an industry or a news report to tell you what to invest in. We have to ensure that when the focus and timing shifts towards an industry or business, we already have some companies invested into in that space, which have the capability to grow exponentially,” explains Siddarth.
The brothers have imbibed qualities of rigid ethics, perseverance and being laser-focussed professionally from their father, whom they affectionately call MDP.
Mohandas Pai recounts what Pranav and Siddarth told him: “We want to start a fund… be part of the young entrepreneurs who are transforming India.” “I told them, as a business, VC investing is a long-term commitment. You have to commit that you will be around till the last monies are paid. Integrity and responsibility are critical qualities. One needs to be patient as one has to wait for companies [invested in] to grow… you can make money only in exits,” says the former Infosys veteran, who is an investor in 3one4—the amount each investor has brought remains undisclosed—as well as an investment committee member. He meets the promoters only when they wish to meet him. Pranav and Siddarth seek their father’s advice when negotiations take too much time. “I have always told them to be flexible and not take a rigid stance during discussions,” says the senior Pai.
Pranav and Siddarth had—even before a Black Swan event like Covid—ensured the companies they had invested in were well-capitalised with strong balance sheets. The brothers were starting to read some of the danger signals in 2019 itself. The flight to quality had started as global pension funds, university endowments and sovereign funds were moving capital to less risky assets or to cash entirely. Central banks were continuing to cut interest rates to prevent a recession. “So we realised 2019 is one of the last good years left… we should assume there’s a big correction coming in 2020,” Pranav had said.
While some of the startups struggled with maintaining revenues, Pranav said there was “no write off” in bailout funding due to Covid-19.
“We have not lost a single company nor did they face any existential threat in the pandemic,” he claims. In fact, some of 3one4’s oldest investments are emerging the strongest, post the lifting of the lockdown.
For instance, the hunt to find safe, hygienic and tasty fresh meat in India became a challenge during the lockdown. A visit to the local butcher was not possible because of the fear of contracting the virus. It only increased the need for an alternative which came in the form of Licious, a Bengaluru-based farm-to-fork company that has established, owns and manages an end-to-end supply chain involving farmers and livestock owners.
“In March, its sales matched those of February... there was no slowdown,” says Pai. “Licious has seen a 300 percent growth over the past six months. It has sustained the same growth rate since its inception in 2015,” its co-founder Vivek Gupta tells Forbes India.
Licious—which has a global FSSC22000 certification—now clocks a million orders a month, up 15 times from the 150,000 it got in June 2019. “We command an over-90 percent repeat consumption across markets,” says Gupta.
The company ensures a consistent cold chain of 0-4 degrees to keep maintaining optimum freshness of its products. It has five production plants, one each in Mumbai, Delhi and Hyderabad, and two in Bengaluru. “Each plant is equipped with meat technicians and scientists to assure meat quality and processing standards,” says Gupta.
Licious has raised $90 million to date with 3one4 being among its top investors.
A company whose operations have become critical post the lockdown is Betterplace, a Bengaluru-based B2B firm which offers HRMS (HR management solutions) to those employing blue- and grey-collar workers, including people in food delivery, retail, manufacturing, health care and security services.
Several global and domestic firms offer HR solutions for white-collar jobs, but not blue- or grey-collar ones. This became critical as India saw a disruption in jobs during the lockdown. Betterplace had no option but to completely digitise its operations for its clients. Before the onset of Covid-19, Betterplace on-boarded 26 lakh end-users (job-seekers) and had 700 B2B customers (employers) on its platform.
The number of job-seekers has now jumped eight times to 20 million and employers rose to about 1,200 in the last three months, claims Pravin Agarwala, its co-founder and CEO. “This is more than double what we had pre-Covid.”
Betterplace raised ₹5 crore through United Seed Fund, as part of its seed funding in 2016. The firm then raised an additional $6 million through the current set of investors, including 3one4 Capital. “We have just closed our next round of Series B funding [he did not disclose the amount]. A further series B+ round is being considered towards the year-end,” adds Agarwala.
As the universe of job-seekers grows, both employees and employers are becoming more sensitive to treat all human resource better.
The company now offers online training in all vernacular languages through its mobile app, and also plans to offer placement options in coming months.
Another critical business solution in Covid-19 times is Open, which claims to be Asia’s first neo-bank, offering a complete integrated platform from current accounts and payment gateway to automated accounting and an API platform, to small businesses. After a brief disruption, Open’s API banking and the integrated platform have seen sharp growth in the past five months. Open adds around 40,000 accounts per month and claims to have grown 2.5 times higher than the levels last year.
The neo-bank now works with over 5 lakh small and medium enterprises and powers over $14 billion in transaction volume each year. It has partnerships with 18 of India’s leading public and private sector banks to provide banking services for small and medium enterprises (SME).
Open raised $5 million through its Series A in early 2019, led by Beenext and a further $30 million through Series B in mid-2019 led by Tiger Global, both of which included participation from 3one4 Capital. “The strategy going ahead will be to strengthen its core base of operations in the next six to nine months, and to reach a million SME base,” its co-founder and CFO Deena Jacob tells Forbes India.
Most businesses have gone digital with a vengeance during the pandemic. The energies of the Pai brothers will, in the next 12 to 18 months, be focussed on the developments in the health care and SaaS technologies.
3one4 Capital has now invested in a company which manufactures and sells “stepped down versions of intensive care units (ICUs)”. With India facing an acute shortage of ICU services for patients during the pandemic, this firm has built a mat with wireless sensors which tracks all vital parameters of the body and transmits them to an app to be shared with a doctor. Another area for growth will be the development of Indian SaaS and the growth of more neo-banks in India.
Pranav and Siddarth are taking their father’s advice of seriously “learning how to marry the micro with the macro”. In the coming years, the plan will be to evolve 3one4 Capital into a multi-stage investment firm, from just an early-stage one. Venture capitalists are starting to look at investing again and deals are starting to get closed remotely, as businesses and economies limp back to normalcy. For 3one4 Capital, it only means exciting times ahead.
(This article first appeared in Forbes India, here)