Legacy — a word that is loaded with a sense of continuity and power that comes from the distinguished services or beliefs of others who came before you and are of the same lineage as you. It is also a word that can put someone under the lens of nepotism or under the huge burden of having to live up to those predecessors’ larger-than-life persona.
Either way, if you happen to be the progeny of one of the most distinguished personalities of India’s technology industry, then you know the lens is on you.
Especially if you decide to start a $13.81 Mn (INR 100 Cr) venture fund in your mid-twenties while your peers with the same privileges are flying off to Mykonos in Greece or Amsterdam in the Netherlands to party and live the good life.
The man in question is Pranav Pai, the son of former Infosys CFO and Padma Shri Awardee Mohandas Pai, who has born the cross of legacy very well on his young shoulders. Pranav, who’s an engineer by profession, started venture capital firm 3one4 Capital in 2016 along with his younger brother Siddarth Pai.
In just about two years, the firm has raised a total of USD 48.3 Mn (INR 350 Cr) in two funds and boasts a portfolio of more than 50 companies. 3one4 is a sector-agnostic, early-stage venture fund and has made investments in the likes of Licious, YourStory, Graphic India, Pocket Aces, Tracxn, Bugworks, and Faircent.
The Pai brothers seem to be in a tearing hurry to make a mark in the VC landscape of India and, by their own admission, speak to about 2,000-2,500 companies every year. And all this with a team of just 12 people.
Their choices are representative of the new generation of investors they are part of, especially when you consider the fact that the median age at 3one4 Capital is 26 years old, far too young in VC years.
But, can youth also be a disadvantage while taking on a mantle of VCs? How do the Pai brothers manage their workflow with such a small team? And how hard is it to bear the weight of legacy coming down from their illustrious father?
Inc42 caught up with Pranav Pai and Siddarth Pai, founding partners at 3one4 Capital, to get answers to these questions and more in this week’s Moneyball.
Inc42: What research and insights led to the formation of 3one4 Capital?
Pranav Pai: I am an engineer by training and did my masters in engineering from Stanford University. I finished my studies in 2013, after which I worked for three-and-a-half years with a company called EdCast — an enterprise software company based in the (Silicon) Valley — where I got to work with some big clients such as Accenture, Walmart, and Salesforce. While I was there, my brother was finishing his chartered accountancy course in India.
We split specialties with one opting for technology and the other for finance and built complementary skills — and that was a plan.
Our father quit Infosys in 2011 and started Aarin Capital with Ranjan Pai, co-founder of Manipal Education and Medical Group, as a $100 Mn investment vehicle whose primary purpose was to invest in health, life sciences, and education.
They are best known for their investment in Byju’s, investing 30% in the company when it was worth $20 Mn; today, it’s worth $2.5 Bn. Once they (Aarin Capital) started making big exits, they didn’t want to become a very big fund and ended up helping start 14 different funds and became more like a fund of funds/asset manager.
We had been studying their fund from the background for many years and saw it become a very impressive structure. Also, as a family (Siddarth, my father, and me), we are investors in many funds in India, Israel, the US, and Singapore. Over the last years, we have learned the ins and outs of how these funds operate, how they are structured, what mistakes they have made, and how they make their money.
Inc42: What is your investment thesis?
Pranav Pai: If you have to invest in early-stage startups, there are some things you just cannot make money doing and some things you must do to make money over 8-10 years. Take, for example, the hyperlocal food delivery segment. It takes a long time before you charge a customer for the delivery and many companies operating in this (segment) have crashed.
Since 2014, which was before 3one4 came to be, we have been testing our portfolio thesis by investing in a personal capacity and constructing a portfolio strategy and it has worked.
The goal was — how do you reverse engineer the ideal return that can be generated by investing in the early stage of fundings.
Therefore, we have deployed funds in a number of companies, which could vary from seed rounds to the first round (like pre-series A in Magic Crate) and have also partnered with other funds. We invested with Kalaari Capital in the first round in YourStory and also we invested with Sequoia Capital in Zoomcar in the first round.
Siddarth Pai: And that’s how we launched 3one4 Capital Fund 1 at the beginning of 2016 with a corpus of $13.81 Mn (INR 100 Cr). Fund 1 now has 40 companies and, out of that, 27 have already raised subsequent rounds.
Most funds launch and then test their thesis and if you get it wrong you have lost someone else’s money. We felt it is more respectful to find out what works before.
Another differentiating factor about our fund is that we are one of the largest and will continue to be one of the largest investors in our own fund. In India, according to SEBI regulation, at the very minimum, you are supposed to contribute 5% of the total corpus of your fund. We feel that it’s too low and it doesn’t show enough skin in the game; we have gone as far as 80% and as low as 30%, but we will never go below that.
We are not some money manager but we are a co-investor with you. There very few funds in the world that can do this.
Inc42: In 2016, you raised your first fund and, a year later, you more than doubled that fund while launching your Fund 2. How did that happen as you weren’t planning to raise this much?
Siddarth Pai: We wanted to raise only $20.71 Mn (INR 150 Cr) for Fund 2 but we got oversubscribed. We went to certain types of people who have built companies before, like Narayan Murthy and Nandan Nilekani, and they were very impressed and invested more than what we thought they would.
We filled up the first INR 150 Cr in the first three months itself. After that, we thought, these (investors) are the people we want to work with and so we increased the size to $27.9 Mn (INR 200 Cr) and that too got quickly filled; then we ‘limited’ ourselves at $34.9 Mn (INR 250 Cr).
Inc42: Could you give us some of the latest updates on the 3one4 funds?
Pranav Pai: So, the first fund is almost fully deployed and there is some amount remaining that will be used for the follow-up rounds. We are targeting a total of 20-25 companies. We have already invested in 11 companies with our eyes on four more.
Inc42: You seem to be in a hurry?
Pranav Pai: Part of our portfolio construction strategy is to identify investment focus areas, wherein we build a certain idea about where the margins are and what the business opportunities are.
We are not trend investors. I can’t let fintech and lending become the flavour of the season before I start investing in them.
A lot of startups today are doing different types of lending like distress lending, SME lending, and we have not taken a position in a single lending company because there are too many layers of risks and it is hard to make money. In 2013-2015, we took very aggressive positions in media and content companies. Now, content is everywhere and media companies are raising big rounds.
Inc42: Could you take us through some of the investments from Fund 2?
Siddarth Pai: In Fund 2, we have picked five areas — enterprise intelligence and automation, fintech, media and content, edtech (but for specific areas), and health.
Inc42: How do you divide the work amongst the two of you?
Siddarth Pai: I handle the financial negotiating, structuring, regulations, and compliance aspects of the fund. This becomes especially crucial in the early stage so that in the later stages there aren’t any problems.
Compliance, especially during the early stages, is not something funds or entrepreneurs put a premium on. It is only when the startups grow that they realise the compounding effect of some of the past sins. The founders are very grateful for this because someone is helping them understand these problems instead of just pointing them out.
Pranav Pai: From a tech perspective, we have three full-time software developers on the team and all of them write code everyday at 3one4, so we automate a lot of our work, which keeps us up to date on the latest frameworks and innovations in deploying software aggressively.
Inc42: How much stake do you take and how much do you invest?
Siddarth Pai: Our range is $250K-$2 Mn for the first investment. When it comes to stakes, we believe that formulaic investing is not working anymore and thus we have a broad range, but in the entry round we usually take 5%-10%
Inc42: You are a young fund, how has the reaction been from your peers?
Siddarth Pai: The big takeaway for us is that we are young intentionally and not because of a marketing gimmick. We believe that most of the founders creating value today and starting companies that will be valuable 10 years down the line are in their 20s and 30s and the people they are hiring are also young people.
As a result, we are able to see trends in content consumption, tones in consumer behaviour…we are the audience these companies are building to target. So, it’s very natural for us to see a product-market fit and that is something the entire fund has to see.
If we hired everyone who was 35-40 years old, there will be a difference in perspectives and will be working against a pattern that will be obvious to us.
As far as what the community thinks, it has been challenging…I’ll be very honest, when we first started meeting funds, there was intense scepticism about who we are and what we are doing. This is when we realised how deeply entrenched the notion that a VC has to be a certain way and fund managers have to be a certain type. The only way we can prove this wrong is by proving ourselves right and letting the results speak for themselves.
As much as people say they’re open to young people and a new kind of thinking, institutions still take a long time to move.
Pranav Pai: Our fund is more than 50% women and we have six women on staff and likely to have more. Not too many funds are like us. I am the oldest member and I just turned 29 a few months back; our average age at the firm is 26.
Inc42: What are the challenges you are facing right now?
Pranav Pai: We have a portfolio of over 50 companies right now and we speak to around 2,000-2,500 companies every year. If we were to build a manual team to do all this, we would need 30-40 people just to manage this, but we have only 12 people.
We had to build a software to automate a lot this. For example, we have an automated system for when companies write to us that helps us classify metrics and schedule a call/meeting; this helps us by taking over some of the monotonous tasks. A lot of people complain to us about how it takes a long time to close a new round and complete an exit. There are many things in the ecosystem that are still very new.
Inc42: Being the sons of such a distinguished tech personality, one could say you had it easy when it came to access. What’re your thoughts on this?
Pranav Pai: Yes, legacy gives us access, but what is critical is that you don’t take it for granted. Just because we know person A or person B and we are able to get a meeting with him/her, there is no guarantee that they will give you their hard-earned money because these guys busted their ass for decades to get to where they are..my father, his boss, and, in fact, all of our LPs (limited partners).
If you are some 25-year-old or 26-year-old kid and you go to them and say ‘Uncle, please give me $2 Mn,’ they will laugh you out of their room. They are nice people, but they have zero tolerance for that.
We have first tried to prove our model and then shown it to our investors. Our work speaks for itself.
This article is part of Inc42’s MoneyBall series in which we bring you up close and personal with the pioneers of the investment world. It has been lightly edited and condensed for clarity.
Dive in to find out about what excites them, their views on the latest technology and investment trends, and what the future looks like from their viewpoint! Explore more stories here.
Disclosure: 3one4 Capital and Aarin Capital, which has Mohandas Pai as its Chairman, are investors in Ideope Media Pvt Ltd, the parent company of Inc42. None of Inc42’s investors has any influence on its reportage of the Indian startup ecosystem.