How 3One4 Capital keeps funds working 22/7

Pranav Pai and his younger brother Siddarth, sons of former Infosys Director TV Mohandas Pai, bring with them an intensity to the conversation and reel out figures to prove their point that India is a happening place for start-ups and this is the best time for them as an investor in start-ups. In just three years of launching the fund, they recently announced the first close of their third fund and once that fund achieves final close, they will have close to ₹750 crore under management.

What really excited them was the convergence of various factors – India is among the top five global economies. In the last 20 years, the country has produced some of the best IT companies in the world and the sector accounts for the largest export component of total exports. These IT companies have produced a pool of high-quality manpower. India has the second largest IT talent base after the US. Which means every year around 5,000 start-ups are coming up. And, smartphone sales and mobile internet users are rising annually. “All these things are happening at the same time. Only China can boast of all these things happening at once, but they still don’t have the enterprise ecosystem that we have. In many senses, this was the opportunity for us,” says Pranav.

The core thesis

How does the convergence change business models, what are the opportunities for companies to capture, what are the interesting ideas that the talent base is coming up with to get funded and sell globally. “These are the questions we are answering today. This is the core thesis of 3One4,” he adds.

Starting off with investing in the seed stage from its first fund, 3One4 now will be able to invest across various stages of a company’s growth with its second and third fund. Its cheque size will range from ₹2.5 crore to ₹15 crore. It will have a sufficiently large reserve ratio to invest in subsequent capital raises by some of its best portfolio companies, according to Pranav.

The first fund was raised in-house and the second had some large family offices and institutional investors. The third fund, Continuum I, has a top tier US university endowment that has over $7 billion of global investments as a significant investor as also Japanese conglomerate Sojitz Corporation. “We are gearing up to become a platform that all the investors, whatever stage they might be, whatever verticals – corporate, venture, institutions – we have good quality wheels they can track and then when they want to invest, there is an opportunity for them to come in,” says Pranav.

He says 3One4 Capital manages its portfolio with just a 14-member team thanks to the MIS it designed. Its investment team built its own software to manage a large influx of companies. “We write our own software to help us manage our deal volume. We are talking to more than 2,600 companies every year. Our software is able to classify compare and help us spend time on the most important companies coming in. And, we make 8-10 new investments every year,” says Pranav.

They look for ventures in a space or market or a business model where they can help. The first thing they screen for is, do they understand the business the same way the founders understand it. They also see whether they can build a long-term relationship with the founders. “We are making sure they know more about what this company should be. We are not setting the goals. Our preference is that the founders set objectives and our job is to figure out how to help them get there. We are enablers, we are not the guys doing it,” says Pranav, on the fund’s strategy.

Busting the myth

He busts some myths – that Indian founders are copycats and that India is far behind the US, Israel and China as far as start-ups go. “Most of the good founders we meet are trying to find something new to do,” says Pranav and asserts that India is not far behind any of the other countries as people think. Of course, there is a huge opportunity to attract more VC investments, but with the building blocks in place, he only expects the numbers to increase.

Siddarth points out that Indians are used to operating in terms of scarcity, especially of capital. If, he says, a US company raises a $100 million in a funding round, an Indian start-up can do the same thing with a $20-million fund raise.

Importance of finance function

He rues the fact that entrepreneurs give the least importance to the finance function. “Unfortunately, the finance and accounting part is not given as much credence as other functions. You can have whatever you want in your pitch deck in terms of IP, you can have whatever you want in terms of technology, but unless it translates to sales, translates to hard cash, there is not much you can do as a company,” he says.

A lot of companies, he adds, have great stories, but many run out because of financial mismanagement. “It is important for entrepreneurs to realise that finance is what is going to be a key driver for them,” says Siddarth.

Siddarth Pai

He adds that they are trying to change the culture and getting founders to look at their venture as a fundamental business, get them to aim for break-even early, because they cannot have equity to subsidise revenue, as a substitute for revenue. “That is an important part when it comes to business, because the moment the equity tap runs out, your business is sunk,” he adds.

What does 3One4 stand for? It is a play on their family name Pai and the mathematical constant pi , says Pranav. The first three digits of the mathematical constant pi or 22/7 is 3.14. And, adds Siddarth, “we work 22/7.” It is as simple as that.