Mumbai: 3one4 Capital, a homegrown venture capital firm, has successfully returned its first fund to investors with a performance of more than 1.0 DPI (distributed to paid-in capital). The firm is sitting on unrealized gains of around 4x in the portfolio companies of this fund, said Pranav Pai, founding partner and chief investment officer of 3one4 Capital, in an interview with Mint.
The Bengaluru-based firm, which backed startups like Tracxn, Licious, Darwinbox, PocketAces and Bugworks from the first fund of $15 million, will now look to raise its seventh fund this year. The firm raised its sixth fund of $225 million in 2023.
In venture capital investing, a DPI of 1.0 means that investors have received what they had initially invested in the fund. A DPI of more than 1.0 indicates a return of more than the principal amount.
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“We have consistently raised a new fund every two-and-a-half to three years. We have been quite consistent. We’ve never missed a vintage, even before. So, I think going forward the same rules will apply. We will definitely have to raise a fund in three years of the last one,” he said. While the firm is not allowed to market the fund till it is launched officially, Pai refused to answer specific questions but said the fund seven is likely to be slightly bigger than fund six.
The firm is now armed with one of the best fund performances in the early-stage investing space in India. It has achieved more than 1.0 DPI, a metric to measure performance of a fund. It started raising its first fund in 2015. It has since been raising larger funds with investors backing them up with more capital.
“In seven years of the final close of the first fund, we now have some really large companies. We’ve been able to exit them systematically. One DPI means you return more than the principal. Now within seven years, I think we’re amongst the first funds in India to do that. We still have a 4x multiple left, so there’s still plenty of gains to be returned from this fund, which we will exit in the next two years,” Pai said.
According to Pai, the firm saw the first initial public offering (IPO) from that fund’s portfolio when market intelligence platform Tracxn went public in 2022. “And we at least have two more companies that are planning to start their IPO process soon. And overall, we’ve had 11 profitable exits so far in this fund, and four more additional profitable exits in progress as we speak,” he added.
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The firm’s graduation rate, which means the number of companies from the portfolio that are able to raise a follow-on round after 3one4’s investment, stands at 82%, Pai said. For each $1 invested by first fund, its portfolio has raised $67 in follow-on equity funding. The portfolio companies have raised $898 million in follow-on funding.
Among the things that the firm did differently to stand out was to back companies that were ready to build in India, for India and the world. It was a conscious decision to ensure the portfolio companies are domiciled in India, said Pai.
“That’s also not an accident. We had to fight every round the new ones (new investors) that came in. We had to spend one month on the board convincing everyone, please let the company remain in India. One day they will IPO here. The regulations will change. The Indian ecosystem will be bigger. We must not move them out. It will be a mistake. So, there were a lot of challenges building companies right. The assumptions were not in our favour. The money was not really available. Outcomes were thought to be much smaller. IPOs were not possible, and companies were forced to domicile out, which was another big unfortunate trend back then. So, we’ve had to beat all these challenges to build a fund that performs and investing the money and letting it grow and hoping it works,” he added.
The firm is sitting on unrealized gains of around 5x in most of its other subsequent funds as well, Pai said.
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“Every subsequent fund has actually matched or done better than fund one. We have three funds already that are 5x-plus, meaning if we invested ₹1, it’s worth ₹5 today, which is very rare in venture investing. What we proved to our LPs (limited partners who invest in a fund) is that we’re not getting lucky. We’re consistently investing in a way that gives you constant compounding and builds great companies,” he said.
