Pranav Pai and Siddarth Pai, the two founding partners of 3one4 Capital, are brothers. Their father, Mohandas Pai, was the former Chief Financial Officer of Infosys, as well as a Padma Shri winner for his contributions in education space.
3one4 (314) is the first three digits of Pi (π). The mathematical constant is also a play on their surname Pai.
In 2016, Pranav Pai founded the early venture capital company with his younger brother Siddarth Pai. So far, 3one4 has invested in around 60 startups in India and the US, managing USD 115 million across all funds.
Last December, 3one4 Capital closed two new funds, Continuum I (Rs 400 crore) and Rising I (Rs 45 crore). At present, it counts meat brand Licious, fintech company Open, HR SaaS company DarwinBox, and data analysis platform Tracxn in its portfolio.
In an exclusive interview, The Passage spoke to Pranav Pai about the trends in the ecosystem, opportunities and challenges in the healthcare industry, and the reason why Indian companies is targeting Southeast Asia market, among other things.
The Passage: What are the major focus areas of 3one4?
Pranav Pai: 3one4 capital is an early stage venture fund based in Bangalore. We manage USD 115 million across all the funds. We have invested in around 60 companies so far in India and the US.
We mainly focus on five areas. The first area is enterprise automation technologies. Darwinbox is a good example. Second space we invest a lot of capital and time in is fintech. Open for example.
The third area we focus on is consumer, but only specific business models with margin efficiencies. A good example is Licious. Fourth is media and content where we are trying to find companies that produce content. We are also looking at platforms posting and distributing content. For example, Yourstory and Pocket Aces.
Finally, the area we will do more work is deep technology. Here we go after many sectors, like agriculture technology, IoT or AIoT applications.
The Passage: What were the major trends you have seen last year in the sectors 3one4 was looking at?
Pranav Pai: In enterprises, Indian companies are becoming more interested as clients and procurers of technology.
Mostly, e-commerce used to sell at discounts. Since 2019, we are seeing a set of quality buyers who are coming online who don't mind spending high premiums on good quality products. Licious and Mamaearth are good examples.
The second big trend is verticalization. Every single product is becoming its own company. We think consumer verticalization is going to be a big thing in the next three to five years in India.
In the media and content space, people are looking for quality programming in their own vernacular language. They are becoming very specific and particular. That's why we have invested in some vernacular content companies over the last few years.
In fintech, there are three big waves coming.
Number one, the retail financial services wave is going to become powerful. There are at least 25 companies who are going specifically after retail bank account owners, and telling them that we will give you a better banking experience or better money experience in general. They will try to gain your trust as a bank account owner, and try to give you everything you need on your bank account.
Second big wave is in business banking. There's a big wave of Neo banking companies coming in to target small and medium sized businesses.
The third big wave is fintech getting more integrated with India's core banking system.
The Passage: Could you tell us more about the concept of Neo bank?
Pranav Pai: The first disruption to banking is called the challenger bank model. A challenger bank will compete with legacy banks.
Such banks compete with traditional bank for your account and everything that comes with the account; the revenue, the spreads, loans, credit card facilities etc. Challenger banks want to replace the old banks.
There are 10 to 12 challenger banks all over the world. It will be a big wave in Europe, the US, Canada and Australia. But we don't think it will happen in India soon until the strict banking regulations change.
The second big wave is the Neo bank. It does not want to be a bank. Therefore, it does not want to open your bank account. It says, you already have a bank account, your bank is doing whatever it can, but we can do more together.
The company will want to be the interface through which you access your bank account. A retail customer can avail all banking services through this one app.
In India, business banking is not readily available for all 10 million SMEs in India. So companies like Open are building the platform between the bank account and the customer. And that's why they are doing really well. Open has acquired over 350,000 small and medium sized business bank accounts. And business owners are using Open to do the entire banking operations.
The platform becomes more than just the bank interface. It becomes procurement, payroll, accounting, reconciliation, invoicing, taxation, auditing, etc. So Neo bank is augmenting the bank account. You still need your bank accounts, you still need to hold cash and deposit somewhere. But Open gives ten times’ efficiency.
The Passage: Why do you think next year will be about healthcare?
Pranav Pai: I have been doing this business since 2012. And every year I've heard the same thing, like next year we will do healthcare.
We haven't done health meaningfully for two reasons. A lot of companies have already tried the most basic ideas. For example, Practo. But they are not really taking off. There have been a lot of problems unfortunately, and mostly business model problem. So the lack of momentum had impacted how a lot of other companies look at the appointment systems.
There are three big health ideas that have done well. The whole pharmacy delivery area has done very well. They have raised a lot of money and have large revenues now.
Businesses focused on diagnostic improvement have fared well. For example, some companies are using AI technology for different applications of diagnostics. They have customers and are making revenues. So that's an interesting space. But it's very hard to do, you need to have a scientific background and you need to be trained doctors to understand how to build a company.
Interestingly, now there is a lot more access to medical financing. So I won't call it insurance, but point of sale financing. Quite a few companies have succeeded.
So this is no longer a startup only domain. Even the big companies are coming in and have also started lending to help make health financing more affordable and accessible.
We said no to 800-900 health companies because, for whatever reason, we cannot make the product market fit question work for us. We only have one investment in health. One of our companies got acquired and gave us an exit. Bugworks is another healthcare company that’s doing well for us.
We will keep looking in 2020. We will try to find some new problems we can solve in the health space - only if we are convinced about the product market fit.
The Passage: How do you see the competition outlook for grocery delivery?
Pranav Pai: I think the market is massive. I see three challenges in these sectors. That's why we are not investing in this sector.
One of our older funds is an investor of Bigbasket when it was USD 20-30 million, now it is USD 1 billion, we got our exit, so we understood how those companies work.
Number one, the cost is very high. In a limited shelf life inventory business, a lot of wastage happens – 20-30% normally. So the costs are far too high. That's why it's hard to break even.
Number two. Delivery cost is very heavy. Bigbasket is the most efficient delivery companies I know besides Swiggy, but they have not managed to cut their costs for delivery still, they need more time.
The third big challenge is the margin question. The margin is still very low, it's anywhere from 1-4%. So how do you increase your margins? The only answer in India is your own brand.
Licious is not a grocery business. It is only protein and meat. So it's a vertical ecommerce company. And the margins are far higher.
The Passage: How does shared bike business economically make sense for Yulu?
Pranav Pai: Yulu is a very high margin business. They don't have petrol fuel cost.
Number two, they have docked parking zones, you cannot just leave Yulu bikes anywhere. So they don't need people running around finding stray bikes and they don't get into trouble with the police.
And number three, Yulu has a strategic partnership with Bajaj which will reduce the production cost significantly. Uber is already partnering with Yulu. So they have two very large strategic partners. So Yulu is able to scale at very low cost and much more efficiently.
So, they will be announcing that they will be putting out 50,000 electric vehicle bikes in India this year. That should help them cover the top four cities and the most traffic zones. The goal is reduce the number of autos and cars that people use so the roads clear up.
I think it is about the approach, there is definitely a sustainable business model and it's about approaching it in the right way.
The Passage: What are your thoughts on the recent trend of Indian companies exploring SEA market?
Pranav Pai: There are not enough tech companies in Southeast Asia. If you look at every big market, there are only one or two companies. Grab and Gojek, in this case.
In India, every market, be it ecommerce, bike sharing, wallet or payments, you have hundreds of companies. We have a lot of good talent in India to build these companies.
It also increases competition. So the good thing in India is a lot of talent, but that brings a lot a competition. In Southeast Asia, the bad thing is lower mass of talent, very few people developing high tech companies, and therefore low competition.
Even companies like Gojek have their largest Development Centers in Bangalore.
Now most of the Indian startups have understood, why wait for them to come here, hire us and build companies for them, instead, Indian companies have decided, let's build these companies and go there and take a crack at those markets.
I think there will be good competition between India and China, in Southeast Asia. And, of course, SEA companies will also grow. Overall, that will be a good push for building strong bridges with all these countries in that region.
In terms of market, India gives you a market of 1 billion people. But we have 1,100 dialects, 29 active languages recognised by the state and it's a very big country. The problem with SEA is, you will get around 700 million people if you pull the whole region together, but they are all in different countries, languages are different, and it is not one unified market.
Indian founders are not thinking of Southeast Asia as one big country to go after. They are seeing specific countries in Southeast Asia. For example, SaaS companies are going to Singapore first. The payments companies are trying Cambodia, Vietnam, Malaysia,
The Passage: Why do you think Indians startups are exploring relatively early stages compared to Chinese in SEA?
Pranav Pai: I think it's a cultural aspect of how Indians are trained to think about expanding business. China has access to much more money.
At the same time, China is a much deeper market. You should remember that China is about 20 years ahead of India.
And, of course, no one else can enter China. So, they don't have Indians or Americans competing with them in China. So I am not surprised that they focus on China first. It is their market and no one else can come, so if you believe something and it's new, take over your local market first.
Indians will decide okay, you know what, there's a lot of competition in India already, a lot of smart people here, there is not enough competition in that part of the world. Let me go there and build businesses.
India is an open market. Everyone is here. So why not go to a place with less competition.