In this episode of 100xEntrepreneur Podcast, we take you through the journey of Pranav Pai. He early on in his career implemented learnings from his father’s (Mohandas Pai) in his work and curated new approaches to finding horizontal & uncommon investment ideas.

Listen to this podcast to learn about:

00:11 – Intro of Pranav & 3one4 Capital

01:50 – Influence of upbringing and early career choices

05:25 – Background and setting up of Aarin Capital by Mohandas Pai

08:17 – Learnings & practices at 3one4 Capital, inspired from Aarin Capital

17:25 – Balancing the Venture fund performance & relationship with LPs

18:33 – Investing early-on in uncommon ideas like – Licious & Yulu

22:17 – Investing in horizontal businesses like Darwinbox

27:48 – Fund-III – Lookout for New format for Indian digital citizens

29:12 – Changes in Fund-III – More variance & verticals

35:42 – “Not enough Indian capital is available for Indian funds to raise.”

38:21 – Top 3 advice from his father – T.V. Mohandas Pai

Read the full transcript here:

Siddhartha  0:00  

Hi, this is Siddhartha Ahluwalia, welcome to the 100x Entrepreneur podcast. Today, I have with me Pranav Pai, Founding Partner and Chief Investmet Officer at 3one4 capital, an Early Stage Venture Capital firm based in Bangalore. Pranav is a Stanford alum, and also the Co-President of Stanford angels and Entrepreneurs India, 3one4 has a portfolio of 50 plus investments across early stage, which includes Licious, Open, Betterplace, YourStory, DarwinBox, Bug works, Pocket Aces, faircent, loanTap, Jupiter, Begin, Yulu and tracxn. Welcome to the podcast, Pranav.

Pranav  0:38  

Thank you, Siddhartha. Great to be here. 

Siddhartha  0:40  

I would like to start with you know, you had a very high name to live upto, you know, Mohan Das Pai, today one of the most iconic business and social figures in India, he built Infosys, which is one of the largest, you know, company which put India on the global map, how, how was it, you know, growing up? What, what kind of aspirations you had for yourself? You know, how did you identify,  would love to know that, you know, being a VC from a very early age, and I think nobody in India, as a VC has set up their own fund below the age of 30 years? Like, what are the thought processes and the journey behind it?

Pranav  1:22  

Thank you, Siddhartha. You know, my brother Siddhartha and I always say that we have a very interesting dynamic at home, our parents together, maybe the most engaging, combination of patience and ambition that we’ve ever seen. My mother, mostly, most people that know her, will say she is very energetic, very, very ambitious for us, really helped us learn a lot read, write, you know, pretty engaged in curriculars very early. And at the same time, our father, you know, given his career path, and you know, companies like Infosys have really built the foundations for today’s startup ecosystem in the country, right? All of us know that. And what a brand it has built for India globally. So, that combination, really, both our parents helped us really be patient about how we set personal goals for ourselves, how we planned our career paths, how we therefore planned our educational journeys, Siddhartha and I, you know, we fortunately, were able to have this conversation in our teens, we decided, you know, it might sound a little bit juvenile, but we decided that we would work together very early on, we decided therefore, that we should have complementary skills. I come from a family of accountants and lawyers, both my parents are CAs, lawyers, a lot of the extended family is in that space as well. So we decided that I should be an engineer, you know, just to make sure that you know, I get in there early and learn about what’s going on. And Siddhartha, you know, he’s a he’s a CA is he’s taking the family’s competence forward that way. So, it’s been a very interesting trajectory since we were kids. And you mentioned about us starting a fund when we were young, I think, you know, our journey about thinking in terms of venture capital started in 2011. I was leaving Bangalore to go to Stanford. Siddhartha was just about graduating or getting into his, his commerce degree and planning to start a CA. When we looked at the entire ecosystem here, it was still very, very nascent, right. I remember graduating army College of Engineering College in Bangalore in 2011, I decided to sit for the placements in spite of Of course, you know, the work on the exam and test for the US one year in advance. So, in spite of having all that in place, I decided to just sit and see what’s going on placements. And back then, Siddhartha, you might remember most of the campus placements were centered around IT, you know, all of these Infosys, Wipro, TCS, Cognizant and so on and so forth. And for the first time, we saw two new companies, Flipkart and newSigma, and we had to go to the computer lab and Google, what are these companies we haven’t heard of them before. So, just zooming out from 2011, to 2020, just 10 years, and look at the change, we have 34 unicorns, India is the third largest startup ecosystem in the world, hundreds of 1000s of jobs. You know, so many billion has been created and million has been created. So I think it’s been a fantastic decade. So when we looked at this in 2011, we said, Look, we need to train for a different reality in India. And we need to start thinking about timing our entry in this in this space, because really, new company creation, or new asset creation, as it’s called in the financial space, it’s going to become completely tech driven. It will be very difficult to see large generational companies being built, which are not digital, not technology first. And thankfully that’s where MDP’s insight comes in. Our father’s insight comes in. He gave us a conference idea that’s a future that we can all believe in. That’s something that’s realistic, it’s going to happen in 10 years or less. So prepare for it and that’s something you should work backwards. So that’s basically the foundation for how we thought about VC and and of course, it’s a interesting story about how we started the fund in 2016,

Siddhartha  5:00  

I would love to know that in how you started the fund, you know, and before that, I believe you, you also had, you know, in Aarin capital, all the learnings from your father, were you involved like directly in Aarin capital as well?

Pranav  5:16  

Yes, I can talk about Aarin and 3one4 for across a decade. So interesting start, when I was leaving for Stanford is when MDP was was retiring from Infosys. So he had put a notice and in 2011 was quite eventful year for all of us in the family. And, you know, thankfully, him and Dr. Ranjan Pai who’s now chairman of the manipal group, good friends, we know, we know their families very well. They decided to come together and launched an investment firm, a proprietary investment firm, so they didn’t raise outside capital, it’s their own capital. And they decided to allocate up to 150 million, two segments, they understood well, so because of the manipal background, the group and of course, my father’s background from IT, they decided that health education, Life Sciences and some amount of software would be areas that they could do some interesting work. And back then, if you remember, 2011, there were barely a handful of VC funds in India. And most of them are just thought about starting out tech, talking about very, very few people. You can count on your one hand, how many, how many funds were there back then, a lot of today’s large funds were evolving, their partnerships were evolving, the old funds are becoming new funds, they were the Indian fund is getting acquired by the US parent. So there was only a lot of fun formation was happening in the start of the decades. So they were really one of the largest, you know proprietary Indian capital pools back then. And that’s why when they decided to focus on very key segments, the ones they knew well, and they had some infrastructure to support these companies, their ability to think bottom up, right, that’s where and that’s what we do at 3one4 reasonably well also, at least we try. That’s where Siddhartha’s and my learnings really started. So, Siddhartha and I were not involved Aarin. And, of course, we were fortunate to be able to observe many of the conversations. But all investment decisions were done by the partners MDP, and Dr. Pai. So, for example, they were the first investor in Byju’s, and that’s a phenomenal story they met Byju’s in 2012. They decided to lead the seed round, they invested in the seed round at 20 million pre money, they had 30% of the company. And what a journey in eight years, eight and a half years, it’s a $11 billion company. Of course, Aarin has got diluted many, many times because Byju’s raised capital very aggressively. And of course, they’ve had to sell some secondaries down the line, but they still have a small ownership in place. And you know, one of the interesting things about a story like that is in one fund cycle, a typical fund cycles, eight, nine years, they return multiples of the fund with just one investment and all the other investments is PharmEasy, a bunch of companies in the US, they are also an LP now they have LP positions in 15 funds, globally, India, Singapore in the US. All that, of course, is gravy on top of the fund sides, right? So, what we learned from them as if you do this bottom up thinking if you take positions in companies before they become mainstream, and if you think about how you will manage your shareholding in your largest winners, more aggressively than most funds typically do. The sheer ability to generate cash on cash returns in this country is enormous. And that’s why when we decided to launch 3one4, again, our thinking was inspired by Aarin, we decided to focus on key sectors we understood very well, we decided to start small. So our first fund was only 100 crores, we decided to not back any of the mainstream companies. So, we don’t have a single e commerce company. We don’t have a single wallet company, food delivery company. We didn’t have anything in payments for the longest time. So we’ve taken very conscious decisions to stay out of mainstream investing. And our thinking in 3one4 is went a little bit beyond because since when we were dedicated early stage, right. Aarin is a little bit more flexible, can take positions in late stage rounds, mid stage rounds early, they’re more flexible. But with 3one4, we specialize in the early stage. One very important thing mistake we cannot make is we cannot start investing in trends that are already mainstream today. We have to get very predictably good at investing in ideas that will be mainstream in a couple of years now, because that’s the only way to preempt the trend and therefore take valuable positions in early stage assets that could become large for you down the road. So, companies like Licious, Darwinbox Yulu, many of the newer ones are doing hopefully will turn out that way. I think that’s been the fundamental lesson that we’ve taken from Aarin and we’ve tried to now magnify and deploy into the early stages through 3one4.

Siddhartha  9:42  

That’s fantastic. You had insights like you were when you were 24-25. And you didn’t took the entrepreneurial path in the sense that you didn’t found a company but found a fund which is like the same amount of risk, which you took and you have now other people’s money also, you know, which you are responsible for. An entrepreneur reasonably gets responsible for other people’s money over a period of time and they understand the risk. Right. But having LPs, which you are accountable to, from a very, you know, young age must must have been a very different experience growing up.

Pranav  10:22  

Absolutely. I think, again, it’s very hard for people in their 20s to launch any investment firm, for many reasons, investments globally is still an old boys game, right? Enough has been written about said about women in VC, you know, known people of different racial backgrounds, diversity in VC. So, yes, those are obviously observable problems globally, not just in India, not just in the US, it’s in every country in the world. But specifically in India, again, Siddhartha and I looked at how early stage investments were working, we noticed three problems. One problem we noticed is almost every founder that tried to approach a VC fund had to fit into this formulaic mold of what a pitch has to be what a business plan is to look like. What is a believable projection? What is a believable revenue three years down four years don’t fires down what is a believable, gross margin? They were these very formulaic expectations on founders that frankly, if you’re trying to build a category, creating company in 10 years, it’s impossible to sometimes find comparables that make sense in year zero. For example, licious, the terrific example of fascinating founders, an incredible operating story, you know, fantastic guys, what a great team. And they really delivered they’ve outgrown all of our expectations. But you know, you can talk to them. And they’ll tell you, they had an absolutely nightmarish experience in the first two, three years raising capital, almost no one believed the story, right? So, that’s the first problem, we identified that and I, when we looked at this, we said, Look, today’s the founders of tomorrow’s companies will not always fit into the models you have today. And this formulaic approach is, you know, we’re just missing the best ideas. So we said, if we start something, this is a real problem to solve. The second problem we realized is, again, I’m not trying to speak anything against the typical age bias in VC. But most people working in investments in any most investment classes are typically 40. In their 40s, they know they have a large track record. Of course, that’s important in terms of trust. And in terms of getting LPs to be familiar with you before they invest. But the downside of waiting that long is that most of the early, you know, early stage, high energy action is the founders are in late 20s, mid 30s, that’s the 25 to 35-30, where the most energy and their ability to culturally vibe with you as an investor that gets lost in translation. So there’s almost a generational gap, I’m sure you’ve seen that. You’re investing, so you’re seeing the same gap as well. So we realized that if if, as young people were trained to think in decadal terms, and if we can show that we can think in decades, right? And the high integrity, you know, we’re low cost structures, we do imagine how the structural side of VC works. Assume that that’s a solved problem for a minute at 3one4. Our ability to build a cultural vibe very early with the most interesting founders. That’s a competitive advantage that’s not available to the more experienced VCs, just by the nature of having those years on that traffic. So there’s an interesting advantage in VC to being young, which I didn’t think was being exploited before. So that’s the second gap we saw. And the third, maybe the most interesting gap we saw is a structural one. So as you know Siddhartha, most VC funds globally are the 2 and 20 model, 2% management fee annually. 20% carry, if you think about that structure, if you ask people, where does that come from it they just say, no, it’s standard. It’s a standard LPA clause. But we dug into the history of that. And we realized that really, this 2 and 20 thing comes from the hedge fund industry. And the hedge fund industry is significantly different to VC because they’re more liquid. In fact, they can do distributions every year, if that’s required by the investors. And one more interesting thing about the hedge fund model, why 2 and 20 works for them is because there are necessary capital contributions that the GPs  have to make back into their fund. Right. So the data is given to them, of course, but then they’re expected to invest a part of that back into the fund with the other continuing LPs for the next month, or next year. So the 2 and 20 works as long as the GPs, the the people who run the investment firm are investing at the same terms back into the fund with the other investors. But in VC, we noticed that to 2 and 20. it’s expensive, but Sure, okay, fine. assume that’s okay, for a minute. Not enough VCs are investing back in their own funds to deserve a 2 and 20. They’re not taking enough risk alongside the LPS who deserve a 2 and 20. So we also that, okay, this makes no sense. This is an obvious gap. There’s no innovation here in structure. So none of the 3one4 funds since we started is a 2 and 20 fund. Right, we’ve always stayed very lean on costs. We’ve said very lean on overheads. And if we even if we return a three x one, just like any other VC fund and say eight years, the cash on cash return that an LP makes in our fund is many, many times more than what they’re making in another fund of equal and performance. So we just imagined the structure part. And that was a big opportunity that we saw, we can exploit. So I’m just summarizing two or three things, how we thought about what are the problems in the VC interface with founders. And we found that there are so many problems that if we sorted through a, we would have a very interesting firm that had six significant competitive advantages compared to the median in the industry.

Siddhartha  15:24  

So, I believe, you know, you would have reduced your management fees significantly, keeping a lean team and a very young team. So there is no burden of executive salaries, which a person who’s coming, let’s say, of India, president of a large MNC, joining as a partner in a VC fund, he would have certain expectations, certain responsibilities also, both from family side and the way a lifestyle is for that person coming on onto a VC Fund. The fund management fees are structured to accommodate that. Right. But as a fund, where I believe you’re almost all the team is, you know, below 30 years, right, so so that, that you have eliminated the kind of heavy costs. So sort of the management fees, I think, in your case can be very low like one percent. And similarly the expectations on carry, you know, because if you’re investing early doesn’t need to be 20%. They can be 10, or 15%.

Pranav  16:27  

Yeah, that’s absolutely right. So that’s how we thought about fees. We looked at all the overheads that frankly, you don’t need, or you can insource and build internal competencies, those are long term competencies that can be significant competitive advantage, if you insource. So that’s how we were able to keep costs under control. And of course Siddhartha and I don’t need to pay ourselves too much where in this for the 2030 year run, right, so we’re not running a fund for the fee income, we like to say. So yes, definitely, on the fee side, we’ve done some interesting things to cut costs, at the same time, not compromising on quality, or diligence depth. So that’s very important. But yes, on carry, in fact, we haven’t reduced carry. What we’ve done, interestingly is, we’ve had a very honest conversation with our LPs. And we’ve asked them, How do you think about carrier performance share? And they’re very clear, they say, look, if you guys outperform. We as LPs need to make sure that you will take our money for the next one. So, as LPs we get too greedy, and we tell you don’t take 20% of the performance take 10. Right? You guys don’t have any incentive to come back to us for your next one. If you’re doing well, right, we want a better deal. So actually, LPs are not as you know, narrow minded as some people paint them out to be they’re actually very pragmatic. These are people who have years of experience decades of experience. So with LPs, what we’ve done is when we outperform, we have a higher carrier. Very simple, right? And if you don’t have performance, a lower carrier, so it’s what we call a tiered performance, structure. And it’s maybe the most transparent way to incentivize good performance, it’s in pure meritocracy, in terms of performance. That’s what we like we like having as a partnership, we like having our LPs aligned with us on risks. So we are ourselves large participants in our own funds, that’s important. So we put a lot of our own money in the fund, we cut our costs, which is very important like I said, and third when we outperform our LPs are very happy giving us a fair share. So all that put together makes for a very compelling very significantly upgraded structure when it comes to VC funds.

Siddhartha  18:24  

Fantastic. And then coming to some of your earliest investments, for example, you invested in non mainstream companies back then, like you take the example of licious right and today Licious is you know, the leading company in the meat space. And they started a trend back in 2015 2016, which now fresh to home and there are other companies which have become very large, nobody predicted that it could become, this space could become so large. Similarly Darvinbox an HR software SaaS company, which you backed very early, Yulu micro mobility, you know, like, these were trends, which are visible now. But in hindsight, if you see they were not visit, and how did you generate conviction, enough to back them?

Pranav  19:20  

Good observation, Siddhartha. Thank you. So first of all, I must say all, all credit goes to the founders. These might sound like fancy ideas on paper, but very to execute on something that’s so early and pull off a business that’s so difficult, like all of these founding teams have done. First of all, I must say it’s all due to their execution capabilities. But from our point of view, when you ask us how we look at investments,like I said, we decided very early on that if we play the game of investing in the mainstream. The downside is when there’s a great company and it’s in a space everyone understands, and it’s important today because every year in India, the VC fund dry powder is only increasing, right, we are our ability to compete on valuation on pricing on, you know, just you know, there are so many fantastic VC funds in India Now, many of them are global funds. So, they are brands, right, they have global networks. As 30 year olds, it will take us time to get there, obviously. So, we decided that in the mainstream, we will lose the game  nine out of 10 times, but, and that’s a disadvantage we’ll have when we’re starting out. So we decided that just like how startups think about interesting, you know, sideways to get to market and how they can build an advantage presence compared to an income, but we had to think as competitors to the incumbent VC funds, quote unquote incumbent, obviously, many of them are still new. So we decided that look, we will lose the game of investing in the mainstream. So it’s not worth playing that game, the same way other funds are. We need to get good at preempting the mainstream. So, what we did is we again, like this, like, what Aarin did very well is we went back to, you know, all the people, we knew all the possible studies we could do in understanding India more, but in a more bottom up way. And we realized that a lot of the investment chatter today now the blogs and so on, and so forth, back then, were basically looking at patterns outside of India and trying to find a match inside India, that was the, you know, who as you will type in western, we decided that, okay, that’s, that’s an exploit, there’s something we can we can actually take advantage of. So we’re able to, instead of going out, and then coming in, if we’re able to go inward, deeper, and then come out, we’ll find ideas that frankly, you know, no, not too many other people are looking for. So for example, with Licious, we said, this is one of the few verticals, we can see that you can actually build a fully vertically integrated brand, right. And that’s a defensible company, that’s a high margin company, it’s a great business. And there’s actually value in a brand in this space, like many times, you might try to build a brand in a vertical but honestly, you get commoditized far too early. So this was actually a space where if you build a brand is actually a moat against commoditization, which is exactly why Licious is growing through its execution. So there are very few ideas that were left that way, and thankfully we met Licious. And that worked for us. And then we look at horizontal. So, Darwin box is a fantastic example. Back in 2016-15, when we made the Darwinbox investment, I still remember, we invested with one more VC fund in the seed round. We spoke to all network all other VC firms are talking about what do they think about HR? And some partners actually laughed at us saying, oh, you’re investing in a horizontal HR company. It is going to compete with SAP and Oracle, and success factors and so on. what’s going on? Or what are you thinking, right? But really realize that this talk to people who work in large organizations in India, they’re miserable about their HR software they hate it, right? Again, these are fantastic systems, there are large scale systems, these are multi billion dollar companies. I’m not not trying to be disrespectful for what they have built. But the end experience for the general employee inside these companies that use these platforms is fairly miserable. It’s not ready for mobile, it’s not ready for more employee first engagement, there are you know, the the sheer click through the number of clicks to get a job done is extraordinarily high. So Darwinbox’s founders, I really a must give credit to them. They just reimagined the entire workflow, that so what, for example, what slack did to corporate communications, I think these guys have done for corporate HR. And the results speak for themselves. They’ve managed to become one of Asia’s fastest growing largest HR SaaS companies, they’re going regional now. fantastic story, big, big customers, they’ve taken out the incumbents many times, like building on top product quality again. So if you’re able to think about horizontals, in a specific way, I think India is one of the last big countries left where you can still build these horizontals. So many, many examples. Of course, I don’t want to take too much time. But this is an example of how we thought about specific verticals and how we looked at certain horizontal opportunities.

Siddhartha  24:01  

And in one of your interviews, which you mentioned earlier in the podcast as well. You said that you use a bottom up approach based on primary research to predict trends, which will be seen in two years. And you also mentioned that you just can’t allow an industry or a news report to tell you what to invest in. Can you share my thoughts on this?

Pranav  24:22  

So absolutely. So I’ll actually give you a specific example. Back when we launched our the first fund, one of the other categories we identified is digital media and content. They were surprisingly for us, India’s a large country, you know, back then we didn’t have zero, of course, or the rumors about Jio launching, we’re just starting right. No one knew the Jio effect would be what it is just four or five years later, but we were looking at all of these things come together and we said look, India has the largest youngest population in the world. Most of this population is going to be looking at media content online. We definitely see TV and newspapers going down in circulation that habit is gone. And There is a supply of content, right? So we didn’t have the producers of digital content, we didn’t have the platforms besides Facebook, YouTube, and so on, There were very few Indian forms, and we didn’t have any investment, actually in some of the new formats, too. So back then podcast was reasonably new in India and the new formats that are coming up now. So he said, if you look at digital media and content, there are three waves of investments that are completely open, the producer with the platform wave, and the new format wave. So we said, Look, if we if we try to do this, well, we need to be careful, because in media, of course, you know, the investor sentiment is always that media is a difficult space, it’s a hits business. So if you are a little too aggressive, your ability to raise follow on capital to grow in this court in this category is significantly more difficult, more challenging. So we had to say, while we while we thought we saw a large space, we had to be very clear that we need to approach this very methodically, we can’t just take positions in everything at once. So we saw our way of looking at this. And those were the bottom up approach. So, we said we thought about Okay, what can be build first with less capital, that can become a large profitable revenue making company in a five to six year time frame. So we said the producers will have more power now because the platform is still being developed in India, Facebook, and all of these other WhatsApp, these other platforms are still developing a deep regional focus in India, right? They haven’t set up large teams in India yet. So we said, let’s invest in producer so Yourstory, Pocket Aces, graphic comics, we took a bunch of positions, and interesting companies that have now become number one in their vertical, right. And they all make revenue, high margin business, and there’s value in the brand. There’s a sound argument to invest in producers back then. And that’s paid off for us. I will not invest in two new producers now in 2020. Yeah, obviously, because the power is now more on the platform. So we saw the second wave coming in 2017. And we said, okay, now, we need to look at what can we do in the platform segment. ShareChat was just becoming popular, if you remember. So we said, Great, that’s good. That’s setting a precedence. So we looked at English, and we said, okay, we can’t compete with Facebook, we can’t compete on Instagram, these are things that obviously, we’re not going to attempt. But we look at the regional language base, I come from a bilingual household Gujrati and Konkuni. So we said, okay, there’s barely anything in our language in our formats in what people we know from our communities are actually looking for when they come online. So we got into local Kuku FM for audio streaming, local for hyperlocal news. We did Mitron early this year, which again, became quite popular thanks to the China ban. So we looked at platforms for different formats. And we said four regional languages is going to be this way, we must try to play this and see what could work. And now the third wave we’re looking at are in formats we’re looking at, literally, as we speak, we’re looking at what are the next new formats for Indian, Indian digital citizens? Right. And I don’t have any answers for you yet, but I’m fairly sure we’ll find some interesting companies, young founders thinking differently. And given our track record now as we are going wave after wave. I think we have a kind of a moat if you can call it that. Some of these understandings, the economics, of course the partnership network, how you work with these platforms, what the rev shares look like how the advertising networks work, we’re able to pull a little bit more together for those companies a lot earlier to make them hopefully larger companies much faster.

Siddhartha  28:21  

Awesome. So you know your fund three at is roughly 1500 crores?

Pranav  28:28  

It’s 750 crores, 100 million dollars

Siddhartha  28:31  

100 million dollars. And you mentioned that it will be investing in 25 companies where we will be putting larger checks if you can share more highlights, you know, so, you have a structure where you invest, this is in the seed stage also where the checks are as low as one to two crores. But you can go up to very high like $2-$3 million in the first check for how do you balance it out in the third fund?

Pranav  29:00  

That’s a great question. So, you know, our fund cycle also has been increasingly overlapped. We’ve raised funds much more frequently than is typical for a VC of our size. So, our first one was 100 crore rupees around 16 million US dollars, fund 2017 was $40 million( 250 crores) and fund three in 2020 is $100 million (750 crores). So, what we learned from fund one and fund two is that every year the variance in the in the early stages is growing very very quickly. So, what was the typical seed range in 2016 between one crores and five crores dressy ranges between three crores and you know, as high as 75 crores sometimes received from a $10 million, so half a million to 10 million or so, we need to be able to find companies across the range, right. It’s very hard for us to say that we only invest in companies where we can put a million dollars in get 15% in the first round. We might miss almost the entire sample. Because of an illogical formulaic rule like that, so we decided that the larger fund, and we don’t want to be too large, so because then the return pressure and so on works against us. So we sized what we did in fund one and fund two. And we said, with fund three, we need to be able to deal with more variance, this nature of how the ecosystem is growing. And at the same time, we need to make sure we don’t miss the great assets, the great companies in this space is where we’ve identified. So in terms of the idea zones that we have, we’re actively looking at. So, we said that, in thinking about this variance and thinking about the sectoral approach, we have invested in five investment focus areas, I spoke about media and content, we do a lot of work in consumer SaaS, FinTech and then deep tech. So five areas or together. We are adding new themes are adding digital health. After five years of work, we’re finally ready to do more in health, we’re adding more competencies in agri, we’re finally ready to re enter edtech now, given what we’ve seen with our first cycle with our learnings from Byju’s, and so on. So, a lot of the things that we were doing with those five areas, we’ve added new areas now. So, new areas plus more variance means we’re thinking about  seed to series A very differently today. So that’s a quick summary of our doing a lot of things internally, differently for fund three.

Siddhartha  31:15  

Just to give examples, for example, your first check in Mitron, I believe was 1 Crore. And the first check in Jupiter and yulu was the rounds where the entrepreneurs were raising as high as 10 to $20 million. Am I right?

Pranav  31:33  

That’s right. That’s right. So again, now one recent trend we’re noticing is when there are second and third time entrepreneurs coming back, you know, their embedded learning, and their experience has given them a very clear way about thinking about their first round, and not just the size, but who they will invite to participate. Right? Yeah. So these founders can afford to be more selective, these founders can afford to have more capital upfront because they are going after slightly more futuristic ideas, right? So they’re trying to preempt the mainstream themselves, if you will. So I think put that all together. And I’m not surprised there are so many more secondary founders raising record seed rounds. So that’s a good thing. I think this is what we saw happening in China at the end of the 2009 2011. Those are some huge companies today, right? I know, a lot of names come to mind, I think that’s where India is now we’re seeing the start of the second wave of entrepreneurship, the repeat founders. And I think that’s going to be something that, again, is called contributing to the variance. So we’ve participated in several of these companies before, but we don’t see that slowing down where second or third time entrepreneurs are starting companies. And therefore with fund three size, we’re able to of course, be meaningful participants, irrespective of their own size.

Siddhartha  32:47  

And you also mentioned you know, that you yourself your family’s investor, LPs and 33 VC funds globally. And you have seen this very close, you know, being you because you would be able to compare performances across these 33 funds. How have Indian VC funds performed across as comparison to the global counterparts. And what would it take, you know, after carry in management fees to return IRR of 20% plus to the LPs because this is the only if you are delivering high returns 20% Plus, after the management fees carries deducted for India to attract like global capital at a much faster pace else it would be to just become a story on the paper.

Pranav  33:41  

Absolutely. I think that’s a great question. So, why Siddhartha and I don’t deal with the LPs side of our family allocations directly. Thanks to Aaris thanks to their spread. And thanks, of course to MDP’s work over the last 10 years, we’ve gotten a fairly strong idea of how benchmarks work in the three or four countries we hold as equivalence. So given our the LP universe with Aarin, the family offices, it’s a little over 35 now, not all of it is VC, of course. So I must clarify that. That will be too much too much illiquid risk. So it’s across asset classes, but is a good concentration of VC in that. What do we observe is three things when it comes to Indian VC funds compared to the global benchmarks? The first thing I think is, India is still just about shaking off the things that didn’t work in the first cycle. If you can be a little generous, the first cycles roughly 2005 to say 2014. And a very few winners from that cycle. Flipkart and NewSigma and a few others, but under 10 or 15 names, I would say not too many. And that’s something has left a memory in many funds, many LPs. And that’s something that again, people will say it was too early or the market wasn’t in place or there weren’t enough customers, the procurement thinking was different back then even for enterprise. So I would say yes certainly the first cycle was challenging. But we entered towards the end of the cycle, right? So like I said, 2011 is when we started. So we got to see the end of the first cycle. And really, we were no big accelerants of the second cycle. And that’s something that we took seriously as LPs. We wanted to kick start the second cycle with more meaningful Indian money available for Indian VC funds. What do you see that the second cycle is very different, we are seeing much more aggressive position taking meaning that taking Indian VC funds are comfortable, taking positions in a little bit more, I would say adventurous ideas a little bit earlier. So they’re getting used to taking genuine venture risk, I would say in ideas that are not yet mainstream. That’s good. That’s number two, I think, one demerit of the Indian VC ecosystem is not enough Indian capital is available for Indian funds to raise, right. So there are still under 20 meaningful Indian LPs in India today. Most of the large institutional LPs in VC funds in India are global LPs like endowments and pension funds and so on and so forth. And most of the VC money coming into Indian companies is still from outside India. It’s American, Chinese, it’s Japanese, Singaporean, European, so on and so forth. So, a demerit because there is not enough Indian, Indian rupee capital available for Indian VC funds to raise from. Their ability to stay invested and follow on in their winners for long enough, right up to IPO or up to, you know, a few billion dollars in valuation. Even Aarin’s example with Byju’s for you know, is a good example, we are unable to hold on the entire 30% stake d uring the 10 billion mark. I think that’s a demerit. Many of these funds have had to sell their winners too early, that’s leaving money on the table. And that’s something that if you benchmark globally, that’s a problem that US VCs, for example, just don’t have Chinese investors don’t have, they can hold on in perpetuity if they want to. The third thing really is we did not have as active an IPO market as we deserved. So there were some amount of regulatory barriers, some discomfort. There is a general, you know, discomfort around, are there enough participants in the tech story in the public markets in India. So I think the recent IPOs like India Mart and so on have convinced enough people that yes, India is going to be a large IPO destination for these new tech assets. So I wouldn’t be surprised if 2021 onwards, we started seeing many more Indian startups going IPO. So really, I think the second cycle is where we’ve seen Indian VC really flourish, I think they’ve only come out of their shell. And there’s been a more active participation in ecosystem building as well. So when we compare this, we definitely will summarize and tell you that first cycle, not very impressed, but second cycle, certainly promising science. And maybe the most interesting will be 21 onwards, next year onwards, the third cycle should more or less start from 8-10 year perspective, that should make for a very different set of images that should make for very deviant types of companies, I think the competition is much higher for example, the US funds in China and other Chinese funds now, but the global funds are much larger, much more aggressive about taking Indian companies global. So how Indian VC funds will compete in a new environment from the third cycle in the 2020s. That should be an interesting observation for all of us to to make.

Siddhartha  38:17  

And, you know, just on a personal note, Pranav, what best advice or pieces of you know, three to five advices you receive from your father, Mohandas Pai when you started your career in VC?

Pranav  38:30  

That’s a good question. So it’s hard to pick the top ones really, he’s been so important to me and Siddhartha both. But I would say the top three things that come to my mind. First, is he really forced us to think about what we’re actually doing when we commit to an early stage strategy. So like you said before, so Siddhartha and I both were in 20s. And of course, we had the good education, no, sound backing, we have lot of data available to us, we’re able to make a lot more informed decisions. But one thing that we just didn’t have is 2030 years of experience in our belt, right? That only comes by, you know, having gone through what he’s gone through. So we really mind his experience. I think the first thing I must be grateful for is he has been very generous with his insights. No question is a bad question. And it took us five, six years of just hardcore preparation to be able to do what we’re doing right. You just can’t wake up one day and say you want to be a VC. So I think his generosity from his insights, I think that’s something that Siddhartha and I very, very grateful for. So that’s one. Number two, I’d say more pragmatically, he really forced us to think about what a decadal commitment really means. Right? So like I said Siddhartha and I do not make too much of our earnings from fee income, just this is not something we’re interested in. So we need to be comfortable by making if you do well. More back ended income. Our income will come from the carry the performance I need to wait eight 9 10 years for that to materialize. That’s an easy commitment to make in theory in your mind, right. But to actually sign papers that declare, you’re going to wait that long for any money to hit your account. That’s a serious, that’s a serious thing to think about. So he helped us put a framework into how we made that decision. He helped us make, build an internal comfort around what it really means to be comfortable with what you would say delayed gratification, right? dopamine so on and so forth. The research is that so really, as young people need to flip out, we think about gratification at all about income and returns. And I think if you completely embrace that way of thinking, the sereneness, that comes to decision making your capacity be patient with long cycles of innovation, and your ability to disengage from the excitement of investing back to the thinking in a 10 year cycles. I think that’s something that if it doesn’t come from experience, it has to come from borrowed experience. It is not something you realize on your own. So I think that’s something again, I’m very grateful that he spent the time to help us think through that. And the third thing I would say, he helped us exploit the shortcomings in VC, like I mentioned a few right, there are many more, there are many more that exploits that we’ve discovered and use to our advantage. One thing I would say, you know, one example, another example I can give you is, I use this example often as we draw, you know, an X axis is a straight line. On one end of the straight line on the x axis on the right, you have investors that change their mind every millisecond, right, the algorithmic traders, the algo investors, you can make a lot of money or as a quant. And you don’t need to have any long term convictions you basically change your investment every millisecond. On the other end of the spectrum, on the extreme left are investors that do not change their thinking for decades. So value investors are a good example. People like Buffett, for example, have been holding Coca Cola and so on for decades now. Fantastic investments, and they’ve done good. I mean, they’ve done fantastically well for their investors. Now we as VCs, VCs, unfortunately, on the left side with the value investors, not that it wants to be there, or that it would prefer to sell only if it could, but because it’s illiquid, because it’s early stage because you know, secondary is hard to come by because exits take time, you are forced to think like a value investor, right. And really, the ideal place to be is in the middle, where you can change your mind immediately something I have a coffee with you, Siddhartha you tell me something about, say, you know, Facebook and WhatsApp payments in India and I had a short position on Facebook, I said, I can change my mind within an hour go into office, right and they the opposite position as a hedge fund. Or I can you know, I can run credit strategies and lend to companies and basically make a guaranteed IRR from strong balance sheet. So as hegde I can do many things that only that’s the ideal, say that’s in the middle, and here you will find the most interesting action globally. So a lot of funds now will evolve globally to become private plus public. So he helped us think through this entire spectrum and say, Look, where do you want to start? And what are the advantages of thinking in different parts of the spectrum? And if you want to be bottom up, where is the best place to start? Right, you might want to think about one this part of the extreme versus the other. So that’s just one example of how he helped us think about these exploits. And I think putting that into practice and putting that into execution as hackers go a little bit faster. 

Siddhartha  43:26  

Thank you for much Pranav. It’s been fantastic to have this conversation with you. Thank you for being very candid, and sharing very transparently your experience and what it takes to build a you know, a remarkable fund in India at a very early age.

Pranav  43:40  

Thank you. So that was a great fun, and first of all very impressed with what you’ve been doing with the podcast. So congratulations on getting close to the 100 episode mark. I’m looking forward to many more interesting stories coming from you in the future.

Siddhartha  43:53  

Thank you so much, Pranav. Really kind of you.

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