Written evidence submitted by 3one4 Capital

 

January 2023

Submission to International Development Committee

Inquiry into “Investment for development: The UK’s strategy towards Development Finance Institutions”

 

About 3one4 Capital:

  1. 3one4 Capital is an early stage Indian venture capital firm focused on partnering with entrepreneurs to build transformative companies. The firm seeks to be the first institutional investor in startups that are designing innovative, inclusive solutions in key sectors like Consumer Tech, Fintech, Digital Health, Climate Tech, and Enterprise/Small Business Enablement. It is amongst the leading India-domiciled homegrown VC firms, managing INR 2,300Cr (USD 310M) of committed capital and a portfolio of over 80 investments. 3one4’s Rising I & Fund II were recognised by Preqin (APAC Alternative Assets Report 2021) as the two best performing India-focused VC funds between the vintage years 2010 and 2018.

 

  1. 3one4 has partnered with reputed global institutional investors, foundations, and family offices across its funds. British International Investment is an LP (Limited Partner) in 3one4’s Fund III alongside top-tier university endowments and domestic foundations.
     
  2. At 3one4, we act proactively, support early standard-setting, and invest in durable technological assets that will solve for the needs of the future. 3one4 is India’s first VC signatory to the United Nations Principles for Responsible Investment (UNPRI)—a global compact of investors and financial institutions working to implement six aspirational principles to incorporate aspects and practices relating to ESG more deeply into investment processes across asset classes. Additionally, founding partner, Siddarth Pai, is the Indian venture capital industry’s first ESG Officer and the youngest professional to hold this position. Recently, the Fund was recognised by Preqin as the highest-ranked VC firm in India and South East Asia in terms of ESG transparency KPIs. This lends momentum to our philosophy of building long-term oriented positions in disruptive, category-creating, home- grown startups that will define the new era of India's growth story in ways that are sustainable, inclusive, and resonant with India's unique opportunities and contexts.             

 

  1. Post investment, the firm works through a deep involvement strategy with founding teams and subject-matter experts to prioritize and strategize for product-market fit, and then optimize for defensibility and growth in revenue and impact. ESG is additionally an essential component of our capital development and portfolio monitoring processes for follow-on investments, helping us identify potential risks as well as capturing upside opportunities. The firm’s in-house Finance, Research, Governance & Business Integrity, and Growth & Capital Development teams act as strategic partners to the founders over multiple vectors to amplify the execution, growth, and reach of the portfolio companies. The firm’s unyielding prioritisation of its portfolio construction principles and deep involvement strategy has helped all the funds stand resilient against the most unpredictable of macro shocks that the industry has collectively witnessed over the last couple of years.

                                                                                                 


What current investments does BII hold?

 

  1. British International Investments is an investor and LPAC member in 3one4 Capital’s Fund III.
  2. BII has also invested alongside 3one4 Capital in portfolio companies like BetterPlace (blue collar workforce management, staffing and upskilling platform) and WeRize (India’s first socially distributed full stack financial services platform driving financial inclusion for underserved consumers across the country).  BII has also supported Dozee (affordable remote patient monitoring solution for hospitals and at-home care) through its debt program.
  3. Within the Indian ecosystem, BII has played a crucial role in backing differentiated domestic fund managers. They have emerged as key players in enabling the consistent growth of the local innovation ecosystem through their support for emerging, impact-focused investors and entrepreneurs.

 

How effective are the governance structure and internal oversight mechanisms of BII (e.g., oversight over direct investments, fund investments, BII controlled companies)?

 

  1. BII has amongst the most comprehensive oversight and governance frameworks across investors in funds and startups. They go beyond the financial aspects that a typical investor looks at, instead concentrating on capacity building, risk mitigation and an emphasis on good governance and business integrity in the investments that they undertake.

 

  1. BII’s approach can be broken down into 4 broad practices:
    1. Intensive diligence on the fund manager and its key persons and co-investors in the fund
    2. Rigourous capacity building and training of the manager on areas of Business Integrity and governance, as well as understanding and measuring the environmental and social impact of their investment decisions
    3. Implementation of best-in-class practices from day 1 to ensure institutional grade oversight of fund processes
    4. Stringent oversight and routine monitoring of all of the above

 

  1. BII’s governance oversight begins pre-investment, through track record evaluations, portfolio company management reviews, LP discussions, etc. Their diligence is the most thorough from the institutional domain, and includes background checks on the manager, directors, equity owners of the manager, key persons, etc. Findings are discussed with the manager in good faith and if BII isn’t comfortable with the findings, it does not invest in such funds or with such managers. This ensures a good pedigree of selected investments. BII’s evaluation has now set the highest standards in the Indian market.

 

  1. BII also mandates the creation of governance frameworks such as an LPAC (Limited Partner Advisory Committee), a body consisting of key investors in the fund. This LPAC operates as an oversight committee of the fund and is in addition to the monitoring frameworks that BII undertakes for such investments. Special care is taken to ensure indemnification of the LPAC members and to ensure that no liability is created on the LPAC or its members via contractual protections.

 

  1. BII also insists on creating lines of communication with the other co-investors in the fund. This allows BII to have dialogues with other investors in the fund and ensure that the manager cannot use information asymmetry to induce any changes to the terms of the fund.

 

  1. On direct investments as well, BII follows the same protocol with no exceptions. BII insists on a board observer seat for itself, at the minimum, in the highest decision-making body of the fund or the company to ensure that it has oversight of the operations.

 

  1. BII’s investment philosophy is to maximise the multiplier effect of the investments that they undertake. They leverage the fund manager to manage the investments they make alongside the fund in companies (known as co-investments). For such co-investments, BII follows a well-define protocol which includes:
    1. Discussions with the manager on the pedigree of the company
    2. Mandating an independent diligence of the company, its directors, shareholders and key personnel from a Financial, legal and forensic perspective which includes AML, CFT, KYC and UBO checks
    3. Negotiation of key BII rights and covenants that BII requires the company to follow
    4. Reporting and monitoring frameworks – both by the manager and BII

 

  1. BII goes beyond what is expected of an ordinary investor through these measures, which helps mitigate risk and exposure on a best efforts basis. Very few other investors insist on such scrutiny to the extent that BII does. BII also spends considerable time in helping both managers and companies understand and appreciate the reason for such intensive practices, which are in the ordinary course for strong institutions. BII’s investment in a fund or company is a source of great comfort to co-investors due to the standards and practices they bring to the table and their no-nonsense, zero fault tolerance approach to governance and business integrity.

 

 

What due diligence does BII undertake prior to making investment decisions and how does this compare with best practice?             

 

  1. The BII has amongst the strongest governance frameworks amongst the investor base investing into India. They have been the only investor to question fund managers on “Business Integrity” and governance enforcement during initial conversations, as opposed to only emphasizing on returns and the investment thesis of the fund. Their approach to diligence spans three stages of the lifecycle of the investment:
    1. Pre-Investment
    2. Continuous monitoring
    3. During exits

 

  1. During the pre-investment phase, the BII team uses their in-house Business Integrity team to scrutinize the following aspects of the fund and manager:
    1. The fund manager, partners and Key Persons
    2. The Fund and its co-investors
    3. The existing and past portfolio of the fund manager
  2. The scrutiny includes background checks, forensic audits, Know Your Customer (KYC), Anti-Money Laundering (AML), vendor agreements, and Counter Terrorist Financing (CFT) checks on all of the above entities and persons. Their review includes all associated persons, their past dealings and investments as well as the necessary infrastructure and capability of the fund manager to monitor the above. BII views the local laws for such measures such as AML, CFT and KYC as the bare minimum that needs to be maintained by the fund manager and insists on a higher degree of care for such matters.

 

  1. BII hosts a series of discussions with the fund manager on their findings and insists on covenants from the fund manager on the basic level of adherence to their standards. This is followed by intensive training sessions and a roadmap for the fund manager through a “Business Integrity Action Plan” (BIAP) - details in Appendix Item 1. This is in addition to scrutiny of the track record of the manager, its investment performance, returns, portfolio construction, etc. This is routine diligence in common with other investors.

 

  1. The rigour placed on the diligence of the manager in terms of governance is above and beyond what any other investor undertakes for such investments. BII’s approach also appreciates the key risk in funds is the pedigree of the fund manager. To this effect, BII insists on modification of the fund documents to include governance and risk mitigation measures that empower the investors in such funds to take action against an errant fund manager. This includes having intentional conversations with the fund manager on the need for such measures, including:
    1. Introduction of “Removal Conduct” in the fund documents (detailed in Appendix Item 2)
    2. Clear procedure for removal of the manager for such Removal Conduct
    3. Measures to remove the Manager for actions other than such Removal Conduct (subject to adequate safeguards against abuse)
    4. Insist on a contractual standard of care by the fund manager and key persons, including an acknowledgment of their fiduciary responsibility to their investors

 

  1. Furthermore, BII insists on covenants and safeguards by the manager regarding its investments and portfolio construction. This includes the following practises:
    1. a negative list of areas the fund cannot invest in
    2. Excusal rights (ie, the right to recuse BII from certain investments that don’t fit BII’s mandate)
    3. Enhanced reporting to BII
    4. Mandatory Environment and Social (E&S) as well as Business Integrity and governance checks by the manager
    5. Inclusion of BII criteria in all portfolio investments undertaken by the fund

 

  1. Many of these rights are unique to BII and are incorporated as part of the core strategy of the fund. These practises go beyond what a routine investor in such funds insists on. These are accepted by the fund and the manager due to the mandate of BII and the signal to the market of a higher quality of processes that a BII investment signifies. An investment from a development finance institute like BII is the hallmark of a marquee manager due to the intense scrutiny and practises of BII.

 

  1. BII’s philosophy towards an ecosystem has always been to leverage key players to have a multiplier effect. Fund managers play an outsized multiplier effect on local ecosystems due to the capital they manage, giving them the ability to foster good behaviour and safeguards in their investments. This leads to a multiplier effect across an ecosystem and raises the bar for all ecosystem participants. This cannot be achieved through direct investments into an ecosystem as it would take years to generate the kind of impact BII’s fund investments generate through this strategy.

 

How effectively does BII manage funds following its initial investment? How does BII evaluate the impact of its investments?

 

  1. The BII team has worked closely with its investments across the Indian ecosystem to enable growth, deeper governance execution and monitoring, and the design and implementation of impact measurement frameworks. BII is an active investor with a focus on adding value and maximizing the development impact across its portfolio. Beyond continuous and deep monitoring of its investments, BII actively enables impact goals for its portfolio by sharing expertise, enabling structured training, and actively developing tools and guidance for all stakeholders. BII has dedicated expert teams across ESG, gender, climate change, business integrity and other key areas who are available to the portfolio for advice, resources, and support.

 

  1. BII leverages its key role in the Indian venture ecosystem to incentivize and drive progress against clear impact goals on inclusion, climate, diversity, jobs creation and eradication of poverty. A specific example is the role BII has played in driving deeper diversity and inclusion across institutions within the geographies that it operates in.BII has been central in the development of the 2X Challenge, which is intended to increase gender lens investing from development finance institutions. Besides actively driving participation in the challenge across direct investments, and introducing structure around measurement and monitoring, BII has also enabled adoption across the investment firms that it supports. 

 

  1. Female representation in the Alternative Investments (VC/PE) industry stands at 8-14% globally. BII was integral to helping shape 3one4’s commitment to intentional inclusion, having achieved:
    1. A representation of 50% women across the team of 26 professionals in total
    2. 4 out of 6 (67%) of the team leads are women
    3. 50% of the management of the firm are women
    4. Team members from every primary region of India – North, West, South, and East – with a wide variety in languages spoken, beliefs, and personal backgrounds
    5. Team members from 14 states that speak 11 languages in total
    6. Team members from diverse streams of training, with degrees in accounting, engineering, business, legal, company secretarial, economics, literature, and the arts

 

Amplifying Impact Across The Portfolio

 

  1. 3one4’s portfolio spans multiple sectors, including Consumer Tech, Fintech, Digital Health, SaaS, and Enterprise/Small Business Enablement. Within these sectors, we actively invest in areas such as climate tech, edtech, food and agritech, EV and energy systems, logistics and distribution, semiconductor design, rural consumption, mobility, Indic language-focused applications, and more.

 

  1. 3one4 Capital’s broad investment areas enable significant opportunities for pan-sector impact. BII has actively leveraged their investment in, and partnership with, 3one4 Capital to drive progress against the SDGs across multiple sectors at scale. They have led focused direct investments and deep partnerships across the portfolio with companies that leverage technology to create amplified impact across communities. The BII team has actively collaborated with 3one4 Capital on designing unique, high-impact initiatives with the firm and its portfolio. A few of these are described here and in the appendix:

 

Dozee:

 

  1. Dozee is a DeepTech Digital Health investment made by 3one4 Capital in 2020 that has transformed patient monitoring at home and in hospitals. It is the first US-FDA 510K certified Remote Patient Monitoring (RPM) system in India. Dozee’s product involves the placement of a thin sensor sheet under the mattress, that utilizes proprietary algorithms with Ballistocardiography (BCG) to contactlessly measure and continuously monitor vitals, converting any standard hospital bed into a step-down ICU. Dozee leverages this data to generate an Early Warning Score enabling early detection of health deterioration for timely medical intervention to provide unparalleled patient safety. This allows the hospital healthcare staff to make better data-backed clinical decisions thereby while easing their patient monitoring burden.

 

  1. Dozee saw widespread adoption of its solution across public and private healthcare establishments because of their critical role in helping hospital administrations manage the COVID-19 pandemic. Dozee has been able to achieve particularly strong penetration in previously neglected regions by strengthening secondary and tertiary health infrastructure at the level of district and sub-district hospitals in India. Their impact across India is summarized in the figure below:

  1. BII recently partnered with Dozee to scale its impact across public hospitals and new geographies with a clear goal of access to quality healthcare to additional~600,000 high-risk patients over the next two years. The primary focus of the partnership involves upgrading hospital beds in ~140 public hospitals across India into step down ICUs with the Dozee platform, as part of the MillionICU Initiative. The MillionICU initiative has already benefited 46 hospitals across 15+ districts and has saved 25,000+ nursing hours. This partnership is helping to alleviate the burden on healthcare staff and increase patients’ access to quality and affordable healthcare in India.
  2. In addition to the MillionICU initiative, BII is also working closely with Dozee to expand into African markets. This is a significant opportunity for Dozee to increase its impact and reach new communities in need of improved healthcare. BII's support in this area is helping Dozee navigate the complexities of entering new markets and scale the impact of its technology globally.
  3. BII has similarly led investments and deep partnerships with companies like Betterplace and WeRize. The details of these partnerships can be found in the appendix (Item 3 and 4). 

Conclusion

  1. India has spent the better part of the previous decade focusing on unlocking access to basic amenities for millions of Indians, building sustainable consumption and production value chains, and developing institutional capacity towards a resilient, inclusive future. It has pioneered the Digital Public Goods model and built a system of interoperable modules that form the basis for delivering income support and relief to millions while allowing the private sector to innovate on top of it to develop world-class products and services. Startups are leading the charge here by leveraging these unique platforms to scale inclusive and innovative solutions for India, driving dramatic impact on outcomes across health, education, economic productivity, climate change, livelihood, gender equality and poverty eradication.
  2. Beyond the work BII leads through its direct investments in India, its investments in domestic VC/PE firms have been critical in institutionalizing and scaling local support for the Indian innovation ecosystem while also enhancing transparency and governance. As India evolves rapidly there are high development needs and large gaps in financing across sectors. Within this dynamic environment, BII leads with intentional investment and deep collaboration across sectors to drive productive, sustainable and inclusive development for the country.
  3. 3one4 is deeply grateful for the support from BII to shape and direct our institutional approach to building inclusive value through our investments in Indian startups. Delivering industry-leading performance alongside our inclusion and impact ideals is a delicate balance that we would not have achieved without BII’s integral involvement.

APPENDIX

 

ITEM 1: Referenced in paragraph 19

Business Integrity Action Plan (BIAP): Matters contained in the BIAP include:

    1. Mandated Business Integrity training sessions for the fund manager and senior personnel
    2. Formalization of a KYC, AML and CFT framework for the fund manager, covering the investors in the fund, the portfolio companies, investors in the portfolio companies, etc. This goes all to the way to the Ultimate Beneficial Owner (UBO), the actual individual person who has control or economic benefits of the investment
    3. Risk assessment frameworks across business models that the fund invests in. Special emphasis is placed on financial services and fintech companies, which are crucial linchpins of the financial systems of the geographies such entities operate in
    4. Assessment of the capability and competence of any outsourced personnel engaged by the fund manager for such requirements.
    5. Capacity building exercises for the fund manager, fund administrator, key persons to allow them to absorb and practise these requirements. This includes templates and toolkits for their portfolio companies
    6. Reporting frameworks and timelines for the above
    7. Regular monitoring calls on the aforementioned processes

 

 

ITEM 2: Referenced in paragraph 20

“Removal Conduct” means any of the following circumstances:

  1. With respect to the Fund Manager, any of the Key Persons and any of their respective Affiliates, any conduct or lack of conduct that constitutes any of the following:
    1. fraud, bad faith or willful misconduct;
    2. gross negligence or reckless disregard in relation to activities of the Fund;
    3. either (A) a breach of Section [*] (Standard of Care), or (B) a material breach of any of the other terms of this Agreement or of any other Fund Document;
    4. a material violation of securities, commodities, AML/OFAC or corrupt practice laws, rules or regulations, provided that, other than in the case of the Key Persons, such violations are limited to conduct or lack of conduct in relation to the activities of the Fund;
    5. criminal conduct; provided that, other than in the case of the Key Persons, such conduct is limited to crimes related and material to the duties to and with respect to the General Partner, the Fund Manager or any Fund Vehicle, and for which the maximum sentence is more than a fine; or
    6. any order, judgment or decree of any court, arbitral tribunal or regulatory authority which prohibits, prevents or materially impairs such Person from carrying on its duties or performing its obligations with respect to the Fund; and
  2. With respect to the Fund Manager, insolvency, administration, dissolution, liquidation, involuntary reorganization, bankruptcy or suspension of payments (or equivalent under foreign law).

 

 

ITEM 2: Referenced in paragraphs 6 and 33

Betterplace: Betterplace, a 3one4 portfolio company, is a global full-stack tech platform for frontline workforce management. Betterplace enables large enterprises globally to hire, manage, upskill, engage and retain their blue and grey collar workforce. By taking a horizontal approach, BetterPlace has integrated a fragmented value chain, rapidly formalizing every blue-collar intensive industry segment, and uniquely deepening access to credit, improved earning opportunities, upskilling, healthcare and professional credibility for millions of frontline workers.

3one4 enabled BII’s evaluation, diligence and investment into BetterPlace. This partnership has amplified the company's ability to scale its products for blue and grey collar workers across India and SE Asia. Additionally, BII launched a formidable initiative with BetterPlace to increase women's participation in the frontline workforce, with a clear goal to upskill and employ 100,000 women workers by 2024. As per The Frontline Index Report by BetterPlace, women constitute only 3% of the total workers in the frontline labour force. Through this partnership with BII, BetterPlace will work with ecosystem players across the country to equip women workers with the skills they need to build a better life for themselves, while also working with employer organizations to create a more equitable workforce. The initiative aims to not only increase women's participation in the workforce, but also to increase their earnings per hour by more than 10%. The BII-Betterplace initiative is seen as a blueprint for transforming the workforce and uplifting women's economic empowerment in India and around the world.

BII has also closely worked with the company to set up internal processes and Environmental, Social, and Governance (ESG) Frameworks. This has allowed BetterPlace to integrate sustainable and responsible practices into its operations, which aligns with the company's mission to create a more equitable and inclusive workforce.

ITEM 3: Referenced in paragraphs 6 and 33

WeRize: WeRize is a full-stack small-city market expansion platform for traditional financial institutions that are unable to reach and properly service these customers. WeRize leverages 3+ billion data points across 800k+ households to create customized lending, insurance and savings products for these customers that fit the unique needs and income levels of these small city customers. Additionally these products are scaled and delivered through a network of thousands of freelancers on the ground across towns in India.

The investment led by BII into WeRize has had a significant impact on the company's growth and expansion. With the capital provided by BII, WeRize has been able to expand its reach to 2000+ cities, resulting in 1 million registered customers on the platform. Additionally, the association with BII has helped to enhance WeRize's reputation, which has in turn opened access to banks and other lenders for the company. As a result, WeRize has been able to form partnerships with reputable financial institutions such as HDB and HDFC. BII's expertise and guidance has been invaluable to WeRize, helping the company to optimize its strategies and operations to better serve its customers through affordable financial products.

The investment by BII has been instrumental in enabling WeRize to expand its reach and impact, as well as open up new opportunities for partnerships and investments. The partnership has enabled WeRize to accelerate financial inclusion to lower income groups across India at incredible scale.The company's commitment to ESG compliance, along with the guidance provided by BII, makes it a responsible and sustainable partner for future investments.