Thursday, May 6, 2021

Tiger Global: Moving Fast and Breaking Things?

"Move fast and break things," that was Mark Zuckerberg's (in)famous motto. Venture capitalists loved it. Disruption was the new buzzword, the perhaps the word. If you weren't disrupting something, you weren't worth financing. Now it seems a big hedge fund is disrupting venture capital investing and VCs are not happy! Change, disruption, creative destruction...all great stuff until they happen to you!!

Axios and Everett Randle, a VC himself, tells the story of how Tiger Global, a $65 billion dollar "crossover" hedge fund that's been investing in private markets for over a decade, is upending the clubby, cloistered VC industry. Here's a summary:

Traditional venture capitalists like to think of themselves as Yodas of investing...finding and guiding Padawans (promising startups) into full-fledged Jedis (unicorns ready for an IPO) with their knowledge, wisdom and expertise. They raise comparatively small funds <$1 billion of assets under management and deploy capital over 4-5 years. Tiger has a different take, it doesn't believe that VCs really add much value to talented entrepreneurs beyond the cash they invest (you know, "those who can't do...become VC" or something like that). So, they offer gobs of money, because "missing out on a hot deal is a much bigger mistake in VC than overpaying for the same deal." In fact, Tiger deliberately overpays to shuts out rivals and generally leave founders alone to do their thing, which can be very attractive to experienced entrepreneurs (get more money and greater autonomy, who doesn't like that?). 

Tiger also raises massive funds— its last was $6.6 billion— and therefore also writes big checks to move the needle. On top of that it deploys its money fast...like very, very fast, within 18-24 months. How? Well, because it effectively outsources due diligence to top-tier VCs. "If the likes of Sequoia and Kleiner Perkins and Andreessen Horowitz all have term sheets out to a company, Tiger is happy to trust their judgment," and swoop in with a briefcase full of money.

While traditional VCs focus on maximizing returns on each investment in a given period, Tiger is focused on maximizing deployment ("thanks for the term sheet [insert top-tier VC name], well take it from here and add 25%). They are happy with a lower IRR/ investment because they make substantially more investments than their competitors, driving superior $ investment gains for themselves over time. As Randle notes "Tiger has developed the first structural, non-brand driven competitive advantage and flywheel at scale in venture. And they did it by throwing away a bunch of stale norms and made-up rules about how venture/growth should be practiced, and replacing them with a system that enables them to outcompete VCs on their own turf. That is why Tiger is going to eat VC."

So, what does it mean for the VC industry? Well, Randle has a great J.C. Penny (what else?) analogy: "When choosing between capital providers, sometimes founders will want the $12 Amazon Prime 1-day-shipping Carhartt T-Shirt (Tiger), sometimes they’ll want the $1,500 Gucci Cardigan (Sequoia, Benchmark, Andreessen Horowitz) but very rarely will they want the $22 J.C. Penney Hoodie (nearly everyone else). You really, really don’t want to be the VC version of J.C. Penney."

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