Tiger Global vs SoftBank: Part 1

Tiger Global and SoftBank are the de facto rulers of the venture capital kingdom, having made 1073 investments and 400 investments to date, respectively. But their investment approach cannot be more different. So in the first part of this three-part series, we’ll delve into Tiger Global’s history, its playbook, and current state of affairs.

History

Tiger Global, formerly Tiger Technology, was founded in 2001 amid the dot-com bust by Chase Coleman III. The firm was set up with the help of a US$25 million cheque from the legendary hedge fund founder Julian Robertson of a separate firm named Tiger Management. The New York-based firm started investing in public equities in 2001 before quickly branching into private equity a few years later. So the firm comprises a hedge fund business and a private equity business that invests in the startup ecosystem.

Tiger Global sensed an opportunity in Chinese public and private markets and correctly predicted the growth of internet-enabled retail in the country. Some of its notable early bets include Sina Corp, Sohu.com and NetEase, the “Yahoos of China,” led by investor Scott Shleifer. Scott Shleifer, who joined the firm in 2002 from private equity firm Blackstone Group now heads the private equities business. Some of Tiger’s early investments in US companies were in Facebook, LinkedIn, Amazon, and Netflix.  

The firm’s preferred investments are in public and private companies that are operating in the global internet, software, consumer, and financial technology sectors. The firm usually invests in Series A to Pre-IPO funding rounds. Tiger Global is notoriously press-shy, with its partners not willing to participate in media interviews. 

Tiger’s Playbook

Mandate

It all starts with Tiger’s unique mandate. Unlike traditional VCs, Tiger is not looking at achieving a higher Multiple of Money (MoM), instead, it aims to return more cash annually to its investors (more on this under Speed). This is particularly attractive to large LPs (limited partner) such as endowments and sovereign wealth funds, as they can keep reinvesting and putting more of their capital to work. Examples of such Tiger LPs include insurance companies like American General Life Insurance Company; retirement plans for JPMorgan and 3M; foundations like the Rockefeller, etc. 

Tiger Global’s LP base is very solid. According to its prospectus, 85% of outside capital comes from investors with whom the firm has more than a five-year relationship. The LP base is further strengthened by the fact that Tiger’s largest LP is its own employees. Means that the firm has real skin in the game, and its employees believe in the fund’s strategy. 

Deal Flow

Apart from the usual routes of deal flow, Tiger has two unique ways in which it improves its deal flow:  

• Seeding other funds:  Tiger maintains a close relationship with other seed funds and invests in them, ensuring that it maintains a tab on the upcoming rounds of seed-stage startups. The firm’s cosiness extends to Series A but is less interested in later-stage funds. 
• Hiring consultants: The New York-based firm is Bain’s largest customer and also relies on the work of EY and others. The consultants help Tiger with researching specific markets and surfacing prospects. Shleifer’s team then uses it to narrow down on a specific area and approach, and then they invest in multiple players across geographies. For example, one of Tiger’s areas of focus is grocery delivery, so the fund has backed startups across the spectrum- Jokr, Grofers (now Blinkit), Getir, Nuro, and more. Tiger reportedly spends hundreds of millions of dollars on Bain’s services every year, with most of it dedicated to company evaluation. But that pales in comparison to Tiger’s annual management fees, which is in the range of US$1.5 billion to US$2 billion. 

Speed

According to Crunchbase, Tiger moved at an unprecedented pace, having made 590 investments in 2021 alone or roughly 1.6 deals per day. 

While each fund has its own unique advantage, Tiger is the reigning champion when it comes to winning deals. The firm is willing to pay more than anyone else to close the deal and moves at lightning speed. Because for Tiger, losing out on a promising startup is a bigger mistake than overpaying for it. Tiger closes deals in a matter of days when it usually takes weeks to make a decision. 

Traditional VCs deploy funds within 2-4yrs, and fund managers focus on maximizing returns on each investment in that period. This can be illustrated as an equation: 

Terminal IRR or MoM x Capital Velocity = Total Amount of Capital Gains

So the returns (Terminal IRR or MoM) and the deployment pace (Capital Velocity) are the two variables that determine a fund’s profits in a given year. 

For example, in the case of a US$10 billion fund with a four-year deployment period and a 3x MoM on exit, this is the resulting equation:

3 x 2.5 = US$7.5 billion net gains/year [4yr deployment for a US$10B fund = 1/4 x US$10B deployed per year] 

The above is what traditional VCs do. Now let’s see what Tiger does: 

Tiger achieves a lower MoM of 2x but deploys capital faster- 2yrs: 

2 x 5 = US$10 billion net gains/year

So Tiger was able to achieve 1.33x more returns per year of deployment than traditional VCs despite a lower MoM. 

Due Diligence 

Often speed comes at a cost, and the quality of investments usually declines. And Tiger follows a light diligence process that sometimes takes just one day with a single meeting and a P&L or any readily available financial data. To counter issues arising from the seemingly light diligence process, the fund has a few tricks up its sleeves: 

• Tiger’s portfolio of 600+ startups gives it tremendous insight into the market. 
• The Bain consultants also lend their expertise in conducting due diligence. 
• Tiger is more than happy to co-invest with the likes of Andreessen Horowitz and Kleiner Perkins, assuming they would’ve done their homework. 

Hands-off approach

Unlike traditional VCs, Tiger strictly follows a hands-off approach. It doesn’t take board seats, and neither does it tell founders how to run their company. VCs usually stress on how they’re founder-friendly, hands-on and provide more than just funds, but as research shows, founders don’t really care about these services and instead value speed and favourable deal terms above all (apart from personal relationship and chemistry). And that’s exactly what Tiger does. It offers better deal terms- cheaper, less-dilutive capital and a quick fundraising process. The firm also makes Bain available to portfolio companies in case they need it. 

Once Predator, Now Prey

The pandemic year-2020 led to a windfall for Tiger. It ended the year with US$10.4 billion in profits, placing Coleman 14th in LCH Investments’ rankings of the greatest hedge fund managers of all time as measured by dollar gains for investors. Assets under management (AUM) across its hedge fund and private equity businesses reached US$90 billion. 

But Tiger’s performance seems to have fallen off a cliff recently, with losses reaching 52% this year. According to the FT, Tiger’s hedge fund had lost around US$17 billion in the first five months of this year, erasing a massive two-thirds of the dollar gains made for investors since its inception.
The firm has reduced its holdings in major tech stocks such as Netflix, Airbnb and Peloton. The value of Tiger’s public stock positions fell from US$46 billion at the end of 2021 to just over US$26 billion at the end of the first quarter. This is unsurprising given that global markets have been in freefall since the start of this year, and the Nasdaq Composite Index has plunged 29% in the past six months. 

The steep fall in Tiger Global’s public holdings inadvertently increased its exposure to illiquid venture capital investments, prompting the firm to tell investors in its hedge and long-only funds that, if they want to redeem, their private investments will be placed in a separate account that will be cashed out in the near future. The firm has taken other measures to appease its investors: 

• Cut its management fees for the hedge fund by half a percentage point to 1% through Dec 2023. 
• Clients can redeem as much as 33% of their investment this year, up from the usual limit of 25% for the hedge fund and 20% for the long-only fund.
• Modified its high-water mark, meaning that until the fund makes up more than 100% of lost investor cash, it will charge a lower performance fee of 10% on gains, down from 20%.

Despite the historic losses, Tiger’s hedge fund has apparently witnessed five times more inflows than the amount of redemption requests. 

Conclusion

With faster deployments and generous investments, Tiger risks dealing with a WeWork-like scenario. The firm has to ensure that its hands-off approach doesn’t lead to mismanagement of funds, corporate governance issues and lack of guidance for startups.  

But nevertheless, Tiger’s trailblazing velocity-focused strategy will redefine the venture capital landscape. Tiger has broken many long-held but outdated rules and norms of venture investing and its playbook is hard to replicate for traditional VCs. 

Despite Tiger’s better deal terms and hands-off approach, experienced board members and the brand value of raising capital from VCs such as Andreessen Horowitz and Sequoia Capital can be more beneficial for early-stage startups. 

Finally, it remains to be seen if Tiger Global will recover from such historical losses and return to its rightful position at the top of the food chain. 

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