This column was first published in SvD Näringsliv, in Swedish, on May 3rd, 2021.
The offer is simple: cash on the table – fast. The success is enormous. The hedge fund Tiger Global is turning the venture capital world upside down. It is only a matter of time before the aggressive Spotify investor enters Sweden again.
Venture capitalists like to emphasize their ability to identify and invest in disruptive companies earlier than others. All with a methodology that, somewhat simplified, is about building relationships with entrepreneurs, discussing the business idea with colleagues, spending weeks in different phases of due diligence and then offering a first term sheet to negotiate.
That approach, the very standard model for how business is conducted, has been torn apart by the hedge fund Tiger Global (sometimes called “Tiger King” with reference to the popular Netflix series). Away with slow processes and due diligence. Away also with the ambition to only do a handful of deals per year. And in with a strategy that is more about going wide – four investments in just one week and often under much more loose conditions.
When Tiger Global invested in Innovaccer, a cloud healthcare company, it only took three days from the first call until there was a signed letter of intent. The deal meant that the company’s value increased to $1.3 billion, which can be compared with $305 million a year earlier. As investor Everett Randle of the Founders Fund put it – “Tiger is eating your lunch (& your deals)”.
The explanation why Tiger Global act like they do can be found in how they view their capital. In normal cases, venture capitalists invests the money fairly evenly over the life of the fund, which is usually several years. Tiger has instead decided to invest as much as possible, as quickly and as early as possible.
This means that the companies in which the hedge fund has invested develop longer before the fund’s maturity ends. Or – as is often the case with companies that are financed by venture capital – they go up in smoke altogether. But as Tiger Global often enters later phases, accuracy is high. The fund’s investments include Coinbase, Square, Alibaba and Spotify, which they owned around 7 percent of at the IPO in 2018. It is only a matter of time before they invest in a Swedish company again. There is plenty of capital and they have become increasingly aggressive.
Tiger Global has 13 funds with assets of $65 billion. The latest fund, which closed in early April, is one of the world’s largest to date with a value of $6.5 billion.
More investments provide increased transparency in the companies, which in turn makes it easier to be able to invest even more in the companies that are doing well. Those who do not do well are ignored – this is how the model works for the entire venture capital industry. This gives Tiger Global a larger selection to evaluate, and expects that the success of the companies that are doing well will compensate for those who drop out.
By acting quickly, they also turn another accepted truth upside down: that there are methods and skills around how to identify which companies can be successful. Tiger Global’s new model thus seems to be about the opposite – that you do your best to invest in as much as possible, with large positions in late stages and at high valuations. For entrepreneurs, this means more capital at a lower dilution.
The speed of the investments raises some critical questions. To almost completely skip ordinary due diligence leads to an increased risk of irregularities. It is conceivable that the investors in Tiger Global have temporarily let this slide, but the risk is still latent. In addition, having such a large portfolio of investments also means that it is not possible to spend very much time with each one. Tiger Global solves this by offering the companies services from Bain, one of the world’s largest management consulting firms. It is almost the opposite of the established trend where you help your investments with everything from strategy to recruitment. Tiger Global also does not want any board seats. The company gets fast money that it can use to grow, but gets no help in doing so.
As with all funds of this kind, it takes many years before you see the outcome of a change in strategy. On the other hand, it is quite clear that Tiger Global has garnered a great deal of astonishment and concern in venture capital circles.
Last week, a Swedish investor was asked about their view of Tiger Global and cautiously replied that they hoped that personal relationships also weigh in when an entrepreneur chooses who they want to work with. The question that the entire industry is now asking itself is whether these relationships weigh more heavily than a fast process – and a higher valuation.
This column was first published in SvD Näringsliv, in Swedish, on May 3rd, 2021.