Mahi Sall, Advisor, Fintech-Bank Partnerships, Payments and Financial Inclusivity
January 25th, 2023
Mahi Sall is the CEO & Founder of FinXpair, a Berlin-based strategic advisory boutique firm focu[...]
Tiger Global: what happens when ‘normal’ returns?
Sifted | Nicolas Colin | May 26, 2021
Not a day goes by without a new European startup announcing a large fundraising round co-led by US hedge fund Tiger Global. Some say it’s a radical change of approach in the venture capital industry, while others suggest that it’s a fad. But how can we explain the rise of Tiger Global in the VC landscape? And what difference will it make from a European perspective?
In truth, it was only a matter of time before hedge fund managers turned their attention to tech startups. By definition, hedge funds (or rather “alternative asset management firms”) have the most flexible approach to allocating capital across asset classes, and those who manage them are constantly chasing the highest returns possible. Therefore in a world that is becoming more digital by the day, hedge funds had to set their eyes on tech at some point.
See: Why a shift to Impact Investing will create big winners and big losers
The issue with tech startups and tech companies is that relatively few of them are listed. This arguably is a challenge for hedge funds, which are used to making bets on public markets where they enjoy abundant information, a broad range of potential targets and liquidity.
Follow the (VC) money
The approach that Tiger Global has embraced to deploy capital in tech is best understood through this lens.
It has to renounce the liquidity because we’re talking about companies that are still mostly private; but it can still diversify with a large portfolio and use the information that’s available to make fast and sound decisions. In this case, the information is not the detailed figures that you can find in a public company’s quarterly report or the alternative data sets you can buy from a broker (the occupancy rate of supermarket parking lots as measured by satellite imagery is a classic example), but rather the information revealed by what tier-1 VC firms are investing in. As soon as a founding team enters advanced discussion with one of these firms, it is time for Tiger Global to use that information (which they typically learn from the founders themselves), step in and make an offer.
See: High tech meets high finance: The real revolution on Wall Street
If following tier-1 VC firms is so easy, why isn’t everyone with billions of dollars under management doing it? For a simple reason: these VC firms don’t like to share, and when they decide to back a company, they usually don’t let anyone else participate in the round. The trick that Tiger Global is pulling to get its foot in the door is that it’s offering a better price.
Founders that have passed the Series A stage are eager to raise as much money as possible at a high valuation, and they don’t need a VC firm’s hands-on support as much as at the earlier stages. Traditional VC firms — including the most sought after — are forced to match the higher price offered by Tiger Global if they want to keep a slice of the round.
First came SoftBank
Before Tiger Global, SoftBank had a similar approach, but blunders like the infamous WeWork deal (and, maybe, the fact that it’s from Japan and led by a very unconventional executive, Masayoshi Son) made it easy for VC firms to castigate SoftBank and keep it out of many good deals.
On the other hand, the fact that Tiger Global comes from the most prestigious corner of the US financial services industry (its founder, Chase Coleman III, is one of the so-called “Tiger Cubs” — fund managers who started their careers with Julian Robertson’s legendary Tiger Management) makes it more difficult to depict it as the clueless intruder. (And, for the record, SoftBank just announced its most profitable year ever, so it was premature to ever write it off too.)
“No such approach would be possible without the current context of cheap capital and high valuations.”
No such approach would be possible, however, without the current context of cheap capital and high valuations. Tiger Global is on firm ground because it’s following the macro trend of software eating the world and tech entrepreneurship becoming a global phenomenon. But, having raised $6bn+ for its latest fund, it’s also relying on what is only a passing phase, enabled by the macroeconomic context and the fiscal and monetary profligacy of governments and central banks around the world.
The question that everyone’s asking these days is: what will happen to all the companies that have taken Tiger Global’s money when the latter trend reverses and everything goes back to normal — growth rates, cost of capital, valuations, governance, returns? Maybe they’ll have put that money to good use to gain market share and wipe out their competitors. But it could also end badly for some of them.
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