A game without rules. How Tiger Global Management is Changing Investment Strategies

What can be understood by rules in the VC

If we talk about venture capitalism as a game with rules, we need to know the main players. First, it's classic close VC funds. They open a closed fund, raise money from their LPs, make investments & exits and close the fund several years later.

• The fund's duty to LP is to generate acceptable returns.
• The duty for Founders is to offer them attractive conditions by fair prise.
• The duty for its own Partners/Managers is to maximize their profits by carry dollars.

Hence, here occurs two main rules of the ?venture game? mechanism:

1. You must be able to keep the obligations to LP and companies. If this fails, then the fund will not be able to raise more money or attract great startups.
2. You can increase the fund's turnover using any strategies and approaches that do not contradict the law. If we accept this concept, it becomes apparent that there are countless ways to play the game. And winning tactics in a game can change and evolve radically over time.

Everett Randle says venture capital play cannot be divided into ?right? (or ?fair?) and ?wrong?. And those market players who think so simply cannot recognize the emergence of more advanced game techniques.

How Tiger Global has changed the way we invest

Tiger Global Management is a hedge fund that invests in high-growth technology companies from a variety of sectors.?

The strategy of the Tigers can be described as follows:

• Be aggressive in pre-empting good tech businesses;
• Move quickly through diligence & term sheet issuance;
• Pay high prices relative to historical norms and/or competitors;
• Take a lightweight approach to company involvement post-investment;
• Invest constantly.

The Tigers have developed a universal strategy that allows them to offer companies a better, faster and cheaper product, while guaranteeing more profit than their competitors.

But what is the Tigers' investment strategy in the real deal?

The answer is simple: ?Invest as much capital as the fund can physically, with a minimum internal rate of return of 18%?.?

How does it work??

Most funds think about investing pace in terms of deployment schedules. Usually, this deployment period is between 2-4 years, and fund managers do their best to invest along this timeline. After determining a deployment schedule, the fund focuses on maximizing returns on each investment in that period.?

So if you raise a $1B fund, invest 1/3 of it every year and your investments are set to 3x as a blended basket at their exit, you will receive $667M net gains per year. (To make the math easy to understand, we skipped formulas)

But at some point, the Tigers thought: ?What will happen if we forget about the schedules and long plans? What happens if we speed up deals at least 1,5 times and just increase their number??.?

Their annual net gains would be $1B.

Despite portfolio terminal MoM returns declining an entire turn from 3x to 2x, they are still making 1.5x the gains per year of deployment. While most funds still live in a world of deployment schedules, Tiger Global threw the schedule out the window, and turned the velocity dial to high level

The second important point is that the Tigers do not meddle in the management of companies. Typically, classic funds try to take at least one seat on the company's board of directors. They explain this by development assistance, support and forced supervision.?

The Tigers don't need this, their logic is built in this way:

?VCs are rarely helpful at the growth stage, so the best product I can offer founders is a cheaper, less-dilutive capital, a quick & minimally distracting fundraising process, and to stay completely out of their way when we’re on the cap table. This approach also enables me to invest at high velocity despite having a lean team?.