How Hedge Funds Are Leading the Race to Stake Startups

From PitchBook — read the original.

Kyle’s reading notes, April 26th 2021. Quoted passages are from the article.

Notes

• How hedge funds are leading the race to stake startups Bifurcation in Investing
• After recently meeting with one such founder about 30 times and helping the company put together diligence materials, Vertex was sure that they were the frontrunner to lead its Series A.
• “The founder told us that they wanted to work with us, but the other bid was an order of magnitude higher,” said Chase Roberts, a principal with Vertex US. The firm’s small fund, its second vehicle of $150 million, precluded Vertex from writing a larger check, and Roberts had no choice but to step aside.
• The trend of wooing fast-growing startups by offering to pay as much as 50% to 100% higher than traditional VCs is led most famously by Tiger Global Management and Coatue Management. But the practice of paying significantly more for a chance to get into hot companies is increasingly being adopted by other multi-strategy firms including Altimeter, Dragoneer, D1 Capital Partners and recent Tiger Global offshoot Addition, as well as growth equity investor Insight Partners, venture capitalists told PitchBook News.
• “The big difference now is the speed of investing, and valuations are like nothing else I’ve seen in my more than 20 years in venture,” said a veteran VC investor who asked to remain anonymous because he regularly works with these firms.
• Another early-stage investor recently told Roberts that he had received a preemptive term sheet for one of his portfolio companies but decided to check if Tiger Global would up the price. This investor took a screenshot of the offer and key statistics for the company and sent them via text message to someone at the hedge fund, Roberts said. “Within 48 hours he had a term sheet from Tiger for about $50 million more than the previous valuation,” Roberts said. What’s In a Valuation?
• “Tiger is essentially indexing late-stage venture by having their research team figure out who are the best two or three companies in each category and geography. They then preempt the next rounds of these companies with a term sheet that is at a significant premium to the last series of financing,” the SaaS-focused investor said.
• Since the scarcest resource in Silicon Valley is access and not capital, hedge funds are happy to overpay at earlier stages for a chance to invest hundreds of millions into winning companies before they go public, the SaaS-focused VC explained. “‘Loss leader’ is too strong of a word, but what they are doing is buying access,” he said.
• “Insight is investing like it’s going out of style. They are raising bigger and bigger funds and deploying them faster and faster,” the veteran VC said about the growth equity firm, which invests from seed-stage deals to LBOs.
• At the same time, everyone in the industry needs to have a strong conviction about startups they want to back before a potential portfolio company begins raising. “There is a lot more preemption; otherwise a traditional firm won’t win the auction. That’s why you see rounds every six months or three months now,” the SaaS-focused VC said.