Playing Different Games

Author: Everett Randle at Founders Fund URL: https://randle.substack.com/p/playing-different-games One-line: Tiger isn’t breaking the rules of venture — it discarded the imaginary ones, built the first non-brand structural flywheel in growth investing, and is going to “eat VC” by selling founders Better/Faster/Cheaper Capital.

Highlights #Investing 101 2.0 #Bifurcation in Investing

• Ask 10 VCs for their thoughts on Tiger et al and most of them will react with a mix of dismissiveness and disgust. They’ll say that crossovers are drastically overpricing rounds, not doing enough diligence on their investments, or are in some other way breaking the spoken & unspoken “rules” of venture.
• By breaking many long-held but outdated rules & norms of venture/growth investing, Tiger has developed a flywheel that enables them to offer a better/faster/cheaper product to founders while generating more $ gains than their competitors. Tiger is eating VC, and with the right context, I think it’s clear why
• Even with his own life on the line, Vardis constrained himself to fighting by the rules of knighthood & honor, while Bronn did whatever he needed to do to survive and get his payday.
• Partners have sounded eerily like Lysa Arryn these past months. “Ugh, does Tiger even do work on their investments?” “They move so fast we can’t even get through our diligence process.” “We only lost to Tiger because they outbid us!” Meanwhile, Tiger continues on unbothered, recently closing on the 2nd largest VC fund ever and flexing a 26% Net IRR for its private funds in a recent investor letter.
• Venture/growth funds have duties to three stakeholder groups - their LPs (who give them money to invest), Founders (who let them invest in their companies), and their own General Partners/Managers (who they want to make rich(er)).
• A fund’s duty to Founders is to offer them an attractive enough “product” such that Founders choose to exchange equity in their businesses for the Fund’s cash over another competing fund’s cash. #VC as a Product
• If we look at venture/growth investing as a game, the duties to LPs and Founders above constitute the game’s two immutable rules - you must follow/succeed at both in order to play.
• Beyond that, you’re free to maximize carry $ by any strategy/means necessary (within legality). Any other rules that you or other players in the game choose to follow are imaginary, and don’t actually need to be followed.
• Tiger has introduced a new play style centered around velocity to disrupt the market and exploit their competition’s tendency to cling onto stale rules/norms.
• It takes an immense amount of trust with your LP base for them to give you the license/discretion to deploy capital this way. Tiger has two primary advantages here — the first is their strong 15+ year private fund track record, and the second is that collectively, Tiger’s own employees are its largest LP!
• A typical venture investment involves a pre-term sheet diligence process, ongoing board involvement from one or multiple Partners, and various other forms of portfolio company involvement. Intuitively, there are only so many boards a Partner can join and only so much work a team can handle. As the saying goes, “venture doesn’t scale”, and many firms simply aren’t built in a way that can handle a high velocity strategy.
• Tiger: VCs are rarely (if ever) helpful at the growth stage, so the best product I can offer founders is a high price (i.e. cheaper, less-dilutive capital), a quick & minimally distracting fundraise 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.
• Just as startups build & sell products to their customers, venture/growth funds also develop products that they “sell” to startup Founders during a fundraise. Funds have to do this because fundamentally, what they offer is a commodity, money. They need other reasons for why a Founder would choose their cash over another fund’s. As the saying goes “we’re in the business of selling money.” #VC as a Product
• A fund’s product consists of everything that affects a Founder & business before, during, and after an investment process that stems from the fund. Today, a typical venture/growth fund’s product looks something like this:
  • 2-4 week diligence process, including multiple calls with C-suite & function leaders, 3-5 facilitated customer introductions, an iterative list of data requests, etc.
  • A valuation that provides the fund with a strong base case return and a chance for a home-run outcome
  • The signaling / branding provided by the fund’s reputation
  • A board member (or multiple board members)
  • Other misc. investor “value-add” — access to the fund’s network, recruiting help, in-house operating/consulting teams, etc.
• Herein lies the second outdated (and false) norm/narrative that Tiger can exploit — the core pitch of most venture/growth products is built around the various areas of value-add that the fund will provide a startup, when in practice the funds provide little-to-no actual value.
• I call Tiger’s product for Founders Better/Faster/Cheaper Capital (or B.F.C. Capital), and it looks something like this:
  • Extremely light diligence process, sometimes just one day with a single meeting and a P&L or any readily available financial data
  • (Usually) the highest valuation offered by any large institutional fund — this means this is the “lowest cost of capital” option for Founders because the founder can raise more $ for the same amount of dilution or raise the same amount of $ for less dilution
  • No board involvement / very few touchpoints with the Tiger team
  • Access to Bain consultants if you want them for something
• Is this product going to be the best fit for every single funding round or Founder? Of course not. But if you’re a Founder who already has the board members / investors that you want on your cap table, has little use for more “investor value add”, and is sensitive to dilution, wouldn’t B.F.C. be an attractive way to raise capital? I certainly think so.
• It’s no Amazon flywheel, but the significance here is that venture/growth is generally devoid of flywheels / sustainable competitive advantages / moats, excluding those driven by brand (which are rare).
• Tiger has developed the first structural, non-brand driven competitive advantage and flywheel at scale in venture. And they did it by throwing away a bunch of stale norms and made-up rules about how venture/growth should be practiced, and replacing them with a system that enables them to outcompete VCs on their own turf. That is why Tiger is going to eat VC.
• Bifurcation in Investing: Ultimately & over time though, similar to what’s happened in retail over the last decade+, we’ll begin to see a middle squeeze in venture/growth. The most funds most insulated from the effects of this squeeze will be akin to
  • Luxury retailers (Apple, Sephora, Tiffany & Co.) — either via longstanding brand power (FF/Sequoia/a16z/etc.) or vertical focus/mindshare (Ribbit in Fintech), OR
  • Low-cost vendors (Walmart, Dollar General) — via high levels of scale and velocity driven by aggressive GPs, similar to Tiger (Addition, Coatue, etc.)
  • The most exposed and vulnerable will be funds stuck in the “middle”. When choosing between capital providers, sometimes Founders will want the $12 Amazon Prime 1-day-shipping Carhartt T-Shirt, sometimes they’ll want the $1,500 Gucci Cardigan, but very rarely will they want the $22 J.C. Penney Hoodie. You really, really don’t want to be the VC version of J.C. Penney.
• People in venture/growth like to deride Tiger, but as is the case with many things that are mocked, I think this attitude stems from misunderstanding more than anything else
• Don’t worry too much about the Partners at the J.C. Penney funds though - this shift will happen gradually, and they’ll still make plenty of money-making investments before Tiger et al can eat their lunch entirely. They’ll still be able to afford a nice cabin in Tahoe to go with their Mill Valley home, though it may have to be in gasp Truckee instead of on the lakefront. But if you’re an associate at a fund that fits the “stuck in the middle” profile? Run away as fast as you can — because there’s a fight starting, and in the end the spoils of war are going to Bronn of the Blackwater.
• Most investors at hedge funds work at a sociopathic pace, especially relative to the west-coast cultures of most VC firms. It is very hard to regularly compete against a team of people who work ~16 hours a day 6-7 days per week.

Connections

• Investing 101 2.0 — the essay is a foundational text for the “new rules of capital deployment” thesis.
• Bifurcation in Investing — the “middle squeeze”: luxury brand funds and low-cost velocity funds survive, the middle gets eaten.
• VC as a Product — money is a commodity; the fund’s “product” is everything around the check, and Tiger reengineered it into B.F.C. Capital.
• Inside Tiger Global’s Deal Machine — The Information’s reporting that this essay analyzes.
• Founders Fund — where Everett Randle wrote this.