Kyle Harrison
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Tiger Global Is a Winning Machine

Mario Gabriele 2021 View original ↗

Tiger Global Is a Winning Machine

Mario Gabriele’s Generalist piece on how Tiger Global Management rewired growth investing — and the clearest account in the corpus of a fund winning by being excellent at exactly one thing.

The frame that does the work: an investor has four jobs — sourcing deals, evaluating businesses, winning the deal, and supporting the company. Conventional wisdom says be good at all four and great at one. Tiger is the best fund in the world at winning, and deliberately outsources or declines the rest: diligence to Bain, support to a voucher for Bain and Heidrick & Struggles, sourcing partly to seeded seed funds asked “how do we become the only partner you bring Series As to?”

The lineage matters too. Chase Coleman came out of Julian Robertson’s Tiger Management, which screened applicants with a 450-question test and paid twenty-somethings eight figures if they produced — “he threw you the ball.” The talent machine is the inheritance, not the strategy.

And the metaphor Gabriele lands on: venture became blitz chess. Tiger trades depth for speed and wins on the clock. The closing risk is Bobby Fischer’s — “blitz chess kills your ideas” — plus the structural one: Tiger pays high prices because public markets are hot on tech, and a sharp downturn changes that arithmetic.

publish: false — the type default for longform. Two things would need thinking about before that ever changed: these notes run long enough to approximate the article rather than summarise it, and they carry Mario Gabriele’s anonymous sourcing (“the venture manager I spoke to”, “one manager recalled”) — reporting given to him in confidence rather than to Kyle.

Highlights

  • Tiger’s current private market thesis is simple: we are still in the opening stages of the digital revolution. For those who began evangelizing the “software opportunity” decades ago, that we have yet to reach maturation may come as a surprise.
  • Just as a16z did a decade ago, Tiger has disrupted the venture market, showing a new way to win.
  • How does Tiger invest across geographies at a rate of roughly a deal a day? **By delegating elements of deal sourcing and evaluation to consultancies like Bain. **By doing so, Tiger is able to move much faster with broader coverage. This maneuver also turns a fixed cost into a variable one.
  • The fact that so many founders find Tiger’s laissez-faire attitude attractive exemplifies the lack of trust many have in VC’s value propositions.
  • As a result, what once looked like a standard chess game — all careful strategy and deliberation — has quickened into blitz chess. That variation requires players to make their move in 10 minutes or less, favoring rapid decision-making and acting on instinct.
  • Even one of the greatest players of all time, Hikaru Nakamura, has said “[Blitz] is just getting positions where you can move fast. I mean, it’s not chess.”
    • Fast capital deployment is a muscle that has to be developed over time
  • Tiger Global’s leader, Chase Coleman, began professional life at a fund that prioritized flexible thinking and a meritocratic structure.
  • As a 25-year old, Coleman saw opportunity in the tech sector. To capitalize on it, he had to adjust his fund’s mandate multiple times over. Contrary Growth
  • Julian Robertson’s style would later be succinctly depicted as simply buying the best companies and shorting the worst.
    • A gift for spotting talent
      • “Julian is deservedly famous for hiring young talent.”
      • Starting in the 1990s, Tiger required applicants to complete a 450-question test that took over three hours to complete.
      • “Is it more important to get on well with your team or to challenge them? Would you prefer to be intellectually right but lose money or to be intellectually wrong but save the trade?”
      • Descendant vehicles include Viking, Coatue, Lone Pine, Maveric, Blue Ridge, and dozens of others.
    • A meritocratic approach
      • While the rest of Wall Street operated according to an almost militaristic hierarchy, Robertson gave talent opportunities to score, irrespective of their age or experience.
      • He didn’t give a shit how old you were, he didn’t give a shit if you’d paid your dues, he didn’t give a shit how long you’d worked for him…he threw you the ball.
      • Those with the hot hand were richly rewarded, too. If you were capable of producing the goods, Robertson had no qualms paying you for it. “He would pay twenty-somethings eight-figure money if they put points on the board,” Kalir said.
    • Superior pattern recognition
      • None of this would have mattered if Robertson, and those around him, had not been shrewd analysts, skilled at pattern matching.
      • A keen understanding of business fundamentals seems to have contributed to Tiger’s flexibility as an investor.
    • A flexible investing mandate
  • Tiger Global Management
    • Spotting Talent
      • Chief among the similarities was a nose for talent.
      • The first investors Coleman hired at the new fund were Scott Shleifer, Feroz Dewan, and Karthik Sarma. All three have carved out extraordinarily successful careers in the years since. Shleifer heads Tiger’s private equity team and is worth a reported $5 billion. Dewan spent 15 years at Tiger, taking over day-to-day management for a time before starting his own fund, Arena Holdings. Sarma left after five years to start SRS Investment Management; just last week, the Financial Times reported that the vehicle was sitting on up to $5 billion in unrealized gains thanks to a well-timed bet on Avis.
    • Tiger Global had a knack for identifying businesses with an advantageous set of characteristics. Once they’d done so, grasping the shape of the entity in question, they’d look for companies with similar complexions in different markets.
    • Flipkart’s CEO spoke of the Tiger investor’s influence on the ecosystem, describing Lee Fixel as “the pioneer who single-handedly put the Indian startup scene on the global map.”
    • While Fixel moved quickly, he seemed to favor a more surreptitious, understated method of investing. A manager of a leading venture fund described Fixel’s approach as “shadowy and surgical”; you would hear nothing of his movements only to come across his name on the cap table.
    • Tiger effectively said to these investors: You are still thinking too small. We are earlier than you realize, and winners will be orders of magnitude larger than we currently believe.
    • The venture manager I spoke to said that it looked like Tiger went from investing in the top 2% of tech companies to the top 10%.
  • The Playbook
    • Volpi’s Four Roles of an Investor
      • Sourcing deals. You can’t invest if you don’t see any deals. To start deploying capital effectively, you need to find ways to attract opportunities. Those might come directly from entrepreneurs or other investors.
      • Evaluating businesses. Every investor — even Tiger — sees more deals than they could possibly invest in. To choose wisely, you need to conduct diligence and assess a business’s potential.
      • Winning the deal. The best startups are usually able to choose from multiple capital partners. If you want to invest, you’ll need to prove your worth and outbid or outmaneuver competitors.
      • Supporting the company. Once you’ve invested, it’s time to get to work helping your portfolio. Your goal is to improve the company’s chances of success and build a positive reputation.
    • Traditional wisdom is that to be a great VC, you need to be good at all of these and great at one or more.
    • This is Tiger’s calling card: it is the best fund in the world at winning deals.
    • Tiger’s Mandate
      • Classic VCs are often looking to clear a 30% internal rate of return (IRR) on investments; Tiger is likely hoping for something closer to 20%.
      • Now, reasonably, you might say, well, why not just invest more money into traditional venture funds?
      • Usually, the answer is that it is not possible to do so. While venture funds have grown, the way they approach sourcing, diligence, and support (discussed in a moment) means there is a cap on the amount of capital they can put to work.
      • Notable names include retirement plans for JP Morgan, 3M, Duke University Endowment (DUMAC); foundations from the Pritzker Foundation, Rockefeller Foundation, and Lasker Foundation families; and insurance companies like American General Life Insurance Company, Variable Annuity Life Insurance Company, and Western National Life Insurance Company.
    • Sourcing
      • Tiger takes two specific steps to bolster its sourcing:
        • Seeding other funds.
        • Hiring consultants.
      • The source I spoke to noted that Tiger essentially asks these managers, “How do we become the only partner you bring Series As to?”
      • As you might expect, Tiger seems less interested in cultivating relationships with growth stage colleagues. These are, after all, competitors looking to maximize their allocation in hot rounds. The manager of a renowned fund said of John Curtius, one of Shleifer’s most prominent lieutenants, “John has made no effort to build a relationship with me…no one from Tiger has.”
      • These companies span continents, and in some cases, are competitive with each other. That’s an unusual practice in venture capital — most consider it poor form and anti-founder to do so. That Tiger has managed to skirt criticism on this front is down to the firm’s hands-off approach
      • It’s easy to pull other themes from the portfolio — digital business banking, restaurant tech, and SMB operations are all prominently featured. If these focus areas sound a little bland, a little general, well, that’s kind of the point. While firms like Union Square Ventures (USV) have been surgical in defining and executing thoughtful, detailed theses, Tiger is happy to say “Tech = good” and run with it.
    • Diligence
      • The difference is that traditional funds conduct their diligence in-house, whereas Tiger outsources it. The fund reportedly spends hundreds of millions on Bain’s services every year, with much of that dedicated to company evaluation. Given Tiger is earning between $1.5 billion and $2 billion a year in management fees, the fund can certainly afford it.
      • Tiger can add new areas of coverage as it needs, not unlike a startup spinning up new servers via AWS. Suppose Shleifer suddenly decides he wants to finance startups in Pakistan’s food delivery market. He doesn’t need to set up a dedicated local office and hire experts in the industry — he can call someone at Bain. With offices around the world and diverse talent, the consulting shop can staff a team overnight.
      • Niftily, by working in this way, Tiger effectively turns a fixed cost (employee salaries) into a variable one (consulting as needed).
      • One manager recalled how a Tiger investor had shown up to a portfolio company with hundreds of pages of customer calls, clearly produced by a consulting firm. Amazingly, Tiger paid for all of this research in advance of the company raising a round.
    • Winning
      • Some of my sources estimated Tiger’s premium to be somewhere around 25-50%, while others suggested the fund was willing to pay multiples of competitors.
      • One source summarized Tiger’s approach to valuation, “I honestly think [they pay] what it takes to get the job done, in a lot of cases.”
      • Does this mean that Tiger overpays for its deals?
      • Possibly, though it’s also feasible venture investors have simply underpriced private tech companies for the last few decades.
      • Entrepreneurs I spoke to explained that processes with Tiger closed in a matter of days, while other VCs took weeks to make a decision.
      • That Tiger can do this is, again, only possible because of its model. It has the latitude to invest more frequently at a lower return threshold and has usually received outsourced diligence before the process has formally kicked off. The entrepreneur remarked that in his first call with Tiger’s team, it was so clear they “know exactly what they want.”
      • Though still combative, venture capital has the decorum of a gentleman’s boxing match; the hedge fund world is a bare-knuckled brawl.
    • Supporting
      • For the last decade, the venture market has been reacting to a16z’s game, defined by its commitment to portfolio support.
      • While some VCs can meaningfully change a company’s trajectory with their involvement, many provide little more than a Rolodex and the occasional unedifying phone call. Because of this perception of over-promising and under-delivering, many entrepreneurs view such promises with skepticism.
      • One experienced founder explained the appeal of Tiger’s unobtrusiveness, “I know what I need to do. I don’t need babysitting.”
      • Once you’re a part of Tiger’s portfolio, you get access to Bain’s consulting services for free. One founder playfully referred to this as “Tiger Vouchers,” available to be spent at your discretion.
      • Though less frequently discussed, a similar arrangement exists with elite recruiting firm Heidrick & Struggles. When it comes time to find their next executive, portfolio companies can tap the search firm, gratis. Talent
      • While most established funds offer significant access, Tiger’s is rather different from most venture firms. Specifically, Shleifer’s team can connect entrepreneurs to public market investors with deep expertise in relevant industries.
      • I can’t speak highly enough about these guys. I would love to work with hedge fund investors for the rest of time…You become way more razor-sharp.
    • Move and Countermove
      • One of the most intriguing parts of Tiger’s strategy is that it is exceedingly hard for traditional venture funds to emulate. By increasing the speed of the game, Tiger effectively sacrifices precision. It accepts a higher error rate to deploy more capital, faster.
      • Tiger is not the end game of the venture market, though it does feel like the logical conclusion to a blitz chess strategy.
      • Others have suggested that Tiger catalyzes a bifurcation in the venture market, a split between the prestigious old-guard and fast-moving insurgents.
      • None of the founders I spoke to seemed to feel Tiger had a negative brand; on the contrary, they appeared proud of their affiliation with the firm.
      • Only an exceptional few truly spell out how these promises are kept and the difference they make. Broadly, venture firms will need to better surface their genuine expertise and translate its impact for founders during fundraising.
      • Right now, the fund is happy to pay high prices, knowing that public market investors are hot on tech. Should the sector experience a sharp downturn, Tiger could find itself in a situation in which its portfolio is significantly marked-down. Because of its broader strategy, it is perhaps likelier to have more losing bets than traditionally selective firms.
      • Bobby Fischer once said, “Blitz chess kills your ideas.” For Fischer, the rapidity of the game handicapped one’s ability to generate sophisticated, novel stratagems.