Taming a Tiger: An Introduction to Venture Capital

Tiger Global, the $95bn venture capital technology fund, has already made a staggering 170 venture deals in start-ups this year, more than double its total in all of 2020 (PitchBook). Amounting to an impressive estimate of one deal a day, Tiger Global made 340 unlisted investments last year – splurging capital at a pace unheard of amongst venture capital firms (Nikkei Asia).


Born from one of the “tiger seeds” of Julian Robertson’s legendary hedge fund, Tiger Management (1980-2001), Tiger Global has quickly become one of the most profitable tech investors. It has invested in a broad array of technology companies; from online grocery delivery businesses (e.g. Getir) to ByteDance (TikTok), Tiger Global’s investments stretch internationally between the US, China, and India.


To contextualise Tiger’s unique strategy of deploying capital faster, paying higher prices, and willingly foregoing board seats, this article will act as an introduction to venture capital.


What is Venture Capital?


Venture capital (VC) is a form of private equity (PE) and a type of financing that investors provide to start-up companies and small businesses that are believed to have long-term growth potential. Similar to PE, VC funds typically comprises of capital from well-off investors, investment banks, and any other financial institutions.


However, there is a considerably higher risk due to the nature of VC targets (typically start-ups), which inherently entails the potential for above-average returns. For start-ups seeking capital for growth, VC investment is now seen as an almost necessary stage in their lifecycle (acting as a symbol of prestige and a signal of confidence). The downside is that investors usually get equity in the company.


One way of looking at VC is viewing it, broadly, as the actor nestled between Angel Investors and PE firms. If angel investors (as you would find on Dragon’s Den) are high net worth individuals who invest in fledgling business ideas, and PE is the industry filled with sophisticated firms who seek to capitalise upon undervalued established companies, then VC is the bridge between the two. Generally, VC targets emerging companies seeking substantial funds for the first time.


When Facebook acquired WhatsApp in 2014 for $22bn, it was an eyewatering victory for VC firm Sequoia Capital – turning its 2009 $60m investment into a staggering $3bn.


How does it work?


The first step for any start-up seeking VC investment is to create a business plan – typically coming in the form of a “pitch deck” (a swanky, glorified PowerPoint presentation). A pitch deck generally includes the key points of the business plan, the products and services provided, an overview of the market, high-level financial projections, and funding needs.

The investors will then conduct due diligence, thoroughly researching all claims made in the pitch deck. Due to the risk involved in VC, this stage is crucial – and some of the most thorough due diligence can be expected at this stage. Accordingly, VC analysts typically concentrate on particular industries (such as healthcare, tech, or even healthtech!)


Once due diligence is completed, investors will pledge an investment of capital in exchange for equity in the company. Usually, the deployment of capital occurs in rounds – with the VC firm playing an active role in carefully guiding the start-up towards funding-incentivised milestones.


Much like PE, VC firms will seek to exit their investment after roughly four to six years via a merger, acquisition, or initial public offering (IPO).


It must be noted that VC is synonymous with Silicon Valley, where the overwhelming majority of unicorns (a privately held start-up that achieves a value of over $1bn) are created and financed. Curiously, we have the “Silicon Roundabout” in East London, which is nowhere near as sunny or glamorous as California.


What makes Tiger Global different?


Tiger Global’s strategy diverts substantially from the norm via the following:


•“Pray and Spray”. In comparison to other VC firms, Tiger Global deploys capital at a substantially higher rate. For example, whilst other firms would invest $1bn over three years (333m per year), Tiger Global can deploy $1bn per year.

•Outsourcing due diligence. One of the most time-consuming processes within the VC investment process is conducting thorough due diligence in-house. To keep up with their investment, Tiger Global outsources this function to Bain (producing an incredibly lucrative mandate).

•A hands-off approach. Founders may be weary of VC investment as it entails the introduction of external management. Part of Tiger’s pitch is that it is an unobtrusive capital partner – a laissez-faire attitude that is proving to be incredibly attractive to founders.


Further Reading

https://www.readthegeneralist.com/briefing/tiger-global

https://www.ft.com/content/54bb342c-230f-4438-a4d7-7cbde010ea1a

https://www.ft.com/content/1dcdda5a-9274-4519-9a5f-c460b8e1b251