A FEW YEARS ago SoftBank rewrote the rules of venture capital (VC). The Japanese tech conglomerate was handing out cash left and right to startup founders. Leading venture capitalists held conferences to discuss how their industry could survive the SoftBank onslaught. As some of SoftBank’s biggest investments unravelled, culminating with the collapse in September 2019 of the initial public offering (IPO) of WeWork, an office-sharing firm, Valley veterans gloated. It seemed to be just another “tourist investor”, as one VC luminary dubs those who occasionally traipse through Silicon Valley looking to pick up sexy startups.
Now SoftBank is being upstaged by another brash outsider. Between January and May Tiger Global Management, a New York hedge fund that also invests in private tech firms, ploughed money into 118 startups, ten times more than it backed in the same period in 2020, according to Crunchbase, a data provider. Its portfolio now counts more than 400 firms, including several behind some of the past year’s most eye-catching IPOs, for example Coinbase, a cryptocurrency exchange, and Roblox, a video-game maker. And, as it told investors in February, it is “searching for ways to make our investment flywheel spin faster”. Its new vehicle aims to raise an additional $10bn. That may be less than SoftBank’s gargantuan $100bn Vision Fund, but it is still an awful lot by VC standards—and the New Yorker may leave a more enduring mark on Silicon Valley than its deep-pocketed Japanese rival has.
Similarities between Tiger and SoftBank are easy to see. Both were backers of Alibaba, before the Chinese e-merchant went public and turned into a global giant. VC types commonly describe both firms as “aggressive”, even “crazy”. Once each identifies a target, it pounces; investment contracts are issued in days, skipping lengthy due diligence, often at valuations well above those suggested by conventional VCs. Just as SoftBank would occasionally sign ten-figure cheques when founders asked for eight or nine, Tiger Global sometimes talks entrepreneurs into taking cash when they do not need it. “Even after they have already invested they send text message after text message, asking whether they can put in more money,” says one founder recently backed by the firm.
Tiger Global abhors such comparisons. And it is indeed distinct from the Japanese group in important ways. SoftBank only got into tech investing in earnest a few years ago, having started out selling software, before moving into online services and telecoms. By contrast, Tiger Global has investing pedigree in spades. It is descended from Tiger Management, a hugely successful hedge fund founded by Julian Robinson, a Wall Street giant. It has been backing tech winners for nearly 20 years, both in China and, later, in America (with investments in, among others, Facebook). Over that period its funds have generated an average internal rate of return of 26% a year, twice that of comparable VC funds. Whereas Son Masayoshi, SoftBank’s messianic boss, calls all the shots at his firm, Tiger Global is no one-man show. And its partners eschew Mr Son’s embrace of individual founders based on a gut feeling in favour of a disciplined strategy centred on collecting a basket of firms in promising markets.
There is another difference. Whereas the arrival of Mr Son left denizens of Sand Hill Road in Palo Alto, where Silicon Valley VCs cluster, quaking in their Allbirds, they appear remarkably unfazed by Tiger’s presence. Despite competing with Tiger Global for early-stage investments, many VCs consider it a force for good: a source of capital that helps their portfolio companies grow faster or start projects they may otherwise have forgone. Yet even if the New York firm follows SoftBank’s trajectory and pulls back, which could happen if interest rates rise, capital grows scarcer and the tech rally fizzles, three factors that have contributed to its success are here to stay.
The first is the acceleration of dealmaking. Before the covid-19 pandemic, negotiations happened mostly in person, limiting the number of encounters. Meeting on Zoom and other video-conferencing platforms takes only a few clicks, allowing both founders and investors to talk to many more potential partners. In Silicon Valley, hardly a place known for foot-dragging, the common refrain these days is that “things have never moved faster.” Keeping up with Tiger Global and its fellow New Yorkers such as Coatue Management and Insight Partners is an important reason.
Second, Tiger Global has tried to be more systematic in evaluating startups. Although the firm never asks for board seats, considering it a waste of time, it knows plenty about its investments, thanks to a growing array of ever better metrics with which to judge companies’ performance. It has also created its own early-warning network to identify promising targets. If a new online service takes off in one region, for instance, it may be time to put money in a similar firm in another location. Many VC firms could learn a thing or two from this approach. “We are a bunch of horrible investors,” grimaces another veteran venture capitalist. “More than half of us don’t even return capital.” This recognition is music to the ears of their put-upon limited partners.
What the hand, dare seize the fire?
Tiger Global’s final impact may be the most profound. It reflects a shift the balance of power between investors and entrepreneurs. Traditionally, investors had the upper hand. Startup founders pilgrimaged to Sand Hill Road, seeking not just money but valuable advice that the best VCs would provide. Competition from Tiger Global and other tourists has forced Californian VCs to offer more generous terms, monetary and otherwise. That in turn has made entrepreneurs themselves more confident. “It’s no fun to be an investor these days,” sums up the boss of a startup preparing to go public. The question for moneymen in Silicon Valley (which remains overwhelmingly male) is less what startup to back and more whether a startup lets you invest. Quite the paw print.