There has been plenty of chatter, both serious and joking, about the rise of Tiger Global’s push into Venture Capital and the impact it has had on the industry. Most of the dialog has been centered around outbidding other venture funds with big checks and large valuations. Others on how they don’t ask for Board seats or otherwise allow the founders to largely operate un-encombered. While both are certainly major reasons as more and more experienced founders, especially in a founders market, know they can search for capital and find investors who are willing to offer more favorable terms and fewer strings attached, there is a less discuss factor that I think will redefine the future of VC, the facts that, as a Hedge Fund, Tiger has unprecedented access to public market data.
While startups are often the cradles of business innovation, they actually tend to be lagging markets. Startups, for the most part, capitalize on macro trends happening in the world and then build services and tools that solve for specific use cases that take advantage of that larger trend? Did Facebook invent connectivity? No, but they took advantage of the late 2000s and early 2010 trend of our work increasingly going online and the need for people to have an easy way to share their lives and connect in this new digital frontier.
Given this dynamic, public markets often are leading indicators to private markets and the performance of these companies can give direction as to where startup innovation has the best chance to perform and have a strong outcome. What is an example of this in action? FinTech.
From 2017 to 2018, VC dollars invested in FinTech startup funding rounds more than doubled from $26B to $55B. In 2021 so far, 1 out of every 5 venture dollars raised has gone into FinTech startups. If you step back and look at the public markets, specifically financial stocks relative to the S&P 500 Index, Financial companies outperformed the broader market by 40% from 2015–2018. More specifically, Consumer Finance and Capital Markets companies outperformed the broader markets by 47–50%. Fast forward to 2020–2021 and we have record numbers of venture funding going into startups in this industry and the IPOs of venture-backed Consumer Finance and Capital Market startups such as Robinhood, Coinbase, Affirm, SoFi and others.
Hedger Funds like Tiger Global are analyzing and playing in these markets and as they execute their public market strategies they gain a unique insight into these industries, how public equities are performing. Through the positions they take in public companies they also get access to leadership at those companies who are able to offer insights into the industry as to where there are opportunities for disruption and innovation. Market incumbents make great litmus tests as their pain points often are startups windows of opportunity.
For Tiger, being armed with this data and primary feedback, their venture team is armed with an additional layer of information to help de-risk investments. If you have a higher degree of certainty about where the world is headed, you can move with conviction and afford to offer more favorable terms if you feel strongly about the potential outcomes.
Tiger’s much into venture has forced the entire venture capital industry to evolve and adapt. While Rolling funds have increased access to emerging managers and solo GPs and mega-funds like Andreessen and Sequoia have been the two initial favorite venture evolutions, I have another trend that, for those of you that know me, I have been working on as a pet project for the last year or so. Will VC funds need to evolve to offer more than just venture financing? If you boil down what we discussed above from Tiger, their main advantage is simply they have more data. By being investors in public markets they have more data points to invest off of and that is what gives them such an advantage. Could VC funds introduce a similar strategy?
Most venture funds as they are currently constructed probably can’t become hedge funds overnight, but could a hedge fund and a VC fund team up? The VC funds get access to the Hedge Fund’s market insights and the Hedge Fund can then in return direct institutional dollars for private assets through their partner VC funds (which they already do, this would just be an even tighter working partnership). What about debt and non-dilutive funding like ARR factoring? Could a VC fund install their own Pipe or Capchase style fund to invest and support their portfolio with a mix of equity and non-dilutive capital? The data required to administer the non-dilutive financing could help funds better spot the winners as they emerge and more proactively put capital to work through those founders.
Tiger Global has certainly demonstrated that there are capital allocators willing to push the envelope on the venture model. Overall, I think more innovation is yet to come as more and more Non-Traditional Investors enter the VC space. Given that their backgrounds are primarily in other asset classes, they will bring the research, analytics, and diligence methods they are used to in those markets and apply them to startups and venture investing. It will be interesting to watch as the industry adapts and evolves over the next decade, have any thoughts around what innovation might happen or is already happening? Reach out or hit reply and let us know, would love to get your thoughts on this.