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Tiger Global Management LLC is one of the most dominant hedge funds in the world. Its footprint in the venture capital industry is staggering.
Last year, Tiger did 335 venture deals…almost one every single day. Its check size is colossal, often in the nine figures.
Those checks come within days with little if any due diligence. This steamroller approach has worked beautifully during the tech bull market of the last few years.
But now many major tech companies like Block Inc., Peloton Interactive Inc. and Robinhood Markets Inc. are down 50-80%. The broader Nasdaq is down 13% from its highs.
Here’s how Tiger could blow up:
1) Valuation multiples in tech compress. This is already happening, big time.
2) Startups Tiger invested in can’t grow into their valuations.
Maybe you’re still growing revenue like crazy. But if the valuation multiple is dropping, you may be unable to exceed the valuation of the prior round before that money runs out.
Tiger overpays more than anyone, so they’re at particular risk here.
3) Startup has to raise a down round. This is a round at a lower valuation than before.
4) Tiger may not want to invest since they already lost money on their first investment. Plus, if their whole portfolio is red, they have less cash available.
5) Huge negative signal from Tiger not re-investing, so the startup struggles to raise money.
6) There’s no one with a bigger bankroll or more willingness to overpay than Tiger, so the startup has few other places to go for funding.
7) Even as the company twists in the wind, Tiger’s involvement is minimal. They don’t join boards or advise founders.
In your toughest moment, your biggest investor is MIA.
8) Tiger suffers even more because its lack of diligence starts to bite. A hot market is the worst time to do minimal diligence, because frauds proliferate in frothy markets.
So Tiger loses in the honest companies and loses even more in the dishonest ones. Leading to…
9) A spiral of big, collapsing startups resulting in catastrophic losses for Tiger.
Tiger’s playbook seemed innovative in a hot market. But it could quickly turn disastrous.
Who survives this? Later stage firms that didn’t overpay along with most early stage investors.
Those of us who come in early are paying very low prices compared to a fund like Tiger. Even if valuations fall, we have a lot more wiggle room than they do.
Whatever happens, I intend to keep investing early in great companies. Let the chips fall where they may.
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