Venture capital has had a dramatic shift, particularly obvious in the story of Tiger Global’s ambitious $12.7 billion venture fund. This represents a significant departure from what was once considered the ideal fund size of $400-750 million, and the results have been sobering. Experts from “This Week In Startups”, discussed the rise and fall of Tiger Global’s investment strategies and I am going to examine their discussion to see what went wrong.
Tiger Global’s aggressive deployment strategy marked a radical experiment in venture capital. Rather than following the traditional 3-4 year deployment cycle, they rushed to invest in hundreds of startups within a compressed timeframe. The numbers tell a stark story – 315 startups in 2021 alone.
The strategy seemed simple: deploy capital as quickly as possible into any promising Series B or C company during the 2020-2022 period. Many portfolio companies received offers of $50-100 million, mirroring the approach of other aggressive investors like Masayoshi Son’s SoftBank.
The results of this strategy are now becoming clear through data from CalSTRS (California State Teachers Retirement System). Their investment in Tiger’s 2021 fund has been marked down from $93 million to $65 million, representing a negative 15% IRR and placing it in the bottom decile of comparable funds.
The Fundamental Flaws
Several critical issues emerged with Tiger’s approach:
- Limited due diligence capability given the pace of investments
- Insufficient support staff to assist portfolio companies
- Valuation inflation due to competitive pressure
- Loss of key investment professionals who departed as problems emerged
The rapid deployment strategy eliminated one of venture capital’s key risk management tools: time diversification. By investing over months instead of years, Tiger missed the opportunity to average into different market conditions and valuations.
The Hidden Costs
The management fees alone were staggering. At even 1% of $12.7 billion, the annual fees would reach $125 million. This created a perverse incentive to deploy capital quickly, potentially at the expense of proper due diligence and valuation discipline.
The consequences for portfolio companies have been severe. Many now face the challenge of operating at valuations that may take years to grow into. Some are experiencing revenue declines, forcing difficult decisions about staffing and strategy.
Lessons for the Future
The Tiger Global story offers crucial lessons for the venture capital industry:
- Speed should not come at the expense of thorough evaluation
- Fund size must align with deployment capability
- Post-investment support infrastructure is essential
- Valuation discipline matters more than deployment pace
While it’s still early in the fund’s lifecycle, the initial results suggest that attempting to scale venture capital investment to this degree may be fundamentally flawed. The traditional venture model, with its emphasis on careful selection and active portfolio management, appears to remain the more sustainable approach.
The future may still hold some hope for Tiger’s portfolio. It only takes a few exceptional investments to generate significant returns. However, the likelihood of finding these outliers diminishes when investment decisions are rushed and support resources are stretched thin.
This experience should serve as a cautionary tale for the venture capital industry. While the allure of rapid deployment and massive scale is understandable, the fundamentals of successful venture investing – careful diligence, appropriate pacing, and robust post-investment support – remain as important as ever.
Frequently Asked Questions
Q: Why did Tiger Global adopt such an aggressive investment strategy?
The strategy was driven by several factors: abundant capital availability, competitive pressure to deploy funds quickly, and substantial management fees that incentivized rapid deployment. They believed they could capture market share by moving faster than traditional venture firms.
Q: What are the typical deployment timeframes for venture capital funds?
Traditional venture capital funds typically deploy capital over 3-4 years, followed by 8-11 years of portfolio management. The total fund lifecycle usually spans 12-15 years before final closeout.
Q: How does Tiger Global’s performance compare to industry standards?
Current data shows Tiger’s 2021 fund performing in the bottom decile with a negative 15% IRR. While early in the fund’s lifecycle, this performance lags significantly behind industry benchmarks.
Q: What happens to portfolio companies when investment strategies like this fail?
Portfolio companies often face challenges including difficult cost reductions, revenue pressure, and the need to operate at lower valuations for extended periods. They may also lose valuable support and guidance from their investors.
Q: Can Tiger Global’s fund still generate positive returns?
While possible, success would require several portfolio companies to achieve exceptional outcomes. The compressed investment timeline and limited due diligence may have reduced the likelihood of finding such outlier investments.
