Jon: All right. This is Peter Harris and Jon Bradshaw Peters with the University Growth Fund. I'm a founder on this on this podcast. We just talk about common VC things from a VC perspective or a founder perspective. And so we like to debate and we want to have honest I think we want to be known. For one thing, it is just as giving, as transparent as we can while avoiding the NDAs that you and I might have.
Peter: We like to be raw.
Jon: How many NDAs have you signed in your life?
Jon: Too many to many that VCs don't sign NDAs. Now for stories. All right. So this week, this episode, it is now March 23rd. This episode is going to come out in two weeks. But earlier in March of 2023 of this year, it came out that Tiger Global's investment portfolio was down 33% even before Tiger Global kind of became like the laughing stock of the poster child of venture excess.
Jon: It's just it's just continuing to crash. And I'm curious, like, what does this mean for you, Peter? And also, as we compare to other recent deals like Stripe just raised $6.5 billion. But my understanding is that their investment, their valuation was marked down by 50%. So what is it that what does this mean for the industry? Does this mean that most of the deals we've seen in the past, like if you raise a $10 million valuation last time, no matter your success and growth?
Jon: Because I think Stripe had growth and success. You have to do a 33 to 50% markdown or what.
Peter: Yeah, well, I mean, I think a lot of companies, especially if you have to raise right now, are taking like big beatings on valuation.
Jon: What is a big beating? 30%, 10%, 20%.
Peter: 30%, 50%. I mean, there's some publicly traded companies that are down over 90%. I don't think you're seeing much of that happen in the startup world, because if you write down valuations by 90%, people just quit. Right. Yeah. So, yeah, but look, I mean, there is a trailing effect. Stock market's down a lot. It takes time for that to flow through to the venture space because most venture funds do not adjust valuations on a deal and nobody does it on a daily basis.
Peter: Quarterly. If you do it on a quarterly basis, you really most do it whenever there's a new event. So the company raises more money. And so the reality is, is that right now most venture holdings are probably being held above what the companies are actually worth, right? Because they just those companies haven't raised more money. And then on top of that, which further compounds it, is that venture capitalists will invest at the same valuation, but then they'll dump a ton of terms into the into the round.
Peter: That effectively reduced the valuation. So one trick to do that is like, hey, we're going to give you a ton of warrant coverage, like penny warrants that allow you to buy more stock in the future for a penny a piece. And so, yeah, the valuation looks flat to everybody else, but in reality, they also got 100% warrant coverage, which means that the valuation is effectively a half of what's being reported.
Peter: Right. So there are a bunch of games that get played there too, that artificially prop up valuations. so yeah, I mean, look, there's. But over time, ultimately like private market valuations tend to kind of come back into parallel alongside public. You don't really want them to get too out of whack when you do. That's what happens.
Peter: What's happening now with companies that are down like 90%, right? High fliers in the private space obviously massively overvalued. They go public. The public markets just absolutely trashed them. And then if you're an investor, you kind of lose no matter what. I think it's interesting that you bring up Tiger Global and, yeah, I thought I thought this is interesting where, you know, they're down 33% on their current marks.
Peter: Last year there was a lot of, you know, speculation about how how much their portfolio was hurting. And you know, what I think is interesting about Tiger Global is that they in a lot of ways, you know, could be considered like the cause or major contributor of the the run up of 2021. And the reason for that is because they have this really interesting business model where they were basically flipping venture on its head.
Peter: You know, traditionally venture is you meet with the founder, they go back and forth. If you still like a universe that you invite the founders and they pitched to your partnership and you kind of like take your time to make it investment decision, write a check, etc., etc.. you know, most founders plan on spending anywhere between like two and six months to raise around like, so kind of like long drawn out processes that in a lot of ways make sense because you're kind of getting in bed to a long term relationship with this venture investor or slash, you know, or entrepreneur depending on what side of the table you're sitting.
Peter: And so you want to, you know, build these relationships over time. And what Tiger Global did is that they came in and they said, okay, what are the things that founders care about? They don't care about like being buddy buddy with VCs. That's not what they care about. And they don't well, they may appreciate guidance at the board level, I don't think.
Peter: And I'd be curious what you think of this, but I don't think founders like, really care about bringing on board members. Right. Especially if you consider the fact that like a board member, like a board's primary job is to hire fire a CEO. So, like, you want to bring on like more people that, like, could vote you out of your spot, right?
Peter: sort of like they don't really care about board seats. They don't really want to spend a ton of time doing this because it's a massive distraction from the other work they could be doing. so what if and then, and then they all want high valuation as of course. So what if we leverage Bain Capital or Bain Consulting excuse me, Bain Consulting.
Peter: We hire them. We pay them millions of dollars a year. I think they paid them like $100 million in 2021, Bain Consulting goes, and they find all of the like the best companies within an industry draft up a report handed over to Tiger. Tiger gets it. They do a call with the CEO. They issue them a like they basically like just confirm a few data points with them and then they issue them a term sheet and then they fund it like a week later and they don't take a board seat and they they give them the valuation that the entrepreneur wants.
Peter: Right. Like this checks every box for the entrepreneur. And what that did was all of a sudden all these other VCs that were like, used to this, like, hey, drawn out experience of making investments over the course of several months. They had to move super fast because you didn't want to miss out on the one deal that mattered that year because you couldn't move fast enough, right?
Peter: If you missed it because like you didn't believe the vision or whatever, like, that's fine. yeah, that still might be process related, but you don't want to miss out because you have poor processes, right? Because that's a fixable, solvable like solution. So you got all these VCs that were like, terrified, moving super fast. Like I had one portfolio company and, you know, they were like, yeah, we like, we had a conversation with Tiger and this other VC was a larger also a large VC either like we don't take money from them, like give us a shot, right?
Peter: And they moved having a nurse to, to do that deal at the end of the day so that they didn't get boxed out by by Tiger. So Tiger creates like this whole big thing moving really fast, disrupting a ton of VCs. Tons of VCs are like, pissed about it, and they're all whining like, it's not fair that like, you know, Tiger's doing this and just wait, just you wait.
Peter: They're paying or they're overpaying on these deals and they will rue the day. Right. And so what's happening now, it's really interesting is all these is, of course, like and, you know, whatever they're like, yeah, I told you, I told you like Tiger was going to be in real trouble. Right? And we're looking at this and they're down 30%.
Peter: Of course they're down. They should be down 50% or whatever it might be. Right. And as I was thinking about it, I was like, the thing is, is as these that Tiger is like playing this totally different game that people don't like fully realize or recognize. And what's also interesting is that there's been chatter that Tiger is like kind of quietly selling off some of positions.
Peter: And these companies and people like, that's because they need liquidity. And that that may be the case. I don't have any insight there. but from my perspective, if you look at the way that Tiger Global is playing the game, they essentially were like, we're not super sensitive to valuation like we are to an extent, like as to being within range, but like we're not super sensitive to it.
Peter: We move fast, we don't do a ton of dollars or we don't take board seats. And if you think about that, what other investor on the on the the venture stack fits that bill is seed stage investors. Right? They tend not to be I mean if you think about like like how do you value like you know, two women in a garage working on something, right.
Peter: Like is that really worth like 5 million bucks or 7 million or whatever, you know, valuation? No, it's not. It's not worth anything. Right. So the investors not super valuation sensitive. It's got to be in within range. Right. But like, as long as it's like sub 10 million for the most part, they don't care. so not valuations.
Peter: I typically don't take board seats, move relatively fast, don't do a ton of diligence. Right. and so what I think is actually what Tiger Global is doing is they're saying, you know what, we're going to play the growth equity game and to a certain extent the venture game like a seed fund. And the difference is, is that we're not we're not like swinging the bat for like $1,000,000,000 outcome.
Peter: And these investments we're sitting in the bat for the ten, the 50 and $100 billion outcomes. Because if we invest at $1,000,000,000 in this company and we really believe that like one out of every 50 that we invest in has a chance of going from a billion to being worth 100 billion, then boom, we just return to our fund and maybe then some on that one deal.
Peter: And that is what venture is all about, right? and so as you think about their strategy, like if I'm them and maybe they are doing this, I don't know, I don't have any like insider baseball there, If you do tell, you know, comment, let us know what you think of this. Come on the show. But if I'm them the advantage that I have that seed funds don't have is that my investments now are much, much smaller.
Peter: Number of my investments will go to zero. Right. If your seed fund you make 50 investments, 49 of them go to zero and one like carries the day. It's Google, right? If you're on economy, if you're Tiger, you're like, hey, look, I invest in companies that are generating real revenue. These things are worth something. So what I can do is I'm taking the same risk.
Peter: I've pushed out the yield curve because I, I paid a higher valuation on these companies, which means I need a much higher outcome. But as long as I'm doing a ton of deals, hopefully one of those or two of those or three of those will end up being worth 50, 75, $100 billion and all of these other ones that are smaller that I look at, you know, I've got now a year, year and a half, two years of data.
Peter: I can look at those and say, you know, I don't think these hand these are good. This handful is like a good group of companies. They're never going to be worth 50 or 100 billion. Right. So what I'm going to do right now is I'm going to start liquidating them. I'm going to start selling. I'm going to keep my winners that I think long term get that big.
Peter: I'm going to liquidate everything else.
Jon: So as an outsider, do you think Tiger Global is winning or struggling?
Peter: you know, it's a good question. I think I think to a certain extent, they are struggling, but I don't know that I would say like they are definitely out. I think that there is a reasonable case to be made that like they're playing the game that they always set out to play. I think it's just painful right now because it would be nice to be able to sell these companies that are obviously not the winners in a better market, right?
Peter: Where you could get your money back or get more of your money back. And now they have to sell them at huge discounts. And I think that's painful. But if you compare them to a normal seed fund, the the alternative is they would have been a write off. So, yeah, it's painful and there's some struggle there. But I don't I don't think it's as bad as everybody thinks it is.
Jon: So you're curious about their model, but you kind escaped. What was it? I forgot It was another example. It's like whenever you lose a large sum of money, no matter what it is. Bill Ackman. As I said in his podcast. No, he was on the 20 minute B.S.. Yeah, with Peter or whatever. No, you're not Peter. Sam Harris.
Jon: No, no, stay or whatever. Peter Stebbins.
Jon: Means he's on with Harry Stubbins and he was talking about their $400 million loss in Netflix and it just got plastered all over the news. But if you look at the percentage of their fund, it's a small number. Yeah. Yeah. Do you think the news is being unfair to them based on portfolio theory?
Peter: Yeah. And their overall strategy, Right. Like, let's say they're still holding on to that one company that's going to be worth 100 billion and they bought it at like $2 billion valuation and they're going to make 50 on that deal, isn't there? Then it doesn't matter that they like took a 50% haircut on a, you know, $50 million investment they made because they're going to make like, you know, billions of dollars on this other one that ends up succeeding.
Jon: Yeah, but are they trying to anoint monopolies? I mean, that's basically they're basically saying we think you can become a monopoly. We're going to give you so much cash, it's going to be hard to mess up and it's going to scare any other investor away.
Peter: But that's the beauty, is that it also reduces their downside risk from that perspective, too. Right? Right. So I like, hey, we're going to make like 50 bets, just like a seed fund. Well, but we're going to give them all enough money that like Maxim guys, the chance that they're worth something in the future, hopefully they're worth a lot, but at a minimum, they're worth something that we can sell and at least get our money back.
Peter: So anyways, I don't know, that's that's kind of my perspective on the Tiger Global. I'd be curious if anything I said is is accurate or not, but I just think it's funny how much people are kind of bashing on Tiger, not realizing that, you know, maybe this is all kind of part of the plan to to a certain extent.
Jon: But you're saying if someone came through and did it again, it's not necessarily a bad model.
Peter: Now? I think it's just a really smart model.
Jon: Just even in a lot of ways, one or two wins and they're golden.
Peter: Yeah, well, I mean, it's it's as good of a model at a minimum as like a seed stage fund. Yeah. And look, there is a lot of these funds that aren't going to survive this current environment and, you know, TBD, if if Tiger is going to either. Right. It could be that they didn't find that one or two that ends up being worth it.
Jon: So you see it's more of they didn't find the one or two versus the whole valuation game because like ten years ago with you two angels. Yeah. Founders trying to raise up more than 1,000,002 and a half million pre pre your post-money valuation was unheard of. Yeah. And now that number is 5 to 12.5 million. Yeah. It's the same traction.
Jon: Yeah. And inflation has not matched that growth.
Peter: Yeah. Well yeah, yeah. That's not inflation. I mean it is an indication of inflation.
Jon: yeah. But it's not entirely I feel like.
Jon: Valuations have got to have grown faster than valuation has.
Peter: Yeah. That's because access to capital in this market has grown faster than inflation has. Broadly speaking.
Jon: So but if if you're saying Tiger global models correct, they're going to keep playing the games they play. Yeah. When does it stop?
Peter: Well, look, they're not playing the games right now. Not right.
Jon: Now. Doesn't mean they won't again, but they might. That doesn't mean that you can't you couldn't team up with Bill Ackman and say, hey, we're going to raise a $50 $50 billion funding. Just go. Just go slugging.
Peter: Yeah. You totally dead. Right. Part of the issue, though, that you have is you got to be able to find you got to put that 50 billion to work in good companies that have the potential of becoming really big. Right. It's like the other way to think about this is this VC set up years ago. They were talking about unicorns and they were this was like 2018 or something, 2019, which it feels kind of like so long ago now.
Peter: But they were like, Are most individual unicorns overvalued? Yes. But is the aggregate value of all unicorns overvalued? Probably not. It's probably undervalued because you're going to have some of those unicorns that end up becoming worth $100 billion. And if the aggregate value of all the unicorns at the time was like $50 billion or something like that, right.
Peter: Well, if a couple of them end up being worth 100 billion, which is totally reasonable and did indeed happen, then you would say like collectively it's undervalued. And so, you know, that's part of the strategy to a certain extent that Tiger is doing, is they're saying we want to be in every single unicorn and we know we're going to overpay.
Peter: It's going to feel like we're overpaying on every single one. But we know collectively that that collectively they're undervalued. And that's what we're banking on. And you have to have a giant war chest to be able to do that. Right. You can't because most growth equity funds, at least historically, were not big enough to play where they had a piece of every single unicorn.
Peter: Right. And they weren't set up in such a way that they could. Right. And that's what was unique and really interesting about Tiger Global's model is like, we will be large enough for a balance sheet or however you want to put it perspective, and we will give the terms they all want so that we can get into every single one of these unicorns anyways.
Peter: What do you think of my theories? Wrong, crazy.
Jon: I think we're going to see more Tiger Global.
Peter: Yeah, potentially.
Jon: I think this is going to be a trend.
Peter: Yeah, well, in order for us to see more Tiger Global's rates, interest rates will have to decline.
Jon: Well, I think what happens, raising.
Peter: More money becomes possible again.
Jon: I think it's also relative, right? VC funds will probably just shrink. Yeah, but it's just they have to sit there. They have to be large relative to I think valuations will come down, but they'll just be higher valuations. This doesn't.
Peter: Do you think valuations will come down permanently or temporarily.
Jon: Permanent. Well, no, not permanently. I just we have a cycle, right? Yeah, There's always cycles, feasts and famines and then people are just competing.
Peter: And the interesting thing though is that we still like even at the high of 2021, we didn't even touch the valuations of, of the dot coms. Okay? We didn't even come close. Anyway, thanks for indulging me. It's just something I've been thinking about a lot. A lot lately. I know you're listening to Tell us what you think it in the comments below.
Jon: Let us know you can reach us on Instagram, Twitter, YouTube comments. Just go to venture capital out of em and you can see all the places where we post.
Peter: All right. Thanks. All right.
