VENTURE CAPITAL

The End of Tiger Global?

• Tiger Global, one of the world’s largest hedge funds, lost $17B in Q1, erasing two-thirds of it’s total gains since inception in 2001
• Tiger just raised a massive $12.7B growth stage VC fund in March 2022
• Tiger has a prolific venture record and in 2021 averaged one VC deal every single day

My Take

Until about two weeks ago, Tiger Global was disrupting venture capital. The hedge-fund-turned-growth-stage-VC spent the last two years deploying mind boggling amounts of capital, astonishingly fast. They broke every rule of the venture capital playbook:

Tiger’s Modus Operandi

• Regularly does deals in less than 3 days
• Hires consulting firms like Bain to do due diligence
• Rarely takes a board seat
• All but created an application to fund startups. You send Tiger your metrics and they send you back a term sheet

The VC Playbook

• 2 weeks minimum to complete a deal
• All diligence is done in house
• Leading a round means a seat on the board
• Picking companies is the heart of the job

Unlike VCs who revel in choosing which companies to invest in, Tiger was creating an index of the private tech sector. Not picking companies, literally buying the market by outbidding other VCs and moving lighting fast. All on the bet that when these startups go public they’ll fetch even higher valuations. The kind you’d expect from tech stocks in 2021.

Except today tech stocks are down 50% to 80% from last year’s all-time highs and high-profile startups have started layoffs to prepare for an impending recession. Which means not only is Tiger down $17B on its public market tech bets, its growth stage VC portfolio is upside down.

Breaking the Game

Raising venture capital is a game. Lining up investors, pitching, managing timelines to ensure you get competing term sheets at the same time. Which FYI is the single best way to get leverage and close a deal when you’re raising your next round. It’s not easy.

Tiger eliminated all of that. It was 1-800-Venture-Dollars. And it scared VCs.

When VCs were asked about Tiger the past few years you invariably heard a riff on the line: ‘Great founders want partners not just capital. That’s us.’

But do they?

I had Trisha Kothari, Founder and CEO of Unit 21 on the Just Raised podcast last August. Here’s what she had to say about raising Unit 21’s $34M Series B from Tiger:

“Clarence and I really liked Tiger’s approach. They are very, very quick and we’ve been very fortunate to have success with fundraises in the past as well, but they’re very time consuming, which really takes us away from the business. It’s often quite a draining process.

What I found with Tiger’s approach, that was refreshing, is that they already knew quite a lot about the company by the time that they met with us for us. When we met with them, they asked us for our numbers and they had — really a spreadsheet — that we had to fill with standardized numbers and a valuation target range that’d be we’re interested in.

So we provided them a target valuation range, and then the next day they came to us with a term sheet and provided a valuation higher than the target range.  And what we found really interesting and refreshing about the entire process was that it was really fast, but that doesn’t mean that it wasn’t well researched.”

— Trisha Kothari, Founder and CEO of Unit 21

If there’s anything to take away from Tiger’s experiment owning the tech markets it’s that VCs can win more deals with fast, efficient decision making. And offering more than a founder’s asking price. I don’t expect the VC process to disappear any time soon but with the trillions tech has created over the past 2 decades, don’t expect Tiger to be the last to try and arbitrage away VC returns.

Bottom Line: Tiger built an index fund of late stage tech companies months before the end of the longest bull market in history.

The markdowns and down rounds haven’t started yet but if they arrive as expected they’ll obliterate Tiger’s VC returns. On the other hand, VCs have billions in dry powder – funds that have already been raised and need to be deployed – and Tiger’s $12.7B fund is less than 3 months old. So maybe VCs won’t be getting a reprieve from competing with Tiger after all.

MELTDOWN

Terra Goes to Zero

• LUNA and UST, two of the most popular crypto currencies went to $0 last week, incinerating $40 billion in investor funds
• The collapse triggered the sale of 80,000 bitcoin from Terra’s treasury to try and staunch the bleeding, crashing crypto markets
• LUNA, which traded for $116 less than 6 weeks ago, is now worth $0.00021
• This was a coordinated financial attack by attackers with $350M; they came away with over $800M in profit but remain anonymous

What Happened

This is the single largest collapse in crypto history. Millions of people were impacted and billions were lost. I’ve heard stories of newly minted VCs who lost their funds in UST. Binance, a trading exchange, lost $1.5B in UST.

Worst of all, since UST was ostensibly a stable coin that paid out an interest rate, it was supposed to be a safe reserve to hedge against inflation. Many investors lost their life savings.

What is a Stable Coin?

Stable coins are tokens pegged to the US dollar. They make it easy for crypto investors to cash in and out of crypto without having to settle with a bank.

The biggest stable coins are backed by actual dollars. Tether (USDT), USDC, and Binance’s BUSD are all collateralized stable coins backed by a treasury of dollars. Like holding a gold reserve if your currency is on the gold standard.

Then there are algorithmic stable coins. They aim to control the price of a token using algorithms that control supply in response to demand. Terra’s USDT was one of these.

TerraUSD / LUNA

The algorithm controlling Terra is complex enough to be hard to explain but evidently still seriously flawed enough for me to be writing about its collapse. I’ll give you my best shot.

To keep USDT pegged to the dollar Terra set up a second token, LUNA.

When USDT went above a dollar, say $1.10, people could exchange $1 worth of LUNA for 1 UST worth $1.10, making ten cents.

When USDT went below a dollar, say $0.90, people could exchange 1 UST for $1 of LUNA, making ten cents.

The two tokens used in parallel, played on investors’ self-interest to hold USDT to $1. Clever, in theory.

They also offered a nifty little interest rate of 19.5% a year for holding USDT. That attracted millions of people to invest and drove the total dollars invested into USDT over $18B.

Death Spiral

The problem is that using only one reserve asset like LUNA makes the system vulnerable to what analysts now call ‘the death spiral’.

The attackers, armed with $350M of their own money, borrowed an absurd 100,000 bitcoins or about $3.5B. They focused on breaking the peg, sending USDT below a dollar and then trading it in for LUNA to make a profit on the arbitrage. That sent the price on LUNA crashing and triggered massive panic selling of both LUNA and USDT, starting a spiral that cratered them both.

Takeaway: The consensus is that we’re going to get some kind of crypto regulation from this. Too many small, individual investors got burned and have no recourse. There are also big questions about who orchestrated the attack and where they came up with the $350M to do it. The rumors range from well known crypto VCs to hedge funds but as of now there’s no evidence.

This is a massive blow for decentralized finance and has spurred millions in outflows as investors pull out of risky projects, but founders are still building DeFi companies and crypto VCs are still investing. Over the long term it may even make the market stronger.

TWITTER

Elon Backtracks

At the All-In summit yesterday Elon compared Twitter’s bot problem to a house full of termites:

If a house is 5% termites that’s one thing. If it’s 95% termites… That’s not the same house.
– Elon Musk, All-In Podcast

He went so far as to say he believes the “at least 20%” of Twitter’s users are bots, not the 5% they claim in public filings.

Twitter’s stock closed at $37.39 a share yesterday, a $17 spread from $54.20 price Elon offered to take it public, meaning the market does not believe this deal will happen. Hard not to agree.

FROM THE PODCAST

Every week I interview up and coming founders to break down their business, how it fits into the market, and get a glimpse of what’s coming next in tech. Here’s a quick take from the Just Raised pod this week.

Empire DAO

Despite the pull back, VCs are backing a new home for the crypto community in NYC. With founder and CEO Mike Fraietta.

Product: 36,000 square feet of coworking space in SoHo Manhattan + tools to manage other community owned spaces with tokens

Innovation: Blockchain protocols like Solana and Ethereum are competing computing systems strivign to attract developers. By selling floors in the building to protocols Mike can build a modern hacker house here in NYC and charge more with less churn than selling office space.

Raised: $3M Seed from several crypto foundations including the Solana Foundation and as of yet undisclosed VCs

…utilizing tokenization and DAO type structures. Down to makerspaces in villages and towns and cities across the world. So the library is no longer funded by the government. The park no longer has a corporate sign or is funded by the government.

We’re able to self-organize and self fund through what we’re building here.

– Mike Fraietta, Founder of Empire DAO

Listen Here →

VC FUNDING 

Lightspark

Founder: David Marcus, former head if Facebook’s Libra crypto project

One Liner: Fast, cheap bitcoin payments via the bitcoin lighting network

Raise: Seed from Paradigm, A16Z Crypto, Thrive, Cotaue, Matrix, and Ribbit

Libra, the stable coin backed by Facebook, was intended to provide an internet native, secure currency for people across the globe. It wasn’t a bad idea, but since it came from Facebook’s toxic brand it was dead before it could get off the ground.

Now David Marcus, former Libra chief is taking some of his learnings and some of his old team and spinning out a new company to build out Bitcoin payments to do effectively the same thing. Given his background this is an obvious investment for VCs.

In a fun bit of drama, FTX founder Sam Bankman Fried said “bitcoin has no future as a payments network” in an interview and caught some heat from Bitcoin maxi Jack Dorsey on Twitter.

Mothership

Raise: $76M from Bill Gurley at Benchmark

One Liner: Marketplace for local, same day freight delivery

Founders have been circling last mile logistics for a decade. Now Mothership has raised what appears to be their first venture round to the tune of $76M, from Bill Gurley, a giant in the VC industry, who led Uber’s Series A and has deep experience in this space. This is one to watch.

It’s the Uber playbook. Build a network of delivery drivers in each city, scale up shipment volume, and serve companies like GoPuff and DoorDash.

Faire

Raise: $416M extension at a $12.2B valuation

VCs: Sequoia and Y Combinator

One Liner: Marketplace for retailers to buy items for their stores wholesale

Your favorite boutique store probably sources products from Faire. Founded just 5 years ago in 2017 the marketplace does over $1B in sales volume, has 450,000 retailers on the platform globally and more than 70,000 brands. It is incredible how fast businesses can be built.

Wildly, Faire just raised $400M in November but picked up another $416M this week to fill up the war chest, likely as a hedge against further market turbulence.

ONE FUN THING

Amazon Turns 25