Nylas CEO Gleb Polyakov had been following the Silicon Valley playbook for raising money: meet with firms; deal with associates, then partners; and try to clinch funding for his developer-tools startup.
Then Tiger Global handed over a term sheet.
When Polyakov alerted other firms interested in investing in his hot API maker to Tiger's offer, one of the more traditional firms he had been talking to abandoned the deal. There's an "old boys' club" and a "process" Silicon Valley VC firms like to follow, said Polyakov. "And if you don't follow the process they get very upset and very insulted, which seems a little silly."
The last firm to turn the tables on Sand Hill Road before Tiger was SoftBank. The Japanese conglomerate had raised a $100 billion fund to invest in tech startups, and its "capital cannon," as Uber CEO Dara Khosrowshahi called it, became a thing entrepreneurs wanted behind them in support, not facing them as a threat. The investment strategy set off an arms race of firms raising larger and larger growth funds to compete in deals.
Now in 2021, there's been an explosion in venture capital investment as all that cash has sought places to land. The first half of 2021 shattered records with $288 billion invested in startups globally.
Leading the pack is Tiger Global Management, which has emerged as this year's funding jockey, setting a blistering pace with venture firms racing to keep up. Tiger Global has invested in over 120 startups already this year, according to an analysis by PitchBook for Protocol, and shows no signs of slowing down with a $6.7 billion fund announced in April and a rumored $10 billion fund on its heels.
"Their strategy right now seems to be hinging a lot on 'Money is still cheap.' The public markets are still accepting these unicorns and VC-backed companies and sustaining those high valuations that they're seeing in the private markets," said PitchBook analyst Kyle Stanford. "Sometime last year [Tiger Global] saw the opportunity to just put as much money to work in the market right now as they can, and that's what they did."
SoftBank, meanwhile, has returned to the market after the WeWork deal's fallout cooled outside investors' interest in its Vision Fund 2. The firm rebounded after mega-hits like Coupang and DoorDash, and is now as much of a player as when it first shook up the venture capital world. SoftBank recently upped the size of Vision Fund 2 to $30 billion of its own money and has made 90 investments from the fund.
Tiger Global and SoftBank are now the two largest investors when it comes to dollars invested in startups for 2021. But the approach to how the two deploy capital is incredibly different.
Kings and nerds
SoftBank is a kingmaker, led by internet emperor Masayoshi "Masa" Son. All of the investments involve a pitch to the chief of SoftBank, who is said to back founders who inspire him and reward CEOs who have the biggest, most audacious plans.
Tiger Global doesn't have the same kind of frontman. Don't try Googling it: Its website presents all of three pages to the public internet, hiding the rest for investors. It prefers to stay out of the press. Instead, it's known for studying its prey and then pouncing on a deal. Its relentless speed is a result of having done much of the diligence on an investment before it even approaches a company. Once it's invested, it remains largely hands-off — a big contrast to SoftBank, which will take board seats and hasn't been afraid to switch up management when needed.
What they have in common — and what makes them both symbols of this golden age of venture investing — is being open-checkbook investors who aren't afraid of pouring hundreds of millions into a startup with a desire to hold that position into the public markets. As such, they've both shaken up the venture capital market in 2021 and are the new forces driving deal speed and price in late-stage investing.
Chase and Stephanie Coleman attend a New York Presbyterian Hospital fundraiser in 2016.Photo: Amanda L. Gordon/Bloomberg via Getty Images 2016
Dot-com to domination
2001 was not an obvious time to start investing in technology companies amid the dot-com bust, but Tiger Global, then Tiger Technology, launched with a 25-year-old Chase Coleman III at the helm. Coleman was one of the "Tiger Cubs," the trusted protégés of Julian Robertson, the founder of Tiger Management.
The hedge fund began by investing in public equities in 2001 before quickly branching into private equity a few years later. Its key early bets were in Sina Corp, Sohu.com and NetEase, the "Yahoos of China," led by investor Scott Shleifer.
"We are grateful to have begun our investment careers at a time when the internet era was just beginning," the firm said in a letter marking its 20th anniversary this year. "Inexperience may have been an asset when it came to imagining what a new internet-connected world could look like, and our research indicated that market leaders could achieve very high returns on capital."
The fund amassed stakes in companies like Facebook, Amazon and Netflix, but then regretted selling the shares early, according to the letter. For a while, Tiger's tech startup investing was led by Lee Fixel, who made prescient bets on companies like Peloton and Stripe. But in 2019, Fixel left to start his own rival firm, Addition. Now the power trio at Tiger consists of Coleman, Shleifer and John Curtius.
The firm is notoriously press-shy, with Coleman described as a "reclusive billionaire" and the Tiger Global partners not willing to participate in media interviews. Curtius at least posts regularly on LinkedIn about how thrilled and excited he is when new investments are announced.
SoftBank, on the other hand, is well-known for being in the spotlight. The firm had grown from a software distributor founded by Son in the 1980s to a holding company that turned a $20 million bet in Alibaba into $50 billion. In 2016, Son appeared with then-President-elect Donald Trump in the gilded lobby of Trump Tower, pledging to bring jobs to the U.S. (It's a pledge he never showed that he'd met.) Within months, he announced the SoftBank Vision Fund — a $100 billion fund that made it the largest tech investor in the world.
Son's team has made headlines, too, for the wrong reasons. Vision Fund CEO Rajeev Misra was accused of sabotaging his internal rivals, allegations he denied. His second-in-command, COO Ruwan Weerasekera, retired late last year, and four partners left around the same time. Jeffrey Housenbold, a partner who led troubled investments in Brandless and Wag, announced his departure in January and recently launched a SPAC. (Housenbold was also responsible for the successful DoorDash deal.)
"SoftBank is a little bit like working with the Kardashians. They're famous for being famous," said Manny Medina, CEO of Outreach, a Seattle software firm that's now valued at $4.4 billion after raising a $200 million round in June from investors including Tiger Global. "They're in the news all the time, even for minor stuff. An investment goes up, they're in the news. An investment goes down, they're in the news. They get a disproportionate share of attention, which I think they love, to be frank."
Vision capital, not venture capital
The launch of the Vision Fund in 2017 was certainly headline-worthy. SoftBank had amassed $100 billion from backers like Saudi Arabia's sovereign wealth fund, Apple, Foxconn and Qualcomm to invest in the future via startups.
Nearly all of its transportation and proptech bets were part of the initial fund with marquee companies like Uber, DiDi and WeWork. It's since shifted tactics with Vision Fund 2, its new fund that's entirely backed by SoftBank's money. The firm is now writing smaller checks and, similar to Tiger, has moved to investing earlier in companies like leading a recent $100 million series B round in videoconferencing tool Mmhmm.
It's also invested more aggressively in health tech and ed tech startups, and it continues to invest in consumer-oriented companies like celebrity video startup Cameo.
"Venture capital seems too small for SoftBank. Vision capital is more like it," Son said recently.
Tiger Global of course isn't as publicly outspoken about its strategy, but its recent investing track record shows a bias toward enterprise and SaaS startups. (SoftBank's made 22 enterprise investments, with 14 being part of its most recent fund, according to its portfolio list.) Tiger advertises doing deals from series A and beyond, but it reportedly did a seed investment in income-sharing startup Blair in May. "[Tiger Global] obviously has been very aggressive investing a lot of money in creating somewhat of a venture capital index," said Stanford, the PitchBook analyst.
Setting the pace
Mention Tiger to a venture capitalist and the first thing they're going to talk about is how quickly the fund is doing deals.
Often, the quick speed at which the firm moves is interpreted as a lack of due diligence. It's become a favorite Twitter meme among venture capitalists to poke fun at Tiger's diligence process.
But Polyakov thinks outsiders are getting it wrong. Most of Tiger Global's diligence comes before it even approaches the company, he said.
First, its portfolio of 400 companies gives it tremendous insight into the market. Tiger partners don't need to take the steps of arranging customer interviews for diligence because a lot of their portfolio companies are already customers and they can lean on their experience, Polyakov pointed out. Second, Tiger employs an army of Bain consultants. As a result, Tiger doesn't have to do its homework on the fly; it's done it in advance.
SoftBank is also known for its speed, but that comes down more to the instincts and whims of its charismatic founder. Pitching Son directly has become part of the ritual of taking an investment and is a make-or-break moment for a pitch. In the weeks leading up to it, founders are coached on how he thinks and how his brain works so they can map the pitch to better suit him.
Ofer Bengal, the CEO of Redis Labs, found both Tiger and SoftBank vying for the lead in a new financing round just months after an August round had made his open-source database software startup a unicorn. The VCs he talked to were people he'd known for years — the classic Silicon Valley model of relationship-building. But this was his first time dealing with the new mega-financiers. A relationship that normally takes years to build was compressed to a few months. Or, in the case of SoftBank, less than half an hour when it came time to pitch the patriarch.
Bengal said his meeting with Son was booked for 30 or 45 minutes, but 20 minutes into it, Son had made up his mind and was interested in investing.
In the end, Tiger narrowly squeezed out SoftBank as the lead investor for the deal, but Redis Labs is a rare company to have both firms invest. Together the round included $110 million in primary investment and another $200 million in secondary share purchases. The round was for a small percentage of the company, which is now worth more than $2 billion.
"Both are aggressive on pace of deployment and how they look at valuation multiples, so there's not a lot of difference there," said one VC who co-invests with both firms frequently.
SoftBank founder Masayoshi Son is known for making quick decisions after meeting with startup founders.Photo: Bloomberg/Getty Images
Adding value — or staying out of the way
SoftBank often takes one or more board seats as part of its investment. In the early days of SoftBank's Vision Fund, the firm was known for making aggressive investments and buying up large percentages of companies.
The result meant that SoftBank had a lot of influence in some of the companies and was prepared to wield it. The firm is largely seen as responsible for pushing out Brandless founder Tina Sharkey following its investment. The ecommerce startup ended up shutting down in February 2020. It also invested $300 million in dog-walking startup Wag and replaced its management before ultimately giving up its board seat and selling its stake back to the company for a loss.
But the aggressive-money approach also helped some of its marquee bets. The company invested $680 million over three years in DoorDash, which used the cash to help strengthen its position in the food-delivery wars. That stake turned into a gain of $11 billion for the firm at the time of its blockbuster IPO. It repeated the process with Coupang, which turned into a $33 billion "windfall" for the firm.
Where SoftBank does add a lot of value is in pushing founders to dream bigger and helping them go international. Startups often point to SoftBank's help in going global as a reason to take their money. Clearco's Michele Romanow cited that to TechCrunch as a reason for taking SoftBank's money after she raised $215 million for her firm, which helps other startups raise non-dilutive capital.
Tiger, on the other hand, is "proudly passive" as an investor, said a competing VC. The firm doesn't require a board seat to lead a deal and isn't very hands-on with its companies.
"They're very clear on what they don't do. They stay out of your hair, they don't take board seats, they're not going to tell you how to run your company," Outreach's Medina said. "They tell you, 'We're going to give you money, and we're going to make Bain available to you,' which is very expensive — that could be alone between half a million to a couple million dollars."
Polyakov's Nylas is one of the few companies where a Tiger Global investor actually joined the board — at Polyakov's request. It wasn't a part of the term sheet and there was a bit of a conversation around it, but having Curtius, Tiger's software-investing lead, join the board felt like a fit for Polyakov's ambitions for the company.
"The thing that really resonated with me was his transparency: He's straight to the point, he says what he means and you're able to say what you mean," Polyakov said of Curtius. "Conversations that would have taken an hour take 10 minutes."
A lot of what Silicon Valley investors offer is just "fluff," said Polyakov. In a survey of startups Polyakov referenced, founders ranked relationship, deal terms and speed as the three most important factors for making a deal. Operational support ranked second to last.
In a sign of the disconnect between founders and funders, VCs saw speed as the least important factor in making the deal.
"The rise of Tiger Global exposes an uncomfortable truth for VCs," Eniac Ventures co-founder Hadley Harris pointed out on Twitter. "That there's a good chunk of founders who just want to be left alone."
Hold on for one more day
One area where both Tiger and SoftBank are proving their value is holding onto shares. That practice is helping them edge some traditional VCs out of the later rounds because they can't hang onto a stake indefinitely, since they need to deliver proceeds back to their LPs.
Tiger is using a willingness to hold onto shares as a deal advantage, said Medina. In the case of Redis Labs, Tiger wanted provisions at the IPO to buy even more shares, said Bengal.
Bengal saw the investment from Tiger and SoftBank as his company's last round before an IPO. And if the markets tank? Both are investors that can afford to bail a company out. "I think we are on our journey to an IPO, but if worse comes to worst and the market changes and all these doomsday scenarios, these guys have deep pockets, so they're both great partners," Bengal said.
SoftBank and Tiger also have the advantage of having the experience in holding public equity. "SoftBank, they can hold on to that public equity as long as they want and realize it whenever it is best for them," said Stanford, the PitchBook analyst. "Tiger Global is also going to have a whole other side of their business to help manage that portfolio, where other VCs might need to hire an outside consulting firm to figure out how to deal with and manage their public equity."
Tiger Global may be setting the pace and the deal terms lately, but founders may be the real winners from its growing competitiveness with SoftBank. Instead of one ominous capital cannon, there are now two — both willing to move quickly to snag deals. And if VCs can't rethink their dealmaking traditions, they may find themselves caught in the crossfire.