At Risk of Recreating Tiger Global
Pt. 2 - Terms That Do Not Scale
From 2020 to 2022, one word was repeatedly used to describe Tiger Global’s effect on early-stage investing - bloodbath.
Tiger invested in 288 deals, and bloodbath conditions contributed to a record-breaking $23 billion in venture deployed in 2022.
Today, the bloodbath has been replaced by something worse, a mess.
The founders and investors remaining are forced to work tirelessly to find soft and not-so-soft landings. Meanwhile, the top mess-maker, Tiger, has effectively closed up its venture capital practice.
While their strategy shook up VC’s stagnant corner of finance, the bloodbath and subsequent mess were not progress. In a society largely underwhelmed by finance, Tiger was not a breath of fresh air.
This Innovative Finance community aims to provide that breath of fresh air. If we don’t let Tiger’s tactics suck all the air out of the room, that is.
A Bloodbath Becomes a Mess
The key to Tiger’s strategy was simple - offer the very best terms. Their speed was notorious, normalizing deals done in weekends instead of weeks, was a function of the primary strategy - offer the highest valuation to every founder every time. High valuations, or rather cheap capital, won them the most deals. That is how they scaled from an occasional growth-round investor to $12.7B VC practice overnight.
Cheap terms led to Tiger’s entire VC arm scaling back down to zero overnight. For now, the returns are not there. The mess is.
No one champions Tiger as a “non-extractive” investor or pioneer of “regenerative” investing.
So, why is innovative finance at risk of repeating the same mistake?
Existential Problems vs. Marketing
There are valid reasons to price capital lower than the market-rate. We need investors willing to push outside of the constraints of market-rate. Price discovery of impact is necessary to break out of the subsidized capitalism dilemma. Some problems are acute and fixable with capital too. Inventing an investment model may be distracting when the return of a fixed problem might just be enough. We need funders willing to accept concessionary, or zero, monetary returns to tackle acute, solvable societal problems.
$1M to revive neighborhood restaurants ravaged by a flood? Screw finance. We’ll talk about flood prevention later. Let’s revive.
$2M to provide household solar lights to an off-grid region in need? Concessionary returns or not – let there be light.
$3M to replant 50 hectares of clearcut forest?
Not so fast.
Restore the forest only for as long as the residents value the trees over the income associated with cutting them down for palm oil. This is called the Poverty Degradation Trap. It is an example of focusing on the acute problem and overlooking the necessary systematic fix.
Innovative finance (in my view) is after systematic fixes.
Cheap capital is not innovative.
What happens when cheap capital is invested in systematic issues?
Occasionally a bloodbath, but inevitably, a mess.
Cheap capital is effective, lazy marketing.
The premise should sound familiar - it is the Myth of Greed.
At first, helpful lines are drawn.
Predatory lending is real. Definitions make it easier to spot predatory lending, where the underlying goal of the loan is not payback, but default. Lives get ruined by a thirst for profit. Predatory terms are possible with any capital product.
As tales of predatory investment practices spread, the counter-positioning is irresistible. Investors start portraying all of finance as predatory, cementing this fear in founders’ minds as they go to raise capital. Quickly, all investor marketing starts to sound the same. Everyone piles on to promote finance as a whole as predatory and then competes with who can portray themselves as the founder-friendliest?
Well, what is the founder-friendliest?
Every financial model suggests it is the cheapest capital.
The better terms, the more cash. The more cash, the more likely a you are to pay employees, make rent, feed your family. Moreover, the higher valuation, albeit only a theoretical number, the more validated you feel for years of hard work. No one should be chastised for survival decision-making.
In Tiger’s case, they even skipped the “founder-friendly” marketing phase and went straight to “cheapest” (aka largest check and highest valuation). This won them a spot on a record numbers of cap tables.
All too often, funders make the same mistake. They see the effectiveness of cheap capital and offer a mission-aligned cherry on top. They conflate financial innovation with price, standing up a market of unnecessarily concessionary capital.
Founders rightly flock.
The acute problem, a single company in need of a certain amount of capital, gets solved. The systematic problem, scalable terms to enable more financial pathways in our economy, remains unaddressed. Even worse, it may take a step back.
Investors market their cost of capital via the Myth of Greed, conflating innovative finance with cheaper finance. Previously helpful definitions, such as predatory, start getting misconstrued into labels. The pitch goes, “if you are a founder in [xyz enlightened industry], you deserve cheaper capital. Choose us, instead of the rest of finance, which is predatory.”
This divides finance around subjects which we all seem to agree upon. We all want a healthy environment, distributed opportunity, and a high standard of dignity and rights for all. Nobody gets in business to fight these things. However, cheaper capital gets sold as the enlightened capital. The rest of finance is greedy.
This division is poisonous for society and puts a ceiling on progress.
The Tiger mess has deterred billions from flowing towards early-stage tech. Cheaper terms result in cheaper returns. Void of returns, thousands of people are living through recaps, layoffs, and career crises. This is financial pain and human pain. It turns capital and people away.
As for Tiger, they may have captured the next NVIDIA, which will pay for their own mess and then some. Meanwhile, early-stage tech as a whole will further fracture into winners and losers. Repairing this damage will take years.
Tiger is an extreme example, but this pattern plays out in any industry with suboptimal returns. Early-stage tech is one thing, but what happens when an entire industry refutes returns?
No new capital flows in and underlying systematic issues remain unphased.
The entire budget for fixing an issue becomes the sum of the line items it can win from government and philanthropies. All the Rockefellers in the world can not underwrite the systematic transformations needed in shared ownership and climate.
There is no singular fix for systematic issues. The best we can do is enable as many of us as possible to pursue what we each see as progress. This respects everyone’s unique version of the future and maximizes our chances at the best collective future possible. We need to shift our $85 trillion dollar economic system to work on these problems.
This requires returns.
Returns require terms that scale.
Here lies the challenge for innovative finance.
Terms that scale are not cheap terms, they are new economic plumbing.
If finance is a means, innovative finance is the task of maximizing ends we actually want. We may not be able to agree on what the future should look like, but we can create financing that is maximally compatible with a range of futures we would like.
Terms that scale are terms which the economy at large can embrace without compromise.
…Part III will discuss innovative finance terms themselves – where they currently scale and where they do not…
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