- After dominating the VC industry last year, crossover funds spent 2022 pulling back.
- New investments by Tiger Global and Coatue fell 60% and 67%, respectively, this year.
- Traditional VCs argue that these funds misunderstood the true nature of venture investment.
As 2022 rolls to a close, the statistics are clear: So-called crossover investment firms like Tiger Global and Coatue Management — which whipped the venture-capital industry into a dealmaking frenzy in 2021 — slammed on the brakes this year.
Their 2022 retreat demonstrates that crossover firms, which are venture funds run by hedge-fund firms, don’t fully understand the venture-capital industry, some traditional VCs insist.
Tiger’s dealmaking has slowed to a comparative trickle this year, with the firm completing just 44 deals in the third quarter of 2022, compared with 105 in Q2 and and 136 in Q1, according to data from PitchBook. Coatue, meanwhile, completed only 10 deals in Q3 2022, down from a peak of 51 in the fourth quarter of 2021.
What’s more, the total value of the new investments in which Tiger participated as an investor this year is down nearly 60% as of November 10, compared to the same period last year, Pitchbook reports, while Coatue’s total deal value is down by nearly 67%.
“They’ve pulled back dramatically,” Brian Hirsch, a managing partner at Tribeca Venture Partners, which has coinvested alongside many of these funds, said. In last year’s dealmaking bonanza, he said his portfolio companies routinely entertained offers — or wanted to — from firms like Tiger and Coatue. Today, those firms are conspicuously missing from deal announcements.
“I haven’t come up against Tiger on a deal at all this year,” he said.
Last year, crossover firms like Tiger looked poised to change venture capital forever. Today, in the shadow of their overall market difficulties, they’ve all but faded into the background, VCs say.
Tiger Global has seen the value of its hedge fund cut in half this year, has been forced to write down the value of many of its private-venture investments, and one of its its star VCs, John Curtius, left the firm in October. Meanwhile, Coatue’s hedge fund is down 19% for the year.
“They’re licking their wounds,” said Nihal Mehta, a founding partner at Eniac Ventures, whose portfolio includes the marketing-tech startup Attentive, a crown jewel of Tiger Global and Coatue’s portfolios.
Speaking to founders, Mehta hears crossover funds come up less and less in conversation, and partners at some crossover funds tell him they’re pulling back from new deals, though crossover funds haven’t disappeared altogether. In September, Tiger Global participated in seven funding rounds for US startups, making it one of the country’s most active venture investors that month, following Gaingels, Andreessen Horowitz, and Alumni Ventures, Crunchbase reported. For comparison, it made 16 deals in September of 2021.
“I think they all really propped up the market last year in a hot cycle, and now they have to do dramatic triage,” Mehta said. Tiger declined to comment for this article.
What happened to Tiger and Coatue in 2022
Historically, many crossover funds focused on mature startups, or what’s known as growth investing. The valuations of those companies tend to more closely track public-market prices because, in theory, they are closer to going public themselves.
So when the stock market plunged this year, the pain was greatest for growth investors. There was virtually no appetite for IPOs this year, nor could many startups easily sell themselves to bigger companies for a premium price. Crossover funds found themselves with billions of dollars in deployed capital and few exits in sight.
Earlier this year, in response to the market downturn, Coatue launched a $2 billion Tactical Solutions Fund, a portion of which is earmarked to support its growth-stage startups with more investment funds while the IPO window remains shut, according to a person familiar with the matter. The fund provides structured equity investments to help companies “buy time” without having to take a down round, the person said.
Last month, Tiger Global and Coatue both revealed they are seeking to raise new funds earmarked for early-stage startup deals. Their combined value: $6.5 billion. But VCs say that’s the last thing seed-stage founders need now.
“There aren’t enough good early-stage companies in the world to absorb that capital,” said Tribeca’s Hirsch, who focuses on early-stage investing.
He said that deploying that much money will be “impossible,” adding that such investments generally require much smaller check sizes and have a much higher rate of failure.
What’s more, with crossover funds already looking worse for wear after a rough period, Hirsch speculates that these firms’ investors, or limited partners, may not be on board. “Most LPs don’t like strategy drift. If they can pull this off, if they can get that through their LPs, I’ll be really impressed.”
Why the crossover-fund strategy backfired
For some, the pullback has cast doubt on the strategy that crossover funds used to try to upend the venture industry — an approach based on quick-turnaround term sheets and a high volume of deals.
Tiger Global made a reputation for outsourcing much of the due diligence that would normally be done in-house to a consulting firm, Bain & Company, allowing the firm to close deals at an unprecedented pace, essentially industrializing what had been a bespoke process. A funding round that once might have taken two or three weeks to complete went from handshake to term sheet in as little as a day.
The rest of the industry felt forced to match that pace for fear they would miss out on investments in promising startups if they took longer to make offers.
“Investors were not doing the level of work that past VCs were doing to diligence companies and make decisions,” Michael Miao, a partner at IVP, said. To Miao, the source of this sudden sense of urgency was clear: an influx of what he called “tourist capital.”
That breakneck pace of dealmaking washed startups in money at ever higher valuations as VCs tried to outbid each other for deals. Not all investors believed that such easy fundraising at such favorable terms was good for the startups. Founders had to do their own research on potential investors on a much faster timetable.
“You’re doing a shotgun wedding to pick someone you’re going to be working with over the next decade,” Miao said.
Crossover-fund capital soon dominated the venture landscape, driving one of the headiest tech booms in history.
“They were doing term sheets every 48 hours for two years,” said Mehta, adding that his own portfolio companies benefited from having a steady supply of capital to help fill out funding rounds and keep valuations high.
Even so, he said he’s skeptical of the crossover funds’ high-volume, low-touch approach. Eniac, he said, prefers to be heavily involved with its portfolio companies, building personal relationships with each founder.
Tiger Global’s strategy might have backfired, several investors said, because it tried to apply a hedge-fund playbook to venture capital.
“You can’t change a tiger’s stripes, a hedge fund is a hedge fund,” Tribeca’s Hirsch said. The highly analytical approach that works for investing in large, liquid public assets, he said, doesn’t work for startups, with their long investment horizons and uncertainties.
“A company’s not a trade,” Hirsch said. “It’s something you put your blood, sweat, and tears into, locking arms with the founder, trying to build something from scratch. I just don’t think hedge funds think that way, it’s just not their business.”
With strategic challenges ahead, Hirsch said founders are looking for more than cash. They want coaching and mentorship.
“Is Tiger going to be there, going slide by slide in the pitch deck, helping them prepare for a Series B, making introductions, shepherding them through the funding process?” he said. “I don’t think of those firms that way. They’re not the first call, second call, third call. They’re not in the day-to-day conversations that really matter.”
Coatue starts acting like a traditional VC
Coatue, for its part, has spent the last several years building out a platform to support its portfolio companies in an attempt to look and feel more like a traditional VC, according to a person familiar with the firm’s strategy.
That included building out a talent team to advise founders on new hires, a communications team to help with marketing efforts, and a data-science team to produce dashboards and data insights. But it’s still unclear if these efforts can help Coatue overcome its reputation as a hands-off hedge fund.
It’s also too early to know if the crossover funds, which still have billions in private investments to manage, will return to their frenzied dealmaking ways or if their subdued 2022 is the new standard.
For his part, Miao said he sees the industry returning to a status quo as funding rounds take longer to close, giving investors and founders more room for relationships and due diligence.
“We think that’s a really good thing for founders,” he said.