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UD #03: The Tiger And The Tree
How venture funds are adapting their models to scale into new markets
Venture capitalists look for various things when evaluating start-ups but every VC is ultimately looking for businesses that are scalable and can develop defensible moats. The irony is that VC funds themselves are typically unscalable and often differentiated by nothing more than their brand. The barrier to scaling for most VCs is the Partner’s bandwidth. VCs often take a board seat and 10%-30% ownership in a company each round. Since they can only sit on about 10-12 board seats at a time and board seats are a multi-year commitment, the capacity to take on another board seat is only available once in a while.
This model has made it particularly difficult for VC firms to expand geographically. Most investors would rather save their limited capacity to sit on boards for companies in geographies they are more familiar with and where they don't have to travel internationally for board meetings.
However, the internet is in the deployment age and every sector in every country is going to be transformed by the internet. VCs looking to back the best companies will have to go global. There are two distinct playbooks for funds looking to go global - and they couldn't be more different.
Crouching Tiger, Pre-emptive Round
Julian Robertson had spent two decades as one of the best value investors in the world. Julian invested in companies with strong fundamentals led by competent management teams. In the late '90s, as the dot-com bubble gathered steam, investors moved money from value stocks into growth stocks and Julian's performance suffered. Ultimately, he shut down his fund and return money to his investors. What he did next was remarkable, he seeded over 30 of his employees with $25M each to start their own funds. An additional 30 others, went on to start their own funds without raising seed capital from Julian.
One of those funds was Tiger Global, which was launched by Chase Coleman as a long-short global public equities fund. In 2006, Chase would bring onboard Lee Fixel, who had been investing in China, to lead its business in India alongside Mohan Lakhamraju. Tiger Global made a handful of later-stage investments into early successful Indian internet businesses like MakeMyTrip and Just Dial.
Mohan Lakhamraju left Tiger Global in 2009 and the firm decided to close its India office. Without a local operation in India, its strategy had to change - and it started to rely on local intelligence from funds such as Accel India and SAIF Partners (a Softbank joint venture now renamed Elevation Capital).
In 2009, Lee approached a founder of a small online bookstore who had recently closed a $1M round led by Accel India. The founder wasn’t looking to raise capital. He hadn't even received the second $500k trance of the last round. Lee Fixel offered the founders $10M at a valuation that was 10x higher than its last valuation. Over the next few years, he would sink $1B into the company - Flipkart.
After his investment in Flipkart, Lee Fixel went on a spree, putting roughly $2B in about 50 companies. He was known for making decisions very fast and offering significant valuation mark-ups. These tactics, are commonplace today, but were novel at the time, particularly in India.
He would stop investing in 2016, with no successful exits and local players wondering whether Tiger Global had ruined the Indian ecosystem by putting too much money into companies at too high a valuation. The famously hands-off Lee Fixel, known for not taking board seats, would become very hands-on with Flipkart. His most successful investment was facing challenges. Negotiations with Amazon to acquire the company had broken down and Amazon instead committed billions to enter the Indian market itself. Softbank had invested billions into rival Snapdeal. Customer growth slowed and acquisition costs went up. Lee installed a new CEO with a mandate to guide the business to an exit. Ultimately, he succeeded. When Walmart acquired Flipkart in 2018, Tiger Global made more than $3.5B.
With the gains from his crown jewel realised, and other investments starting to look promising, most people expected him to restart investing aggressively. But when the world needed him most, he vanished.
He left to start his own firm, Addition Capital. His partner at Tiger Global, Scott Shliefer, would take his playbook and continue to run with it.
Tiger Global's approach is heavily influenced by its background as a global equities fund. Its process starts by researching countries, industries, and trends, identifying those that it believes will drive returns in the future. It then looks for existing or emerging market leaders within those trends and invests in them, whether they are public or private companies. Tiger Global is able to make quick investment decisions because it has already done the research upfront, its investment process only aims to confirm its hypothesis.
Tiger Global doesn't take board seats. The firm's value proposition is cash at high valuations. Uninterested in picking up calls from a founder on a Friday night, Tiger Global outsources most of its portfolio support to Bain & Company, which also helps it with top-down research.
Tiger Global is creating a global index of all the technology companies that fit into its investment thesis. Its top-down approach to reasearch, its lack of requirement for a board seat, and its outsourcing of value-add allow it to scale its geographical reach and deal activity in a way no firm before it has done. In the first couple of months of this year, Tiger Global maintained a pace of 1 deal every working day, across multiple geographies, with only two partners on its private equity team.
A very long-distance bicycle.
Top of the Midas List in 2020, for the second year in a row, was Neil Shen, the Managing Partner of Sequoia China. Also on the list were Doug Leone, Global Managing Partner of Sequoia, and Shailendra Singh, Managing Partner of Sequoia India. Many firms dream of having one investor on the Midas List, Sequoia had 11 across 3 geographies. By 2019, its China fund had more unicorns than any other fund except Softbank - and its US fund. Its India fund, by comparison, was underperforming, with investments in only a handful of unicorns.
Not bad, for a fund that initially had a rule to only invest in companies that were a bike ride away from its Silicon Valley offices.
When Sequoia decided to start investing in markets outside of silicon valley, it looked for markets that fit two criteria: it had to be large and it had to be growing. Global Managing Partner, Doug Leone explained it like this:
We asked ourselves one simple question... where are the most valuable companies in the world going to be created over the next 20-25 years? And in order to create valuable companies, you need a large and growing economy... you go to China, you go to India... you don't go to Europe because it's big and it's not growing and you do not go to Vietnam because it's growing but it's not big. So that brought us to China, it brought us to India, it brought us to South East Asia. And we did it in a decentralised fashion.
We found people and teams and we made sure they made the decision because we knew for sure we wouldn't get it right out of the US there was a chance there was a chance they may get it right down there. So we took the courageous move and so when we put those pieces in place. And we knew the world was moving towards application layer investing vs deep technology. And now it's the world of the 22-23-year-olds and that was happening globally. The fervour of start-ups was having globally.
Sequoia's first market outside of Silicon Valley was Israel, but their second market was China, which is perhaps today their most important market outside of Silicon Valley. Here is an excerpt from the book, Winning In China by Lele Sang and Karl Ulrich, explaining how they approached the market:
When Leone and Moritz started traveling to China, they were aware of how other firms were approaching the country—these outfits typically shuttled their partners back and forth from the United States. Sequoia set out to find a local partner, ideally someone who had spent time in the United States, had contacts in China, and had experience as an entrepreneur. They took 10 trips to China and took dozens of meetings, trying to identify someone who fit their ideal.
None of their efforts yielded the person they sought. Then, after returning home, a Chinese founder of Billpoint, a Sequoia investment and the predecessor to PayPal, introduced them to [Neil] Shen. Leone, Moritz, and Shen met at a hotel in San Francisco. Sequoia’s search ended there.
Within 30 days they had a handshake deal, and, shortly after, Moritz crafted a private placement memorandum for Sequoia China and handed it to Shen. Shen remembers being impressed by the trust, confidence, and agility shown by Sequoia. The fact that the deal was cut quickly also reflected Shen’s strengths. Growing up in Shanghai, he’d excelled at math. After graduating from Yale School of Management in 1992, he’d started his career as an investment banker in New York and Hong Kong. When the first internet wave reached mainland China in 1999, Shen left banking and cofounded Ctrip, a travel company, and later Home Inn, a budget hotel chain. Both went public on the Nasdaq. Yet Leone also appreciated Shen’s acumen when it came to investing in other people’s ventures. He’d displayed that with a bet on Focus Media, an investment made while he was running Ctrip. “He aligned himself with winners,” Leone said.
What appealed to Shen was Sequoia’s history of backing many of Silicon Valley’s legendary companies, including Apple, Google, and PayPal. That would matter to Chinese entrepreneurs. The message was plain, Shen said: Sequoia “would help you to succeed.” Sequoia China’s initial fund-raising went well, with $160 million collected within three months.
The full autonomy Sequoia gives its local partners doesn't always pay off. In India, the firm opted to enter the market by acquiring a local private equity firm. It did not go so well:
Sequoia’s first serious look into India was in 2006. It entered India acquiring a fund called Westbridge Capital, a firm that was known more for its PE-sized bets in late-stage mature non-tech companies rather than early-stage technology bets. Given these contrasting backgrounds, it came as no surprise that the partnership didn’t last long. Five years later, in 2011, Westbridge broke away from Sequoia and went back to being an independent entity. Sequoia had to rebuild its Indian operations pretty much from scratch with a relatively young team comprising Shailendra Singh, Mohit Bhatnagar, Abhay Pandey, G.V. Ravishankar and V.T. Bharadwaj.
Perhaps as a result of these organisational challenges, Sequoia missed out on investing in the epochal companies of this era, companies like Flipkart and Snapdeal. Even though the firm did manage to back other marquee startups like Ola, Zomato and Freshworks, none of these investments were at the seed or Series A stage and were usually in the Series C stage or beyond, where entry valuations were likely to have been much higher.
- Sequoia’s Singapore Sling via The Ken
When Sequoia ended its partnership with Westbridge, it did two things that enabled it to turn the ship around in India:
“Those of us who continue to work at Sequoia are aligned on two things. One, massive focus on early stage investing. Second, our experience shows that investments in technology and technology-enabled companies produce the best venture returns. The early stage and tech focus is Sequoia’s DNA,” says Bhatnagar. “It is easy for us to say no to a bunch of stuff now. It is okay to part ways with others who don’t believe in this, because the ones who remain are wedded to this focus.”
- How Sequoia Became India’s Biggest Venture Capital Firm via Forbes India
The decision paid off massively. Today, Sequoia is an early investor in a number of Indian unicorns. When Tiger Global went on a tear in India at the beginning of April, investing in 4 companies and minting 4 unicorns over the space of a week, 2 of them were Sequoia India portfolio companies.
In 2012, Sequoia decided to expand its India fund to cover South East Asia. That decision has also gone well:
At the time that Sequoia established a presence in Singapore, the local funding scene was shaped like a “barbell”. There were some seed stage investors (angels and a few institutions like Jungle Ventures) who wrote small cheques in the $500,000 to $1 million range, and beyond this, there were Series C investors who wrote large cheques (the likes of GIC and Temasek), but in between these two stages, there was hardly anyone.
The opportunity was to basically invest in a blue ocean geography without pesky competitors like in India. The challenge was to build a local team who could find and filter deals – they filled it by hiring folks like Yinglan Tan, who joined Sequoia in 2012 from Singapore’s National Research Fund.
In the past three years, Sequoia has invested in nearly 15 startups in Southeast Asia including in companies like Tokopedia, Carousell and Go-Jek that have grown to massive scale with large follow-on rounds from the likes of SoftBank, Alibaba and Tencent.
- Sequoia’s Singapore Sling via The Ken
Sequoia also explored Latin America in 2011. It hired David Velez to lead the office. David was an MBA at Stanford GSB, who had helped General Atlantic start its Latin America business. Over numerous trips to Brazil with Doug Leone, what they saw is familiar to anybody operating in an emerging market at the time, they saw an ecosystem still in the experimentation phase, with copycat businesses and Rocket Internet clones. David Velez decided his time was better spent starting a company than looking to make investments. He left to start NuBank, raising seed capital from Sequoia. Earlier this year, the company raised a round valuing it at $25B.
Today, Sequoia is very active in Latam, counting unicorns such as NuBank and Rappi in its portfolio. It doesn't have an office in LatAm or a dedicated fund but as its activity in the region heats up, you can expect both of those to emerge soon enough.
Compared to Tiger Global, Sequoia operates like a traditional VC firm. They take board seats and are extremely hands-on. They do not describe investments as deals, but instead as 'partnerships' looking to work closely with founders for up to a decade or longer.
In China, Sequoia invested in a group-on clone called Meituan, a restaurant review business called Dianping, and a food delivery business called ele.me. All three companies would eventually become competitors in the food delivery space.
As is common in China, Alibaba invested in one and Tencent invested in the other. When Dianping founder, Zhang Tao, complained to Neil Shen that he wasn't getting enough support from Alibaba compared to Meituan which was getting heavy support from Tencent, Neil Shen introduced him to the folks at Tencent, who invested in the Dianping.
Alibaba was upset that its portfolio company would take money from its rival, so it sold its stake in Dianping, and bought a controlling stake in its competitor ele.me. Eventually, Neil Shen would be instrumental in engineering a merger between Meituan and Dianping. Today, the combined company Meituan (previously called Meituan Dianping) is a super app with products in food delivery, travel, and grocery delivery. it dominates the food delivery market with ~65% market share, more than double that of ele.me.
This type of hands-on involvement across multiple portfolio companies and multiple geographies is only possible when you have General Partners focused on each geography with deep local expertise and connections.
While Sequoia's funds are run independently, they are highly connected. General Partners in one fund tend to be Limited Partners in the others. All partners meet yearly for a global summit where they share ideas and themes. While the investment thesis in different regions isn't generated in a top-down manner, common themes tend to emerge. For example, the fund is a heavy investor in the hyper-local logistics space across geographies. Investing in Meituan Dianping (China), Doordash (USA), Rappi (Colombia), Zomato (India), and Go-Jek (Indonesia). In Africa, Sequoia invested in Opay, alongside Meituan Dianping. At the time, Opay was trying to implement Meituan’s hyper-local logistics-driven ‘super-app strategy‘, before the okada ban derailed those plans.
Its deep experience in the space was crucial in 2016, when DoorDash was out of favour and struggling to raise capital. Investors worried about its unit economics and capital intensity. From its experience with Meituan Dianping, Sequoia understood how big the space was, how profitable it could be at scale, and how much capital was needed to scale it. It stepped in and led a $127M round valuing the company at ~$700M. Today, DoorDash is valued at ~$40B.
Another lesson Sequoia learned from the competition between Meituan, Dianping, and ele.me was the importance of scale and market leadership in the space. It is applying this lesson in Indonesia, where two Sequoia-backed companies, Go-Jek (hyper-local logistics) and Tokopedia (E-commerce) are in talks to merge into a single entity called GoTo in order to avoid falling behind rival Grab. Sound familiar?
As of today, neither investor is particularly active in Africa, although both have made a handful of investments. As mentioned earlier, Sequoia China invested in Opay in 2019. This year, a Sequoia scout invested in Flextock’s pre-seed round while Sequoia participated in an African fintech’s yet to be announced round. Tiger Global, on the other hand, invested in IrokoTV and Takealot in the first half of the 2010s. This year, the firm has returned to the continent, investing in Flutterwave and another Nigerian fintech, in a deal that has not been made public.
I would not be surprised to see both firms become more active on the continent over the next few years. It has become clear that there are multiple geographies that can support multi-billion dollar companies. Venture Capital has to evolve in order to deploy capital globally.
For Sequoia, expanding globally involves a network of independent yet interconnected funds, which combine its global brand and track record with local expertise and connections. While sharing lessons and knowledge from across markets. For Tiger Global, expanding globally means one large centralised fund with two partners based in New York making rapid decisions across multiple geographies backed by extensive research.
Many other VC firms are operating the same models executed by Sequoia and Tiger Global. Other brand name firms like Accel and Lightspeed have largely autonomous outposts in China, India, and Europe. While other cross-over funds like Altimeter, D1, and Coatue are also investing globally through a centralised base in the USA.
Sequoia's model requires a strong brand and track record, while Tiger Global's model relies more on the ability to raise and quickly deploy large amounts of capital. Some funds will continue to operate like a16z, making a handful of investments in multiple geographies from a single office in Silicon Valley. But for most funds, if they are to be competitive in the new geographies, they will have to adapt to one of the two extremes.
Rally Cap is building a global ETF of early-stage emerging market fintech, and they’re excited their portfolio has expanded to include: