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April 22, 2015

Worried about Tiger Cubs & other Hedge Funds in Indian StartUp territory? Now, start thinking about the Grand Cubs.

Economic Times has an article quoting some worried voices on Hedge Funds adventuring into startup territory:
Hedge funds, which have fuelled frenzied deal-making in Indian internet companies and stoked valuations to stratospheric levels, are moving down the food chain to take positions in younger, smaller startups. 
Early-stage startups such as Zop-Now, Vserv and MobiKwik have got hedge funds to bet on them. But as these investors plant themselves firmly in India's startup landscape, analysts as well as entrepreneurs are wary about the funds' potential to abruptly pull out in a crisis, as they did during the econom ic downturn that began in 2008.
...The entry of these high-risk appetite investors and the rising pace of deal-making reminds some investors about previous peaks in investment cycles.
...“From 2006 to 2008, we saw prop books and hedge funds say that they will be in India for the long run, some even having teams on the ground. But after 2008, we did not see most of them in the country,“ said Anand Prasanna, director of US-based investment firm Morgan Creek Capital.

Parag Dhol of Inventus Capital had also made a dire prediction on the trend at the Venture Intelligence APEX'15 PE/VC Summit:
"The transactions of recent months, where investors who used to talk to only companies that are EBITDA positive, are now writing cheques to companies that have hardly any revenues, is going to lead to lot of pain." 
Like most trends in the Indian market, the hedge-funds-investing-in-startups also seems to have been imported from Silicon Valley. Extract from a Reuters report of more than a year back:
Tiger Global Management, part private equity manager and part hedge fund manager, has emerged as among the most prominent of a growing club of Wall Street financiers now eyeing technology start-ups. They include hedge funds such as Coatue Management and Valiant Capital Management; private equity groups such as Rizvi Traverse Management and TPG; and mutual fund giants BlackRock, Fidelity and T. Rowe Price.
...Tiger Global, a so-called "Tiger Cub" because of its ties to investor Julian Robertson and his once-highflying hedge fund Tiger Management, has quietly taken one of the largest positions of the newcomers, technology investors say. 
Tiger Global of course has been on the prowl in India for a few years now and, the dream run of Flipkart in 2013-14 and its healthy exit from Justdial, is attracting fellow hedgies in droves to Indian shores. Of course, only time will tell how exactly the 2014-15 wave plays out (compared to the 2000-01 and 2007-08 ones).

Given that Tiger Global is clearly at the vanguard of the hedgie trend (both in Silicon Valley and in India), a little bit more context on the firm would be clearly useful to have. More from the Reuters story quoted above:
Founded in 2000 with $25 million by Chase Coleman, a protégé of Robertson's, Tiger has earned the respect of Silicon Valley denizens, in part through its highly profitable investment in Facebook. 
...While the firm has long been active in venture-backed companies, particularly internationally, it has recently stepped up the pace in Silicon Valley...People familiar with the matter say that Lee Fixel, who co-runs Tiger's venture-growth business with Scott Shleifer, has been particularly active in the firm's venture-backed deals. 
Wikipedia provides more context on Tiger Management founder Julian Roberston and the "Tiger Cubs" (which includes Tiger Global):
After closing (down) his fund in 2000, Robertson kept his hand in the hedge fund business by supporting and financing upcoming hedge fund managers (38 in total as of September 2009), in return for a stake in their fund management companies. Apart from those, many of the analysts and managers Robertson employed and mentored at Tiger Management, including Chris Shumway, Lee Ainslie and Ole Andreas Halvorsen went out on their own and are now running some of the best-known hedge fund firms, called "Tiger Cubs". These include funds such as Viking Global, Tiger Legatus, Blue Ridge Capital, JAT Capital Management, Tiger Global, Maverick Capital, among others.
According to an Octa Finance profile, Tiger managed more than $21 billion as of April 2014. The hedge fund, which invests only a small percentage of its assets in (public) equities and options, had between 11-25 clients.  Its returns over the last seven years have been:

2007: 71%
2008: -26%
2009: 1%.
2011: 45%
2012: 23%
2013: 14%
2014: 17%

Even as some of the other Tiger Cub names are becoming more familiar in the Indian startup context, there are a now a few former Tiger Global managers that have also set their sites on India. An interview with one such "Tiger Grand Cub" is here.

Wonder what the grand cubs will accomplish? Well, there's a saying in Tamil that goes like this:
If the mother (tiger) leaps 8 feet, the cub will leap 16 feet. (The progeny is always assumed to be more accomplished than the previous generation because they have the experience of the parent to drink from.)
Whatever the distance covered by the cubs and grand cubs in Indian Private Equity / Venture Capital territory, rely on the Venture Intelligence - with its on ground presence in India since 2002 and deal data since 1998 - for the measurement!

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