Partner, Tiger Global
Where VC Flows From Here with Scott Shleifer of Tiger Global & Hani Enaya of Sanabil - #FII6 - Day 2
"Where VC Flows From Here" with Scott Shleifer, Partner, Tiger Global Management, and Hani Enaya, CIO, Sanabil, took place on Day 2 of the 6th Edition of FII.
About Scott Shleifer
Scott Shleifer, a partner at Tiger Global Management, spoke at the 6th Edition of the Future Investment Initiative (FII) in October 2022. He attributed the firm's success to being early to identify internet companies as strong investments due to their potential for high growth, high incremental profit margins, and low multiples of net profits when found early. Shleifer said the firm also looked for private companies to buy larger stakes and invested globally, with initial research focused on China before expanding to other regions. He noted that the firm looks for low penetration opportunities in large markets, and that once penetration hits 10%, it becomes more difficult to find such opportunities. Shleifer stated that Tiger Global owns two to four percent of six of the seven most valuable private internet companies, including ByteDance, Shein, Stripe, Flipkart, Databricks, and Canva, though he acknowledged a mistake on Canva. He described the current market environment as one where the cost of capital is up and companies are adjusting expense bases to avoid needing to raise capital. Shleifer characterized the Saudi region as a thriving ecosystem with innovation in software, fintech, and consumer internet, citing the acquisition of Souq by Amazon as an early success. He also said that several private internet companies generate more than a billion dollars in net profit and that the hallmark of great internet companies is having mostly fixed expenses, which leads to a healthier environment where capital is respected.
Transcript (10 segments)
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Interviewer0:11
21 for Tiger and you've been a truly global platform. What do you think have made you successful in being truly global?
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Scott Shleifer0:19
Thank you for having me here, much appreciated. Well, the first is that we were early to identify that internet companies had very unique characteristics that made for great fundamental investments. They had three things that were unique relative to what we had looked at before. They could grow at a high rate for a long time because you had penetration rates going from sometimes below 1% of a market to, in the case of online music, something like more than half the market. First was the internet. The second was the idea to look for private companies as a way to be able to buy bigger stakes in the best companies for a smaller amount of money. And then the third was to look globally. So the first investments that we started doing research on were based in China, both public and private in the internet back in 2002 and 2003. Then over the course of years, we looked at companies in Russia, Latin America, India, Southeast Asia, and the region. So those are some of the factors that have helped contribute.
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Interviewer1:50
Fantastic, thank you Scott. So a very relevant question for today. You've seen many cycles. How do you think about the current market environment for internet investing?
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Scott Shleifer2:10
The internet is not broken this year. I think Google and Microsoft each are going to generate somewhere between 60 and 70 billion dollars of free cash flow. Google went public, I think it was 15 or 16 years ago, for a $40 billion market cap. So Google went public at less than one times net profit. It was a value investment, one of the best available then. So the internet's not broken. We're continuing to see high revenue growth, high incremental profit margins. And if you can invest in leaders, what has changed is there are a lot more eyes on the space. Cost of capital is up. Growth is absolutely continuing at high rates. And companies are definitely making sure that their expense bases are where they need to be so that they won't have to raise capital until they'd like to.
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Interviewer3:30
Got it. And throughout those same years, you invested specifically heavily in specific themes like e-commerce and consumer marketplaces. This included ride hailing, food delivery, and e-commerce fulfillment. I'm really curious, how do you decide as a shop to close up on a specific investment theme? When do you decide to move on?
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Scott Shleifer4:10
We made it better, faster, cheaper using computer science, engineers, and great leadership. We try to find those markets when penetration was below 2% and where over the next five or seven years penetration would go to more than 20%. Then before you've gained market share, before the market has grown, revenue is up 10x. And then if the market grows and a company gains share, you can have revenue that grows 20x, 50x, 100x plus. The best way to get into a company and achieve multiple of cash flow is that type of growth. When we're typically looking to close up shop and go try to find the next great opportunity, it's when we see that the market is already well penetrated and the easy growth is behind us. We look for markets that are still early in their development, where the potential for disruption is high, and where we can invest in companies that have a clear path to becoming the leader in that market.
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Interviewer5:11
I'm very curious, the last 10 years, one can characterize them as the era of fast money, skyrocket high valuations, quick deals. Today's market is nothing like that. So many market headwinds. From your exposure to your portfolio companies, how do you see the leading companies behaving in these markets?
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Scott Shleifer5:36
I'm really grateful and I think these stats are right. We own 2 to 4% of six of the seven most valuable private internet companies today. I think the seven most valuable private internet companies are ByteDance, Shein, Stripe, Flipkart, Databricks, and then check out. We've made many mistakes, many varieties. What we're observing is continued high growth, and many of those companies are profitable. There are several private internet companies today that generate more than a billion dollars of net profit today, not projections. So from the largest, most valuable private internet companies, nothing's changing in the current environment because they have a sustainable business that is profitable or fully funded. There are companies that are earlier in their journey and expenses are higher than revenue, and for those, this environment absolutely is different. The hallmark of great internet companies is that most of the expenses are fixed. During a period like this, you make sure that your expenses are right around or below revenue. That has involved companies doing layoffs that have more cost than they can bear. It's a different environment, but a healthy one where capital is respected. Companies that don't have to raise, or would like to extend the time horizon until they need to raise capital again, are in a good position. It's very similar to what we saw when we got started in 2000 on the private side in 2003, 2004, and 2005. It was a great opportunity to identify great companies and be able to become a shareholder at a great price. The same thing was true in 2008 and 2009.
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Interviewer8:10
You mentioned the region. Would love to hear your view on the markets in MENA and Saudi.
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Scott Shleifer8:15
It's a thriving ecosystem. In particular, the three categories that have been something like mid to high 90s percent of where we've ever invested are software companies, fintech, and consumer internet. What we're seeing in the region is really great innovation, great founders, and starting to be some big numbers like revenue, gross profit, and in one or two cases net profit from companies that have been able to innovate. The first success we had was a company in the logistics space. We're seeing a lot of innovation in logistics businesses, B2B marketplaces that help companies procure. As we all know, it's a great thriving region. There's a lot of financial institutions, and there's a lot of software and innovation being built to help them know their customers better and make more money. So tons of innovation in the ecosystem. What we've seen is once you have businesses that are sustainable, an ecosystem develops. You have amazing seed funds and incubation platforms and investors that focus on early stage companies that can sustainably identify great businesses and have them reach a profit and ultimately generate a return.