Like many financial services hedge-fund crossover investing makes money by charging fees for assets under management. They bring in more investors by showing gains in the market. In late stage startup investing, this creates the incentive to inflate valuations. By deploying larger amounts of money faster than traditional venture capital, hedge-fund crossover investors can win deals and push the valuation higher in subsequent rounds showing higher and higher paper gains.
As long as there is never a write-downs—which neither investors nor CEOs would want to do—it’s a great way of monetizing inflated startup valuations.
Unfortunately, this seems to be one of those investment strategies that only works in a bull market. Tiger Global lost $25 billion (and counting) as of June 2022 ($5 billion of that in their VC fund) making it the biggest loss in hedge fund history.
Read Late Stage Prisoners Dilema by Ranjan Roy.
- Write-downs are coming as inflation causes downward pressure on startup valuations
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Startups are a microcosm of the economy and we can observe that things are changing quickly towards a recession footing. The effects of inflation on valuations are readily apparent, but we also see that things were too good to be true and investors and late stage companies exploited it.