Coatue: An Agile Colossus

Created

Jan 19, 2023 8:01 PM

Actionable insights

If you only have a couple of minutes to spare, here's what investors, operators, and founders should know about Coatue.

Coatue ≠ Tiger. Though they are frequently compared, the two mammoth crossover funds run very different playbooks. Tiger looks to index the private markets and relies on outsourced diligence. Coatue is a more selective picker and leans on its internal research abilities.
Large organizations can still evolve. Though Coatue is one the biggest funds in the world, it has continued to experiment with its structure. Almost a quarter of a century into its lifecycle, the fund shows no signs of curbing its adventurousness.
Data science offers an edge in private markets. In 2014, Coatue began investing in data science capabilities. In the years since, it has built a robust platform called "Mosaic" that surfaces credit card data, customer lists, and company comparisons. Though some question its utility, it is favorably received by founders.
A global outlook can surface new lessons. Coatue was quick to recognize the potential of investing in Chinese tech. It has applied lessons from that geography to Western businesses and visa-versa. Coatue founded a splashy conference to facilitate cross-cultural exchange: "East Meets West."
Hedge fund norms are an uneasy fit with VC. Though it has a fully-fledged private market practice, Coatue's internal culture has been lifted from Wall Street, circa 1985. It is notoriously cutthroat and aggressive. The compensation structure is also non-standard and may partially explain critical departures.

Introduction

Size usually comes at the expense of agility. The elephant can't match the mouse's darting run; an eighteen-wheeler does not corner like a golf buggy — no tugboat turns on a dime.

Coatue is an unusual colossus. Since Philippe Laffont founded the firm in 1999 with just $15 million, the crossover fund has expanded to a size that puts it among the giants of the financial world. One source I spoke with suggested its assets under management may now reach as high as $90 billion.

Yet, as it has grown, Coatue has seemed to lose none of its nimbleness. On the contrary, increased size appears to have bred greater agility, not less. An organization that began life as a long-short hedge fund has spent much of the last decade spinning up new investing practices. Most notably, that has occurred in the private markets with a now-thriving growth stage strategy alongside carve-outs in fintech, climate tech, and beyond. Not all of its experiments have succeeded—a high-profile internal investment in a new quant strategy flamed out spectacularly. But the fact that a firm of Coatue's scale is willing to move, to experiment, to try, is the core of what makes Coatue special.

Another strange juxtaposition is the firm's clearest vulnerability. While Coatue has charmed entrepreneurs with its fast decision-making, friendly terms, and impressive data science capabilities, it may have done so while neglecting its internal culture. To an unusual extent, sources I spoke with highlighted the firm's high churn, aggressive atmosphere, and corrosive managerial practices. All those who shared their experiences — a group that included former employees, co-investors, and portfolio founders — asked to remain anonymous. In one case, that was explicitly motivated by fear of reprisal. "Coatue can have some vengeance," a former employee said.

Such issues may not matter, at least when it comes to returns. Cultural unrest has not stopped the firm from becoming a global standout. Still, strong talent continues to depart, and while Coatue will believe it can continue to attract gifted employees, humans are peskily non-fungible. Coatue may need to remedy its internal frailties to secure an enduring, positive legacy.

In today's piece, we'll touch on the juxtapositions at the heart of Coatue. In the process, we'll explore:

Philippe Laffont's investing path. Coatue's founder didn't intend to be a stockpicker. His passion for technology transformed into a gift for picking the sector's best businesses.
Coatue's continuous evolution. What started life as a public market vehicle developed into a true "crossover." Coatue has become a powerful player in venture capital in the last decade.
How the fund makes decisions. Philippe Laffont may be the ultimate decision-maker, but several other power players influence how investments are made at the firm.
What weapons Coatue uses to win. Continued spending on internal data science tooling has paid off. Coatue's platform, dubbed "Mosaic," impresses potential portfolio founders and helps guide decision-making.
The firm's cultural flaws. Coatue has created a high-performance environment but has done so by governing with fear and aggression. That's contributed to high levels of organizational churn, even among senior investors.
Reasons for optimism. The fund's foundation allows it to execute across asset classes and sectors. Given the technical capabilities it boasts, Coatue seems particularly well-placed to further its presence in crypto.

Let's begin.

Origins

Finance has a rich fraternal history. Brothers Lehman, Solomon, Lazard, Harriman, and Brown have all written themselves into Wall Street lore. Though Coatue doesn't bear their name, Philippe and Thomas Laffont represent a continuation of that tradition.

Early days

Born in Belgium, the Frères Laffont spent much of their early years in France. Two years older than Thomas, Philippe described himself as a reclusive youngster, particularly in his teen years. "When I was sixteen, I either did not have the confidence or my parents did not let me go out enough," he noted.

Philippe's obsession with computers and technology filled his free time. That interest proved helpful — he applied to MIT and was accepted in 1985. The following year, Thomas followed his elder brother to the United States, attending the Lycée Français de New York for his final high school years.

Surrounded by technical savants at MIT, Philippe began to feel as if he needed to "repurpose" his talents outside the realm of hard math and science. Though he continued to attain a Master's in Computer Science from the institution, he took a job at McKinsey's Madrid office upon graduation. If he'd had his way, Philippe would have headed West rather than East. Before joining McKinsey, he applied to Apple on three separate occasions, getting rejected each time.

One benefit of moving to Spain was that Philippe got to stay close to Ana Isabel Diez de Rivera, the woman that would become his wife. A lawyer by training, Ana came from an influential family in the country. She was related to Carmen Díez de Rivera, a key figure in Spain's transition from Franco's dictatorship toward a modern parliamentary system.

Learning the market

After two years, Philippe's time at McKinsey came to a close. Though he was ready to return to the US, Ana wanted to remain close to home. They struck a compromise, with Philippe deciding to spend a year working for her family business. It was the kind of job useful in hindsight but frustrating in the moment. Philippe was shunted to a basement office without much to do. To fill his time, he perused the Herald Tribune.

Quickly, Philippe developed a fascination for stock listings. Soon, he was buying the Tribune every day to see how the markets had moved. Not long after, he started investing, picking blue-chip technology companies he felt equipped to analyze. Philippe's early picks included Microsoft, Intel, and Dell. Though based in California, Thomas got in on the action, too, with the brothers sharing ideas.

By Philippe's admission, it was fortuitous timing. In the mid-90s, companies like Microsoft appreciated significantly, giving the Laffonts confidence in their abilities. "We confused luck with skill," Philippe noted, adding that had he started investing during a less bullish era, he "would have for sure given up and done something else."

Tiger Management

Life turns on such moments. After a year in the basement, Philippe and Ana moved to America. Rather than hungering for a job in Silicon Valley, Laffont sought to make it on Wall Street. It wasn't easy. He landed an unpaid role at a mutual fund, but it didn't take long for him to parlay that into a better position. At a conference, he met someone with inroads at Tiger Management, the famed hedge fund of Julian Robertson.

As with Apple, Philippe was rejected at first. Since he had attended MIT, his CV was automatically routed to Tiger's IT department, who promptly responded that they had "no space" but that Laffont had a "wonderful resume."

Thankfully, another door opened. A friend of a friend knew Robertson well enough to get the would-be investor into the room with the "Wizard of Wall Street" — but he only had two minutes. "I went straight to the point," Philippe recalled, telling Robertson that he wanted a job picking technology stocks for Tiger. "I was so direct with what I wanted," he added.

Philippe made a strong enough impression in those 120 seconds for Robertson to introduce him to his technology team. He passed their screening, receiving a role at the storied firm. He would spend the next three-and-a-half years under Robertson's tutelage, learning the trade and focusing on technology and telecom. Not long before Tiger Management closed its doors, Laffont decided it was time to go solo. In 1999, Philippe started Coatue Management.

Coatue Management

Like Robertson, Philippe built his empire from relatively humble beginnings. In 1999, Coatue opened with just $15 million in assets under management (AUM). According to one source I spoke to, Coatue is likely managing between $70 billion and $90 billion today.

Brothers, reunited

Named after Philippe Laffont's favorite Nantucket beach, Coatue was inspired by Robertson. Like his mentor, Philippe planned to buy the best companies and short the worst, though he narrowed his focus to the world of technology. In particular, Laffont focused on "generational consumer technology companies," as one Coatue employee described it. Whereas many peer firms were focused on short-term movements, Philippe wanted to look toward the horizon, searching for businesses that could compound for three years or more. "That's our edge," he said in a rare interview, "Patience and longer-term thinking." (Chase Coleman would launch Tiger Global with a similar premise.)

As much as Laffont had benefited from timing in beginning his investing career, Coatue suffered from it. In December of 1999, when the fund opened its doors, the Nasdaq Composite—an index of the exchange's stocks—stood at 4,000. By March of 2000, it had crested 5,000. Then, the bubble burst.

The dot-com crash saw tech stocks collapse. By late 2002, the Nasdaq Composite lingered a touch above 1,200. Coatue's first three years of investing had coincided with more than a 75% drawdown in the markets. Remarkably, Laffont weathered the storm, showing an ability to manage in adverse circumstances, a skill that attracted further investors.

The following year, in 2003, Thomas would join his brother at Coatue. He had taken a very different path since graduating from the Lycée, attending Yale before heading to California. Thomas worked his way up from the mailroom in CAA's Beverly Hills office. Over his six years at the agency, he worked for Bryan Lourd, an industry heavy-hitter who counts George Clooney, Ryan Gosling, Scarlett Johansson, Paul Thomas Anderson, and Lady Gaga among his clients. Though Thomas became an agent in his own right, the opportunity to join his brother in building a preeminent investment firm was too good to pass up.

One of Coatue's defining hits arrived shortly afterward. Like Scott Shleifer at Tiger Global, Coatue recognized the potential of Chinese technology investments. While Shleifer snagged several of China's "Yahoos," Coatue made the bigger splash. In 2004, the Laffonts bought Tencent at its IPO price. At the time, the markets valued WeChat's owner at less than $1 billion; today, it sits around $590 billion. While Coatue has, of course, changed its position sizing, it nevertheless represented a massive win.

Another critical bet was Apple. As a Coatue employee noted in our discussion, "Philippe probably made more money on Apple than anybody." Though rejected from the company's Cupertino offices, Laffont remained impressed by the business, frequently buying in. Reflecting on his history with Apple, Laffont said, "It just shows how sometimes you do get the things you want but just through a different door."

Better late than never

Though the Laffonts showed a knack for identifying great technology companies, they were slow to recognize a fundamental shift to the industry's financial landscape. In 2000, Tiger Global made its first private investment, backing Russian search engine Yandex. That represented the beginning of an accelerating private market run still in full swing.

Tiger's move into the space was motivated by an understanding that many interesting technology companies had yet to hit the public markets. The firm could accumulate stakes in a business that might not IPO for years by moving earlier. In the process, it built relationships with management teams and developed a sharper understanding of the underlying dynamics. Lessons from the venture practice could be passed to the hedge fund team and visa-versa.

In 2009, DST Global entered the fray with Yuri Milner making his famous investment into Facebook. As one former Coatue investor active during this era noted, "The narrative at the time was that [Tiger and DST] were stupid."

Perhaps that's part of the reason that it took Coatue time to catch up. In 2013, the firm made its move, opening up an office on Sand Hill Road in the same building as Andreessen Horowitz and beginning to scout for private market deals. The new initiative was led by Thomas Laffont and Daniel Senft, a talented stock picker and long-time lieutenant.

Without a strong brand in Silicon Valley, Coatue found unusual ways to break into the ecosystem. Even before they'd raised a dedicated venture vehicle, the team secured Coatue's first private investment, purchasing secondary shares in cloud management system Box. As a former employee noted, that opportunity had arisen thanks to the firm's Wall Street connections, with a Morgan Stanley banker flagging the upcoming sale.

It was a start—one propelled forward by the closing of a formal venture vehicle. Pitchbook data suggests Coatue's first private market fund totaled $185 million, though the employee I spoke with remembered it as $350 million. (They might have been thinking of a $355 million growth fund raised in 2015). Whatever the figure, Thomas Laffont and Daniel Senft had money to spend. The Box deal was followed up with direct investments into Hotel Tonight, Evernote, and Lending Club. The following year, Lending Club would IPO, marking Coatue's first venture liquidity event. It didn't take long for Coatue to set its sights higher.

Bigger fish

A former investor with knowledge of this era mentioned that Coatue identified a few high-priority companies to target. "Uber was our white whale," they noted, lamenting that "Travis wouldn't give us the time of day."

Other marks included WhatsApp and Snap, with Coatue's interest in the companies influenced by their work on Tencent. They had seen the power social media and messaging businesses had to translate attention into monetization. Jan Koum and Evan Spiegel's companies were considered best positioned in Western markets. While DST would go on to snag a sweetheart deal on the messaging service, investing even after Facebook had agreed on an acquisition, Coatue got its chance with Snap.

Per the former employee, getting into the deal was a five-month endeavor. First, Coatue tried to win Snap's Series B but was beaten out by Insight Venture Partners. The source recalled that it was the type of deal in which terms escalated rapidly, with a $200 million valuation skyrocketing to $800 million in a matter of days.

Coatue was intent on not missing out again. To win Spiegel over, Thomas began a "masterful" full-court press, wooing Snap's founder with expensive dinners and introducing him to celebrity contacts through his network at CAA. The Coatue team also demonstrated the rigor with which they had studied the social media space, particularly the Chinese market. That was compelling to Spiegel, who made frequent trips to China to understand the local dynamics better.

It paid off. In December of 2013, Coatue secured the chance to invest $50 million into Snap at a multibillion-dollar valuation. As the ex-Coatue investor recalled, "That was what put us on the map."

Hitting its stride

While Coatue didn't have name recognition in tech circles, it had other weapons: the firepower of a hedge fund. As demonstrated by the Snap deal, early-stage companies valued deep research and proprietary insights. With a much larger staff and more powerful instrumentation than a traditional venture firm, Coatue shone in this area. Though the private market team didn't gain access to Uber, they won over Logan Green and Lyft with their research.

Before meeting management, Coatue's team took trips with Lyft drivers, taking pictures along the way. Those photos were included in a pitch filled with insights on the space. As a source said, "it was a marketing deck."

That soon became something of a calling card for Coatue. Rather than heading to a meeting and waiting to be pitched, the firm's investors would do the pitching. With the help of the hedge fund team, they'd compile research and walk through their thoughts on the market. As the source mentioned, it demonstrated to startup founders that Coatue was intelligent, thoughtful, and willing to do the work. Today, this is common practice for later-stage firms, but it was unusual at the time. It yielded promising results, with a former investor remarking that "it worked ninety-plus percent of the time."

To bolster its capabilities, the Laffont's staffed an in-house research team, managed by a former BCG consultant. It's interesting to compare this integrated approach with Tiger's outsourced model. Whereas Coleman's firm relies on Bain and other consultancies to get up to speed on a business, Coatue established this practice themselves.

Around this time, Coatue also began heavily investing in a data science practice. In 2014, a young Wharton graduate, Alexander Izydorczyk, interned at the firm. Izydorczyk worked closely with Philippe Laffont to develop Coatue's capabilities in this area, eventually joining full-time. By 2017, this initiative began to pay off, with Coatue providing tailored insights to prospective investments and portfolio companies.

In tandem with this data drive, Coatue widened its aperture, pursuing deals in sectors it had previously eschewed. The fact that the firm felt confident in doing so showed it had begun to hit its stride. Coatue's public investments in China had given them an understanding of the geography that they parlayed into the private markets. To lead those efforts, the fund brought in Tony Zhang from DCM Ventures, a firm with deep connections to China and outstanding performance. Indeed, DCM's 2014 vintage is one of venture capital's best-performing funds, with a 2021 piece reporting 30x returns.

Zhang made his presence felt, brokering investments into Didi, Uxin, ofo, Meituan, and Kuaikan Manhua. A former investor suggested that Coatue invested about half of its first two funds in China. Ride-hailing business Didi was considered a "very important investment." Of the group mentioned above, three are now publicly traded—ofo and Kuaikan are yet to reach that stage.

Coatue formalized its transnational approach with the introduction of the "East Meets West" conference. Thomas Laffont's brainchild brought together luminaries from Asian and Western tech ecosystems alongside a liberal sprinkle of celebrities. Kicking off in 2015, "East Meets West" was initially held at the Four Seasons on Hawaii's big island before moving to California's Pebble Beach in later years. One source described it as "a pretty brilliant move," with Coatue getting credit for bringing notables like Mary Meeker, Yuri Milner, and Pony Ma into conversation.

Of course, there have been awkward moments. One attendee recalled a panel event featuring former Secretary of the Treasury Larry Summers and Coinbase CEO Brian Armstrong. Unconvinced by the cryptocurrency sector, Summers made his opinion known, pressing Armstrong in the process. "It was a little embarrassing," the watcher noted.

The fact that Coatue could even preside over such a moment was a testament in and of itself. The firm had established a name and network in both American and Asian venture markets in just a few years. But it wasn't time to sit still.

Moving earlier

Coatue's grip on growth investments grew firmer, so it started to look upstream. Coatue realized, alongside many other investors, that seeding a company fundamentally changed the dynamic with a founding team. The shared history and demonstrated trust fostered a tighter connection that could prove vital in securing much larger allocations down the line. While Coatue had shown an ability to win competitive late-stage rounds thus far, the market had grown more crowded. To stay competitive, Coatue needed to move earlier.

The firm brought in two established names to kick off the effort: Matt Mazzeo and Yan-David Erlich. Mazzeo had famously worked at Lowercase Capital, a firm with legendary returns. He also shared Thomas Laffont's connections to Hollywood, having spent more than seven years in business development at CAA. Erlich brought high-level operating experience to the table alongside an investing track record, having founded connected worker platform Parsable, incubator MuckerLab, and firm Outlier Ventures.

Coatue soon brought a heavy-hitter aboard to manage this team: Dan Rose. The former VP of Partnerships at Facebook, Rose was a long-time golf buddy of Thomas's and had stayed close to the team for years. He soon brought along a former colleague, Caryn Marooney, who had served as Facebook's VP of Communications. Rose took on the role of Chairman while Marooney joined Mazzeo and Erlich as General Partners.

Around this time, Coatue bolstered its late-stage team, too. A co-investor with ties to the firm pointed to the arrival of Kris Fredrickson as something of a turning point, with the former Benchmark principal refining the team's tastes. Sebastian Duesterhoeft and Lucas Swisher arrived from Silver Lake and Kleiner Perkins, respectively. The inference from this source was that such additions represented a step up, albeit one secured at a high cost. "They found a cohort of people and paid them a shitton of money," they explained. It seemed to give the firm the firepower to keep expanding its efforts.

Expanding the aperture

In many respects, the entire story of Coatue can be seen as a continuous mandate expansion. What started as a hedge fund focused on public consumer technologies has gradually grown to include growth and early-stage funds. New sectors have accompanied this structural growth. Since 2013, the venture team has moved beyond consumer internet and into fintech, enterprise software, healthcare, and crypto. All have become legitimate hunting grounds for the once narrow fund.

This adventurousness is perhaps the defining characteristic of Coatue's last five years. Increasingly, the firm is a true generalist in the private markets, a flexibility that has resulted in a much tighter deployment schedule. Coatue made 58 investments in 2020, a figure that jumped to 165 in 2021. Quarter four of last year was the firm's busiest ever, with 55 deals announced during that period alone. That's still a way short of Tiger's 362 for the year but is an undoubtedly rapid pace.

It seems to have worked, for the most part. While one co-investor remarked that Coatue had been left "holding the bag" on a few deals, it has also secured stakes in some of the most consequential businesses of the last few years. Even though they may have been late to the sector, the firm has established an impressive base in crypto with investments into Fireblocks, OpenSea, Alchemy, Dapper Labs, and Dune. Those have contributed to the growth team's purportedly strong performance, with a 2021 report suggesting that Coatue's 2017 vintage boasted an internal rate of return (IRR) of 47%.

According to one source, Coatue's early-stage group has yet to find equivalent success. Referring to a $500 million vehicle, the former investor said, "As far as I know, the returns on that fund have been pretty bad." A venture capitalist from a different firm expressed respect for the growth practice while noting that the venture lacked equivalent coherence. "On the early side, it's not there," they said.

It is still relatively early days. Less than a decade into its private market sojourn, Coatue has grown its footprint, developed new competencies, and found ways to win. For an organization of Coatue's size, such dexterity is both unusual and worthy of recognition.

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Operations and structure

Our work thus far has given a sense of how Coatue developed. It is now time to study the firm's different pieces, examining how they fit together.

Fund structure

It's worth taking a moment to outline Coatue's business components explicitly. Fundamentally, there are three core business lines: public market investing, growth investing, and early-stage investing.

Coatue has also experimented beyond these primary categories. A source close to the firm pointed out the existence of four additional Special Purpose Vehicles (SPVs). One is focused on fintech, another on climate tech, and a third on the Chinese ecosystem. Coatue invests in both private and public companies from these three SPVs. Climate tech seems to be a particular focus, with a new $2 billion SPV recently added. Coatue has already taken significant positions in Tesla and Rivian.

The fourth vehicle, named the "Opportunity Fund" is exclusively geared to the public markets and was raised during the brief stock market collapse in March of 2020. My source noted that Philippe Laffont realized the breakout potential of businesses like Zoom and Wayfair, raising $1 billion to snag them at depressed valuations. It reportedly generated more than 100% return within a year.

Though no longer operational, Coatue did once have a fourth "core" investment practice, trying out a quant approach. Data lead Alex Izydorczyk helmed this $350 million fund but struggled to generate consistent returns. After a strong 2018, Izydorczyk's division made 2% in 2019 and toiled in 2020. Coatue returned the fund's capital by the middle of that year, booted Izydorczyk, and slashed the team. Reports suggested that Izydorczyk was a harsh leader with brutal expectations. As we'll discuss later, his approach appears to be representative of a firm with a frequently corrosive culture.

One interesting side effect of Coatue's different standalone funds is that each vehicle has a standalone "scorecard." Limited partners (LPs) can see which strategies are paying off and make decisions accordingly. While that might provide more granular information, it also opens the firm up for criticism. For example, earlier in this piece, we shared that some sources suggested Coatue's venture strategy had mixed results. Would this even show up if Coatue blended investments? One former investor compared Coatue's preference for atomizing its vehicles with Tiger's more unified strategy, remarking, "Tiger's approach is smarter."

Hierarchy and decision-making

Coatue's chain of command is both simple and convoluted. I was fortunate to get a relatively clear picture of the firm's internal hierarchy through my discussions.

Founder Philippe Laffont sits at the top and is the firm's ultimate decision-maker and portfolio manager. Thomas Laffont and Daniel Senft serve as trusted lieutenants with greater latitude than other senior investors. Once you move below this level, things quickly get complicated. While investors might focus on particular stages more than others, there is considerable fluidity with hedge fund analysts contributing to early-stage venture deals and visa-versa. Some leaders manage sectoral areas while others govern a particular asset class practice.

For example, Michael Gilroy and Rahul Kishore were identified as key leaders of the firm's fintech practice—a sectoral focus—while Dan Rose was pointed out as the manager of the venture asset class. Perhaps the best way to understand Coatue's hierarchy, then, is through a matrixed approach. Based on my conversations and research, that representation might look like the chart below. Leadership is represented along the various axes, with key individuals shown in relevant cells:

Of course, this is far from complete. The firm has too many employees to represent here succinctly. Nevertheless, it gives a sense of how Coatue functions and governs.

In terms of decision-making, sources indicated that Thomas Laffont and Daniel Senft could make investment decisions within reason. "No one's begrudging ten or fifteen million checks," an investor stated, suggesting that larger tickets likely needed Philippe Laffont's approval. Investors further down the pecking order may have to adhere to a similar process. Ultimately, the buck stops with the man who started the firm: Philippe Laffont.

Playbook

Our work thus far has given a sense of Coatue's development and internal structure. It is now time to examine the firm's current playbook. We'll specifically focus on Coatue's private market work, walking through how the firm sources, evaluates, wins, and supports deals. In doing so, we'll have a chance to juxtapose Coatue's approach to Tiger's, the investor to which it is most frequently compared. In doing so, we'll learn that the superficially similar firms are leveraging meaningfully different tactics.