“We have to recognize that SPACs have eaten the normal IPO market”: Bullpen Capital Founder & General Partner

Duncan Davidson, Bullpen Capital Founder & General Partner joins that Yahoo Finance Live panel to discuss the busy IPO market.

Video transcript

- Well, it is shaping up to be a very busy IPO week. The big one on deck, though, Coinbase going public this Wednesday through a direct listing. Let's bring in Duncan Davidson, Bullpen Capital founder and general partner. Duncan, a lot of ideas to get through to. But let's talk about Coinbase first because we were talking about this-- Zach and I were talking about this earlier. This is kind of a bellwether, if you will, for how investor appetite is going to look when it comes to cryptocurrencies. How are you looking at this IPO shaping up, and what are the expectations?

DUNCAN DAVIDSON: It's going to be huge. Understand Coinbase is an anomaly. Although it's sort of a banking type of entity, it has become the Facebook or Google of crypto. It is so dominant. The question is how did Goldman Sachs let this happen?

Coinbase is an amazing opportunity. It's churning out lots of cash, which is why it's going out as a direct listing. It's a perfect listing candidate. It doesn't need to raise money. It's a cash engine right now.

- Yeah, and, Duncan, I mean, you've been through this a few times, right? So when we talk about IPOs, whether or not it's an investor or bringing companies to market yourself, talk to me about what you've seen so far to start the year, because we saw a lot of companies come out the gates double on day one, things not necessarily as hot in Q1. But now this week, I mean, there's-- there's a lot coming down the pike here this week. So, I mean, where are you putting the temperature check at right now on kind of reinvigorated demand here to kick off Q2?

DUNCAN DAVIDSON: Well, first of all, we have to recognize that SPACs have eaten the normal IPO market. They are a predominant factor in the market right now. And they slowed down a couple of weeks ago. There was a little bit of a chill in the stock market.

And I don't know if you guys have reported on this yet. But the SEC stepped in late last week and is trying to make the SPAC process more like a normal IPO. I think this is good because, in a way, we're in a race with SPACs to either institutionalism or have them blow up because of too much excess. And so the SEC's stepping in as part of this process to make them more institutionalized.

And I think the stock market is going to stabilize. It may have to digest the SEC comments. But I think it's going to get revved up again after people incorporate what the SEC is trying to do in this market. I can go deeper, if you'd like.

- Well, to what extent do you think that just the scrutiny alone is likely to dampen the SPAC boom that we've seen over the last four months?

DUNCAN DAVIDSON: Well, there's an interesting part of SPACs which is quite quite fascinating to me. Normally in an IPO, you can't do a projection. But on private markets, venture capital markets, companies make projections all the time. And we scrutinize them. And they're used to figure out whether the prospects of the company are really good or not.

In SPAC world, because the SPAC IPO has no projections-- it's a shell. There's no operations. It's not been an issue. But in the de-SPAC process, the process where you do a pipe to raise private money and then merge into the private company into the SPAC, in that situation, people have been putting projections in. And some of these SPACs are trading on 2024 and 2025 numbers. And sometimes you look at the numbers.

I know one SPAC, which is doing $4 million of revenue, is predicting $400 million by 2025. OK. Maybe there's a little bit of exaggeration going on in some of these projections. So what the SEC is trying to do is force the company and the banks, in particular the banks, to scrutinize and rationalize these projections. And if you go overseas, other markets, like the ASX in Australia, they allow the-- the IPOs to do one-year projections. But the banks are held to a high standard of vetting those projections. And that's part of what's going on right now.

I think this is good. I don't think this is a bad thing. We don't want this market to blow up. You want this market to be institutionalized and continue for a long time.

- And Duncan, just to return back to Coinbase, it's kind of funny we're talking so much about SPACs now. I remember chatting with you, I guess, back in 2019, chatting a lot about direct listings, what, when Slack went that route and whether or not that would be the new thing. But with Coinbase, I wonder how it might go for you because we are still talking about maybe $100 billion valuation there. We talk about that being a company that, of course, hits your kind of checkboxes there as being a consumer-facing company that already has a lot of cachet. People know about it. But wonder what this one might do for direct listings in that trend and also what it might say about just investor interest right now in some of these projects that are like that, with quick growth. I mean, nine times revenue growth after last year? It's pretty impressive.

DUNCAN DAVIDSON: Well, let's go back a little bit. The reason why I thought direct listings were interesting is that a lot of people in the venture world wanted to bring back the small IPO that we had in the '90s. And in our wisdom, we killed it off. The SPACs have become the preferred way to recreate what used to happen here rather than direct listings. They have actually been relatively few, and they haven't been the big phenomenon. I hoped for.

Coinbase, though, is such an interesting company. What people don't really, I think, understand about it is it's a bankers bank. It's a custodian for a lot of the holdings of crypto by big financial institutions and companies like Tesla and even MicroStrategy. And so by being a banker's bank, it's got a really deep and long-term base of people that will park their crypto. That is an amazing position to be in.

And I think the holders of crypto love Coinbase. It has huge cash flow, on top of that. I think it did $1.8 billion in Q1. And a lot of these future fintech companies are being valued at over 30 times revenue in the market. So if you do the math, last year's revenue, 3 billion times 30, this should be about a $900 billion market cap company, which sounds amazing. But the cash flow supports that viewpoint and the growth.

- Yeah, well, we'll see where it ends up on Wednesday when they start trading. But Duncan Davidson, always love having you on, Bullpen Capital founder and general partner, thanks again for the time.