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6 megatrends in capital market: Interview with Duncan Davidson, co-founder of Bullpen Capital

Jill Lai, DIGITIMES, Taipei 0

Duncan Davidson, co-founder and general partner of Bullpen Capital

Companies around the world kept tapping the capital market with trillions of dollars. In 2021, some US$8.7 trillion has been raised through equity sales, bond offering, and loan deals, according to the data of Refinitive, also cited by Financial Times. This year, SPACs boom and the number of IPOs also broke the record in the past decade. All these stats show the capital market has never been so hot and full of investors from all over the world.

Duncan Davidson, co-founder and general partner of Bullpen Capital and the pioneer of "Post Seed" investing shared his observation on the current capital market. He will also be a panel speaker in an online forum, Asia Venturing (V): Capital Market is Flat, co-powered by Anchor Taiwan and DIGITIMES, along with Alex Lee, QIC CEO and the moderator, Sonia Sun, senior counsel at KPMG.

One thing that is still happening now, is the US-China two-way investment has declined since 2016. More intense U.S. regulatory scrutiny and US-China tension have caused the investment between the two countries started to cool down. In addition to that, Davidson also highlighted six megatrends that can feature the latest hot capital market.

Trend 1: The great bifurcation of the US capital market

One obvious trend is the bifurcation in the US capital market. The great bifurcation is that deals in the upper quartile of growth get outsized valuations and round sizes. Davidson mentioned he had a company that was below $10 million in revenue and had a difficult time with an A round of $10 million. Once it grew past $10 million revenues, growing triple, it got two pre-emptive rounds. The first at $150 million valuations, and the next at almost a billion-dollar valuation, literally four months, another four months, and bam bam; which usually happens when you get over this bifurcation threshold. The closer you get to an IPO or an exit, the more people are rushing with big dollars.

"A lot of the capital is waiting to see who emerges from the early stage as a winner. And then they just pour more money on top of it. That is why the bifurcation will happen."

Trends 2: Post-seed investing gets popular

The "seed industry" of venture has been disrupting the incumbents, just like Tesla's disrupting Ford Motor. 15 years ago, there was no seed investing and a series A round was only $5 million. Now, the average series A is $15 million. Davidson explained more about the history and said, in the past, the series A investor was mainly traditional venture funds, and their whole structure was only putting in $5 or $10 million. Then, a bunch of new challenger venture funds came in below the Series A and the seed round became the new A round seed.

"We are trying to take the early investing away from the traditional venture funds. Why post-seed is so interesting is it is the last money in before traditional venture capital. We now have pre-seed small checks, seed middle-sized checks, post-seed finishes the process, and then passes it on to the traditional venture funds. At the end of the seed process, you have a lot more information, lower risk, and still attractive low valuations. So, the post-seed round basically has replaced the series A in the ecosystem. Starting with small money, but ending with post-seed, and then you will get the big checks. That is why many investors started to be interested in post-seed investment."

Trend 3: Big money rotating to future tech companies

The US stock market has been so strong. The FANG stocks, an acronym of the stocks of Meta (formerly Facebook), Amazon, Netflix and Google (now called Alphabet), grew more than double over the past five years, getting to one or $2 trillion market value. Amazon now has a market cap of US$1.8 trillion. He said, "It means a huge amount of capital has been rotating to a small number of tech stocks in the FANG stocks. Because of that, everything has been pulled up behind it in the tech space. For instance, Tesla's net worth at a trillion dollars made another EV supplier Rivian go public this week at nearly $100 billion – a market value bigger than Ford Motor Company– that still looks relatively cheap compared with Tesla. The rotation is to leading tech companies that people think are going to be the future Fortune 500, the future leaders of the market. So huge amount of money is rotating into this."

In the phone industry, Nokia built smartphones with a computer and Apple built a computer in your pocket. Amazon against Walmart; Netflix completely changed the streaming industry away from movies and DVDs. There are also several cases in electric vehicles too. "These changes are all driven by some brilliant tech companies. So, whenever there's this type of change in a big market, all the money goes to the top companies."

Trend 4: Companies stay big and private longer before IPO

Even though the number of IPOs has broken record high this year since 2016, it has been much more difficult to get to an IPO since 2000. "In 1999 and 2000, there is a huge IPO bubble in the US, driven by so-called dot-com stocks, and then the stocks all fell down. The US government changed the rule on IPOs. They made it much harder to have an IPO. Since 2000, the number of IPOs has dropped a lot compared to the '90s. So, many companies try to stay private much longer. Then, many investors are pouncing on those companies while they are still private, in effect doing private IPOs. So, when they finally go public, they're way further along than they would have been 20 years ago."

Trend 5: SPACs become common

Going public through a SPAC has been around for a long time. But only about two years ago, they began to get used as a new form of IPO. It was DraftKings that drove the change. DraftKings went public through a SPAC and grew a lot afterward. Since then, SPACs have made many companies in their early stages going public easier and faster. (The recent cases are Payoneers, Lucid Motors, Gogoro, etc.)

SPACs have grown in popularity lately and they are going after the aspirational and interesting companies, like electric cars, which really make new changes to our life and reinvent the future. For the rest of the companies, they should probably just follow the normal process to go public, suggested by Davidson.

Trend 6: Investors eye on aspirational markets

There are around five aspirational markets that are especially favored by investors – Space, all kinds of EVs, future sustainable products, such as new types of foods or biodegradable materials, fintech replacing traditional banks, and sports gambling. "We may soon have a sixth, future energy; and seventh, direct-to-consumer brands driven by the 'creator economy,'" said Davidson.

"EVs are obviously a part of climate change. But let's say you come up with a new energy system, not solar, not wind, maybe it's fusion, maybe it's a small nuclear reactor, maybe it's thermal, or maybe it's a more efficient way to use existing energy. Those types of things are viewed as very promising and very aspirational."

"Finally, what I think, is kind of interesting. There's been a big push in the US for direct-to-consumer brands, as opposed to old brands. There's this whole cluster of the creator economy, influencers on Tik Tok, and then selling products this way. The use of influencers for new brands or consumer products is considered a fast-growing market."

BIO of Duncan Davidson

Duncan Davidson is co-founder and general partner at Bullpen Capital, the pioneer of Post Seed investing which has funded 100+ companies for the last decade. Previously he was at VantagePoint Venture Partners, a mega-fund ($4.5B+ in capital under management) and one of the leaders in CleanTech, investing in Tesla as well as MySpace and Widevine.

Prior to joining the venture capital side, he started or was a senior executive in 4 startups: Covad Communications, the leading independent DSL provider that raised over $2B and went public in 1998 at a $9B market value on less than $12M of venture investment; SkyPilot Networks (an outdoor WiFi mesh), founded in 2001 and sold to Trillium in 2009; Xumii, one of the first mobile cloud apps, acquired in 2009 by Myriad Labs, a European mobile software provider; and InterTrust Technologies, the inventor of digital rights management, where he led the IPO and go to a market value of $8B, and was bought by Sony and Philips after the IPO.

At Bullpen he is focusing on future technologies like blockchain, micro-mobility and Space. He is on the board or an active observer at Wheels Labs, Skywatch, Barn2Door, Hologram, Grin, RippleMatch and GoodTime.

(Editor's note: Asia Venturing is a series of monthly roundtables with roadmaps to the future focusing on the hype v.s. the reality of Asia's supply chain-boosted innovation ecosystem, jointly powered by DIGITIMES and Anchor Taiwan. We bring together leading industry luminaries, corporate strategists, experienced investors, and entrepreneurs to expand your network and redefine the possibilities of cross-border opportunities. The replay of the latest session can be seen on DIGITIMES or Anchor Taiwan)

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