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Tech expert: 'We have an incredibly hot valuation market' as Bumble soars on first day of trading

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Union Square Advisors Ted Smith joins the Yahoo Finance Live panel to discuss the 2021 IPO outlook as Bumble officially makes its public debut.

Video Transcript

AKIKO FUJITA: We are still waiting for shares of Bumble to begin trading there. Shares are priced at $43, now indicated to open at $76 a share, I think at last check there. So we're expecting a significant bump there. Just one of many companies that have seen a huge bump, at least on the initial day of the IPO.

Let's bring in Ted Smith. He's Union Square advisors co-founder and president. Ted, it's good to talk to you today. I imagine you've been having a lot of conversations with some of the companies that you have invested in about just this red hot environment around IPOs, whether it is through a traditional listing or through a SPAC as well. What's the feeling right now on the private side of things?

TED SMITH: Well, first of all, Akiko, thank you for having me on today. I really appreciate it. And you're absolutely right. We're having a lot of conversations with our later stage private clients about how they think about ultimately achieving an exit. And there are so many more options today than there ever have been.

There's the traditional IPO, which is obviously still available to companies of size and certain financial performance. There's this incredible surge in SPAC we've seen over the course of the last 12 months. And there's a very active M&A environment as well, both from strategic acquirers, as well as financial acquirers. Sponsors, private equity firms have never been busier, have never had more capital at their disposal.

So really, it is a terrific time to be a high flying later stage private company, just in terms of the amount of capital that's available for those businesses and the opportunities they have to either go public as a way to achieve an exit or to achieve an exit through a sale to a strategic or a financial partner.

ZACK GUZMAN: Ted, just to follow up on Akiko's question there, I mean, how worried maybe should people be when we talk about this drawback in comparison to the tech bubble? Because we have seen valuations stretched here. And we'll see where Bumble goes, but it seems like we're seeing more and more, whether it's SPAC deals or IPOs, more and more enthusiasm, shall we say.

TED SMITH: We are seeing a lot of enthusiasm. I do think this is different. I mean, I was-- I'm old enough that I've been doing this and was part of the environment in 1999, with which the current environment is often compared. I think the major differences are at least twofold. One is, I do think that companies that are going public today have much better longer term business models than a number of the companies that were able to get public in the late 90s, early 2000 timeframe before the original tech bubble burst.

So I think there's a difference there in terms of the long-term viability of these businesses, their capital consumption, and ultimately, their ability to generate profits. So I don't think there's an apples to apples between the types of businesses that are getting public.

I also think that the markets are significantly more liquid these days, and as I mentioned before, significantly more options for companies to achieve some form of liquidity event. It's not the IPO or bust or IPO with maybe an M&A as a backup plan option that was really in Vogue or dominated kind of the late 90s, early 200s scene. There are so many more options at this point that that I do think that that's also a difference between the two markets.

That being said, there's no doubt that we have an incredibly hot valuation market right now. What we've witnessed over the course of the past 12 months as we entered into the pandemic, we saw the markets in near free fall late in the first quarter of last year. They stayed there not very long, as optimism surged, at least in the tech space, as there was a view that technology companies were going to be part of the solution to how we were going to address the pandemic, as opposed to part of the problem. And we've seen those valuations continue to climb then over the course of the last nine months.

And we expect that, frankly, to continue. So I think we-- I think investors in this environment do need to be cautious about the valuations that they're paying for any company in any particular construct, just given the fact that those multiples that are out there are really at all-time highs in many cases.

But we also see these businesses continuing to grow, continuing to intelligently consume capital, to bring on new customers, whether those be enterprises or consumers. And so, we think there's still a long path for these companies to continue to succeed. And that's why they've achieved these incredible valuations and, frankly, will probably continue to have those.

AKIKO FUJITA: Ted, you mentioned the huge growth that we have seen in SPACs, and I wonder how that has affected things on the VC side. We've heard about just how competitive it is, where investors are picking these companies, saying, please let us take you public. Does that ultimately lead to a significant disruption for VCs?

TED SMITH: Well, I think, again, I think it gives VCs one more arrow in the proverbial quiver with which to think about their exit alternatives. And certainly VCs that have companies of scale in their portfolios are evaluating that. Also, companies that have perceived high growth prospects that aren't yet of scale clearly are interesting to some SPACs at this point. Given the difference in the way SPACs are ultimately marketed to investors and the opportunity for companies to get earlier-- to get public earlier, rather, via a merger with a SPAC, we are going to see some more VC-oriented companies get public this way.

I think the one thing I worry about in that world is, we haven't yet seen sort of a major meltdown of a tech company that has gone public via SPAC, an entity that wildly misses the projections with which they went out to the market and talked about these tremendous growth prospects, and ultimately, their profitability prospects. We haven't seen that happen. And obviously, I'm not hoping for that. But I think history would indicate that we will see that happen at some course-- at some point over the course of 2021.

And then it will be interesting to see if the SPACs sort of take a step back and say maybe we pushed that envelope a little hard. Maybe we should not be thinking quite so aggressively about some of these earlier stage companies becoming public. Because there is a reason that through the traditional IPO markets, these companies would not be going public just yet.

And ultimately, I think we'll see a convergence in the standards by which companies can go public through the variety of means, regular way IPO, direct listing, and SPAC such that companies of a certain size and growth and profitability threshold do get public, whether they go-- whichever one of those routes they choose.

AKIKO FUJITA: Ted, let's talk about your investment thesis right now, some areas you're focused on over at Union Square Advisors. Obviously, we've heard a lot about the growth in the AI space, in the cloud space as a result of the pandemic. But you've also sort of looked at some of the verticals that are likely to get a big bump on the back of this global vaccine distribution. What's catching your eye on that front right now? And what are the opportunities for you?

TED SMITH: Yeah, so Union Square Advisors primarily helps later stage private companies and public companies raise capital and also advises them on their M&A exit alternatives. So you're absolutely right. We continue to focus a lot on AI and its various forms. We think it has applicability to a broad range of verticals, places like Human Capital Management. We've certainly spent a lot of time with companies that have next generation AI for security purposes.

AI at the edge being used in smaller devices like cameras and other devices that are not full blown computers we see as being incredibly important and also relevant to how we communicate and how we interoperate during a pandemic. Having that AI at the edge which can replace a human being, doing a wide variety of tasks, where we're trying to keep human beings from congregating, is incredibly important.

I see there on the graphic and we've talked a lot about digital transformation, which we think the pandemic has only accelerated. So as large enterprises finally get around to reducing their paper-based footprint using a combination of robots and technology to be able to manage their massive paper factories and convert those into digital use cases, we think is an enormous business. We're tracking a number of really interesting companies in and around that space as well.

AKIKO FUJITA: Yeah, it's been fascinating to see which sectors have really thrived throughout the pandemic. Ted Smith, Union Square Advisors co-founder and president, it's good to talk to you today. Appreciate you stopping by.