SAN FRANCISCO – Imagine an initial public offering in which the company’s prospectus is posted on the Internet with a suggested price. Interested parties – drawn heavily from the general public – would read the document and make bids, submitting the number of shares they want and the price they are willing to pay. After a set period of time, bidding ends, and the investment bank overseeing the deal allocates the shares, starting with the highest bidder, until all shares are taken or there are no more bids. All buyers then are charged the price submitted by the lowest-bidding buyer who got into the deal.
Bill Hambrecht, co-founder of Hambrecht & Quist, is doing just that at his new investment banking firm, W. R. Hambrecht + Co. The firm calls this service “OpenIPO.”
Mr. Hambrecht quietly established the firm last year (VCJ, July 1998, page 5) and kept mum about the new business until February, as W.R. Hambrecht prepared its first IPO for Sonoma, Calif.-based Ravenswood Winery Inc.
A key goal of Mr. Hambrecht’s “Dutch auction” offering is to get IPO shares into the hands of stockholders who are more likely to hold them rather than to sell them right away for a quick profit, a practice known as “flipping.” That means targeting small- and mid-size institutions and individuals as buyers, rather than the large institutions traditionally favored by regular investment banks. Investor interest was so intense on the first day of publicity that W.R. Hambrecht’s server crashed that morning.
Mr. Hambrecht also wants his firm to sidestep the controversial practice of spinning, which involves an investment bank doling out hot stocks to preferred customers or to powerful businesspeople whom the bank wants to conduct business (VCJ, January 1998, page 30). Those shareholders then flip the stocks. W. R. Hambrecht will not have a salesforce, although the firm will pay commission to outside brokers who sell W. R. Hambrecht-managed shares to clients who prefer not to buy stock over the Web.
In keeping with its non-traditional approach, W. R. Hambrecht did not hire Wall Street-style analysts. Rather, the firm outsources much of its research work to Odyssey L.P., a San Francisco research firm. Research reports will list financial data but will not include “buy” or “sell” recommendations. The firm also will have a help desk for buyers to call for information, which will be handled by an outside group, Bank Holding Co. Corp. of Bryn Mawr, Pa.
Mr. Hambrecht sees a “very healthy dose of skepticism” about Wall Street analysts, whose employers’ success depends on the performance of the stocks the analysts assess.
W.R. Hambrecht + Co. expects to save money through its use of the Internet and will charge companies 4% to 5% of the capital raised in an IPO versus the 7% to 8% more common in the investment banking industry, Mr. Hambrecht said.
The new firm will target Internet, software and branded consumer companies.
Mr. Hambrecht was convinced of the wisdom of soliciting the general public to buy IPO stocks based on a deal Hambrecht & Quist backed a few years ago. The Boston Beer Co. was going public with a $30 million offering, and the chief executive insisted on reserving $10 million in stock for those who bought the brewery’s product. Mr. Hambrecht was not optimistic about the public interest in such an arrangement, but when the beer company placed an advertisement about the offer on its bottle, some 120,000 orders came in for $50 million in stock.
That volume of interest was overwhelming in the pre-Internet days of investment banking, but the Internet makes handling that many potential shareholders manageable today, Mr. Hambrecht noted. And, significantly, two-and-a-half years after the Boston Beer Co.’s IPO, 50% of the individual buyers still held their shares.
Not everyone, however, shares Mr. Hambrecht’s enthusiasm for the auction-based democratization of IPOs.
Venture capitalists Steve Dow of Sevin Rosen Funds and Mark Dubovoy of Information Technology Ventures were intrigued by W. R. Hambrecht’s approach, but neither was ready to bring a portfolio company to the investment banking firm yet.
“He’s certainly pushing the envelope into a real uncharted terrain,” Dr. Dubovoy said of Mr. Hambrecht. Traditionally, companies going public look for the investment bank with the best analysts and support capabilities, Dr. Dubovoy noted, wondering how W. R. Hambrecht’s services would compare with more old-fashioned institutions.
Mr. Hambrecht said he already has heard the research and support concerns from VCs. What draws them to W.R. Hambrecht, however, is the idea of using a pricing mechanism to set the IPO market closer to the aftermarket, thereby leading to less dilution.
Mr. Dow was less concerned about research if the base of the targeted shareholders was going to be the public. After all, he said, most people do not have access to Wall Street analysis now; it is primarily for institutions. However, Mr. Dow does wonder about the stability of the public’s appetite for IPO stocks. “I guess it’s going to be interesting to see what happens if and when the Internet bubble’ every bursts,” he said.
Other VCs have been quick to embrace the possibilities offered by Mr. Hambrecht’s new firm. Joanna Gallanter, a managing director at Venture Strategy Group (VSG) has already introduced a “quasi-health-care consumer company” to W. R. Hambrecht + Co.
Ms. Gallanter, whose venture firm invests in branded consumer companies, said W. R. Hambrecht’s strategy of targeting the public as shareholders is well-suited to enterprises with strong brand names and loyal customer bases. The OpenIPO might even let such companies come to the public market sooner because they could tap their customers to buy shares. Had the OpenIPO option been available in the past, online bookseller Amazon.com and auctioneer eBay would have made excellent candidates, she said, because both companies have loyal, enthusiastic users.
Mr. Hambrecht is an adviser to Venture Strategy Group, and the firm has an informal relationship with W. R. Hambrecht + Co., Ms. Gallanter said, but VSG is not required to bring deals to the new investment banking group.