The Real Legacy of Spring Street Brewing

Thinking about doing your own public offering on the Net? Not so fast. Read the story behind Spring Street Brewing Co., the most celebrated direct public offering in history.

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Thinking about doing your own public offering on the Net? Not so fast. The story behind the story of the most celebrated direct public offering in history

By nearly every media account, Spring Street Brewing Co.'s direct public offering in 1996 was a whopping success. That the little brewery fell short of its $5-million fund-raising goal mattered little. To have raised nearly $2 million over the Internet was itself worthy of the record books--especially to the cash-strapped entrepreneurs who ate up the story. To this day Spring Street's on-line feat continues to inspire other company builders, such as SolarAttic's Ed Palmer, to take a flying public leap onto the Internet. But as Andy Klein, a former securities lawyer and founder of the brewery, tells it, Spring Street's historic Internet offering ultimately failed on several counts. For one thing, of the masses who trekked to the Web site to view the prospectus, fewer than 1% actually invested. And the stock never did gain a wider audience--an attempt at an on-line trading floor lasted all of four days. Wit-Trade, as it was called, bit the dust, but from the rubble Klein unearthed a gem of an idea: Wit Capital, the first Internet investment-banking house. (See "Old-line Ways, On-line Means," below.) While Spring Street Brewing Co. continues to struggle, Wit Capital recently raised $80 million in its own Internet-driven initial public offering. Senior writer Susan Greco recently spoke with Andy Klein from his New York City office about Spring Street's lesson for entrepreneurs and what he sees as the future of capital raising over the Internet.

Inc.: Considering your success with Spring Street, why haven't we seen more direct public offerings over the Internet?

Klein: I think most people misunderstood what happened with my beer company and, most important, why the offering was successful. It had nothing to do with the appetite for venture capital or investors' interest in beer companies. It was that we had the good fortune of being the first company to raise money using the Internet. And that led to hundreds of stories about the offering as it was occurring, which led, in turn, to, I would say, hundreds of thousands of people on our Web site.

The interesting fact was, although we had around 500,000 people who came and saw the prospectus on our site, only 3,500 of them invested. Yeah, we raised nearly $2 million, but the conversion rate--that is, the rate at which people who heard about the offering and looked at the prospectus were willing to buy in a direct offering--was very, very small.

Inc.: Why was that?

Klein: Because people aren't that stupid. And I say that sort of tongue-in-cheek. I mean, our beer company was a very decent offering, a perfectly legitimate effort to raise capital. But the average investor is smart enough to know that if there's not an intermediary who's in the business of evaluating the company, doing due diligence, and putting its reputation on the line with the company's reputation, that investors should beware.

Inc.: What did you say to companies that called for help with their small stock offerings?

Klein: I would always say, "It's a great idea if you have a way to get in touch with hundreds of thousands of people for free." The threshold issue that kills everybody is, How do you get the people to read the prospectus? How do you market it? Well, if you don't happen to wind up, by accident, in the middle of a media storm, it's impossible, because the cost of marketing the offering is greater than the funds you raise.

Inc.: But for a little while, though, did you think that that was going to be your destiny--to help other companies do what you had done?

Klein: No, not at all. I could show you the very first business plan for Wit Capital going back to April 1996. The experience of the beer company proved to me that there was an enormous capability to raise capital through the Internet, but that what was missing was value that comes from having an intermediary.

And so I think that although the Internet holds out great promise for people to raise capital in new and efficient ways, I'm not sure one of them will ever be for companies without any independent view being expressed.

Inc.: What about this whole realm of "public venture capital" that you'd hoped to pioneer?

Klein: We did think, early on, that the opportunity was largely in the venture-stage financings. We did one "public venture capital" deal for a company called Sandbox Entertainment. We took an early-stage company and offered it to individual investors through the Internet. The structure of the deal was very novel. We were going to do a public offering of a security that was restricted from trading by contract. I thought it was a great idea. But it was too novel for the broker-dealers to whom we first tried to market it. We wound up having the deal converted and sold as a more traditional private placement.

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