Can you give an example of a good OpenIPO candidate?
Ravenswood Winery is a good example. Taking that company public got them money that really was not available privately. It was amazing to watch the impact of the public markets on Ravenswood. They had a real sales spurt. They became kind of a national name. They already had a strong brand when we took them public; that's why we took them out. But going public really added to the value of the Ravenswood brand. If three years ago, someone had said that Ravenswood was going to sell out for $150 million [Ravenswood was acquired in April by Constellation Brands for roughly that amount], you would have said he was crazy.
It was the combination of public money coming in, the exposure the public market gave them, and also being our first OpenIPO that gave Ravenswood a lot of publicity -- and that spilled over into its sales. The company grew very rapidly, and everything worked.
"I'd bet there's a huge number of companies, probably as many as 10,000, that are good enough to go public over the next decade."
Going public adds tremendous assets to a company. It gets them money -- permanent equity money -- on a very reasonable basis. It gets them publicity. It allows them to expand their management group because of stock options and equity ownership. I honestly think the companies that go public are the companies that are going to survive.
In the last few years IPOs have been built on very dramatic assumptions and very aggressive growth plans, and have been marketed to a certain kind of investor. That investor is looking for the next Cisco, the next Intel. But I'm convinced there are lots of people out there who are more than happy to buy stocks in companies they respect that aren't necessarily projecting such dramatic growth.
That's one of the reasons why I think IPOs should be auctions: to go out to a company's affinity group and the individual investors who know the company's products, and to offer stock to them. That's the whole point.
We also found that in the institutional market there are lots and lots of middle-market investment advisers. They're always looking for new and unusual ideas and are willing to look in industries that are not in vogue. The whole point of the open IPO is to go out and reach buyers who don't normally participate in conventional, investment-bank IPOs.
Where will the next batch of these IPOs come from?
A huge portion of the pipeline is technology companies, but there are businesses in other areas as well.
We've had some success in the consumer-branded areas. For example, there are hundreds of independent wineries, and among them, there are a dozen or two that have very strong brands and that could be very good candidates for the public markets.
The model that I always have in my head is an initial public offering we did at H&Q for Neutrogena, the soap people. We did an offering for them back in the '70s. CEO Lloyd Cotsen had to buy out some of his partners and his father-in-law, who was the founder. Neutrogena went public and stayed public for over 20 years. And it grew. The people who bought that stock -- there were some who held it the whole way -- were rewarded when the company sold out to Johnson & Johnson for roughly $900 million.
"The whole point of the open IPO is to go out and reach those buyers who don't normally participate in a conventional IPO."
That was a perfect example of a company that went public to provide liquidity to its partners and to allow management to fix the balance sheet. It was a great cash-generating business, so Lloyd didn't have to raise any more money. He never had to sell out, and he didn't sell out until he decided that he wanted to do something else with his life.
There will also be some franchises that ultimately will go public. Some law firms will go public, because there are some very strong franchises in that field. Some venture-capital companies will go public -- I would love to own a piece of Kleiner Perkins. There are going to be a lot of businesses like that, where going public will be one way to capitalize on the value that the partners have built.
What about liquidity and exits? Are we looking at letting many investors into an environment where you encourage long-term investing and discourage short-term investing?
We're realistic enough to know that the biggest challenge is making sure that we can provide liquidity in the aftermarket. People will not buy IPOs if they think they won't be able to sell their stock later. We're now spending a lot of time developing Web sites that integrate research on small stocks with stock auctions.
Can you really create a new marketplace for companies that need capital?
Yes, if we can rewrite the definition of a successful offering. Companies don't have to subscribe to the notion that if the stock doesn't go up by 15% to 20%, they're going to dissatisfy the investor.
A lot of work needs to be done. First, you have to demystify the going-public process and take a lot of the costs out. If a company is getting a prospectus written and going on a road show, that ends up costing $2 million. That's a lot for a small company. We know now what part of the prospectus people read: they read the summary, they read the business strategy. I think investors would be happy if a company simply put its own projected business model on the Web, as some countries already allow.
There has to be a change in the way information is provided. At the moment, only a thousand or so companies get decent Wall Street coverage. We seriously think there's going to be a change in the way both analysts and investors do research. The Web gives you the perfect way to make research about small companies available to everyone.
To make an Internet IPO work, the underwriter has to show that it can create a real aftermarket, a liquid market, and be an information source about the companies that it is taking public. The reason Andy Klein's Spring Street Brewing Co. offering didn't work was that a pure Internet IPO won't work if people aren't assured there will be an aftermarket. [Because Spring Street Brewing acted as the underwriter for its own IPO, no investment firms made a market in the stock. Spring Street sold the stock and by default was the only buyer.]
To make our OpenIPO work, we had to build the Internet capabilities and provide both liquidity and information. Without liquidity and information, institutions will not buy a stock.
But I thought you wanted to cut out the institutions ...?
