An IPO for Everyone

"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 ...?

The average deal we've done is 50% institution, 50% individual. Make no mistake about it, the right institutions want to play. The right institution is the guy who has a dedicated small-company fund. But in the current process, those institutions also have been sifted out.

We are targeting the guy who really looks for special situations, who is part of a smaller fund that may be part of a bigger fund family. The whole point is not to exclude institutions, but to see that large institutions don't have a built-in advantage.

When did the lightbulb go off? When did you decide that a new approach to IPOs was needed?
I seriously started considering it after the Hambrecht & Quist IPO, in 1996. When we went on the road show, we suddenly hit a difficult market. There were some institutions that weren't going to buy our stock. But eventually, we hit a few who liked the story and gave big orders for the stock. The deal came together -- the market improved a little the week we were doing it. All of a sudden, all these institutions that didn't like the stock came in with orders. There was no way the other underwriters or H&Q could say no to them. We ended up distributing a lot of stock into the hands of people I knew didn't want it, who were buying it purely for the flip. So when our stock went up a couple of points, they flipped it. The guys who really wanted the stock ended up buying it in the aftermarket.

That's when I started thinking, "Why shouldn't we find people who really want to own the stock? Why should we give the stock to people who are going to flip it and only pay us back in commissions?"

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