There is a new twist in initial public offerings, and it may just open up a whole new source of capital for start-ups. Called a "public-private" deal, it involves going public at a stage when most companies are still trying to demonstrate a market for their products or services.

A case in point is Office Solutions Inc. of Portland, Ore., which was formed in January 1983 to sell microcomputers and telephone systems to businesspeople in the Pacific Northwest Last May, the company began looking for approximately $1 million of equity to cover the expenses of opening its first three sales centers. The original plan, says president and chief executive officer Ralph D. Lockhart, called for a private equity placement with a dozen or so wealthy individuals. But instead, the company wound up selling $1 million of stock in an initial public offering that was fully registered with the Securities and Exchange Commission -- this despite the fact that Office Solutions had yet to generate any revenues or earnings.

The deal was underwritten by Paulson Investment Co., a Portland-based securities firm, and required the founders to give up slightly more than 50% of their ownership. Unlike most public offerings, the issue was aimed specifically at investors with annual incomes over $50,000, or net worths over $150,000. Indeed, the stock could be purchased only in 1,400-share units (of which there were just 408), and each unit was priced at $2,450. The prospectus made it clear, moreover, that there would be no market for anything but the units during the following 12 months. "We stated from the very beginning that this was a high-risk, venture-capital-like investment," notes Lockhart. "The idea was to discourage widows and orphans."

The Office Solutions underwriting was similar to a previous offering that Paulson Investment had managed for another start-up, Schuchardt Software Systems Inc. of San Rafael, Calif. Using the "public-private" approach, Schuchardt hat sold 40% of its stock and raised $1.4 million for the company to develop and market a line of business-applications software compatible with the IBM Personal Computer. "So many investors seemed to be interested in software opportunities," says president and founder Fred Schuchardt, a former executive with MicroPrc International Corp. "We saw this as a less costly alternative to venture capital financing."

Lockhart took a similar view, and today his company has four stores in Oregon. Meanwhile, Lockhart is already looking well down the road. He hopes that the young computer retailer will soon be able to expand into other parts of the West without major additional financing. "We'll have a real advantage in being a public company," he notes. "Our strategy would be to acquire established operations with our stock."

Of course, there are pitfalls involved in going public so early in a company's life. Nevertheless, the benefits make it likely that other young companies will soon be following Office Solutions and Schuchardt to the public market. Paulson Investment president Chester Paulson, for one, thinks that is just fine. "There's nothing wrong with selling big opportunities as long as you sell them for what they are," says Paulson, who expects to do future deals of this type for companies in growing industries. "There are certain types of investors who can take certain types of risks. And for us, it's a matter of matching the two."