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.

We've found it far more successful to build our own brand by comanaging more traditional IPO activities. Our business plan has evolved, but it's always been very clear to me that what was important was to build a reputation for getting investors good investments. And that's what's missing in a direct public offering, because in a direct public offering the company really cares only about getting the money. And I think people are smart enough to know that.

Inc.: But what about the need for more early and second-stage financing?

Klein: We haven't filled the void that I think still exists between the private rounds and the public rounds. And below the venture level, there's a huge need for capital, but again it's like survival of the fittest. The reason there's a huge need for capital is because there's a lot of people trying to build companies that aren't going to be successful. I'm not sure that average individual investors are that anxious to lose their money. If you invest $50,000 in a start-up company and it hits a wall and there is no more money, you're done. So the angel networks are a growing phenomenon, one that we certainly root for and we think should work, but there's a lot of work still to be done.

Inc.: What finally happened to your brewery? Is it still around?

Klein: Yeah, it's around. It's struggling to stand out in a hugely saturated market. We combined earlier this year with a beer company called LongShore Brewery, and we've changed the strategy quite dramatically from trying to be a nationally distributed beer to being more local, because distribution was just disappearing in front of us and other small beer companies.

There's a lot of hard work and very little to show for it, so it's been frustrating for all the people at the beer company. Back in '93, '94, '95, the prospects for microbrewing were considered extremely high. People were talking about 15% of the beer market turning into craft beer. And it just hasn't happened.

You look at the publicly traded microbrewing stocks as sort of the best indication of where that market is, and Boston Beer Co. went public and went up to 32 and has been trading under 9 so far this year. Pete's Brewing Co. went public at around 24, dropped way down in trading, and was sold over a year ago. So it's been tough. It's been tough for Spring Street to raise more capital, and as a result it's been tough for it to get real traction.

Inc.: Is there still a market for the stock?

Klein: No. And there never was a market for the stock short of the week that we flirted with the Internet trading system that we called "Wit-Trade."

Inc.: Looking to the future, do you think a lot more growing companies will have access to capital because of the Internet?

Klein: I do. I think it won't be quite as easy as people like to think. But I think that clearly one of the trends that is extraordinarily powerful and well under way because of the Internet is the involvement of more individuals in more aspects of capital raising and finance. And there's more information, there's more access, there are more people trying. And everyone has a different model.

The opening up of the capital-raising process to air and light has to have a great effect on access to capital. It should be easier. Having said that, it's still not going to be simple. And I don't think it should be. If everybody who had an idea got funded and all the people who put up the funds lost their money, then where would we be?

Old-line ways, on-line means

Andy Klein, Founder
Wit Capital
Launched: 1996

What Wit Capital is: An on-line investment banker that's become a distribution channel for old-line investment bankers.

And isn't: An investment banker for small companies that wouldn't go public otherwise.

The on-line advantage: "The way we raise capital--we have millions of investors we can connect to electronically. The offering is entirely on-line," says Klein. "We can zap out E-mail to millions of investors, giving them access to the prospectus. We can take their orders in an automated way. We can build a book on demand and show that book to the managers and the company to price the deal effectively. Then after the deal's done, we produce high-quality research that we give away for free to anybody on the Internet."

Your odds of finding funding: Among its 80 deals as of June, Wit helped take a number of non-Internet companies public, including a handful of Inc. 500 companies. In addition, it recently formed a $40-million "angel" venture-capital fund for growing companies looking to raise from $250,000 to $2 million. But don't get too excited. The only way to get Wit's attention is to get on the radar screen of traditional VCs and investment bankers.

Fee: From 4% to 10% of money raised. --S.G.