Like a lot of software products rushed to market before completion, Bill Hambrecht's new investment banking boutique,
, looks a lot like an unpolished beta version that was hurried to meet the shipping deadline.
And while the reaction from the venture-capital community is cautiously supportive, they too have fundamental questions about the ability of online IPOs to offer an improvement over a traditional investment banking syndicate.
The first problem is access, something the glowing press reports Monday neglected to mention. "Now he's catering to the little guy," ran one feature article. "His new firm intends to cater to the current fashion ... of selling stock to the public online," said another.
But a thorough examination of the company's Web site (
www.openipo.com) on Tuesday shows that its first underwriting,
Sonoma's Ravenswood Winery
(RVWD:Nasdaq), remains open only to the country-club set -- or at least to the select few who can call themselves institutional investors or "qualified individual investors" (with a net worth of more than $1 million or annual income of at least $200,000).
There is currently a way around the gate, but it involves opening an individual trading account with one of four second- and third-tier brokerage firms. None of these, incidentally, offer online trading and one,
, is based in Hong Kong and cannot do business with U.S. investors at all. And while parent company
WR Hambrecht & Co.
has applied for permission to cater to individuals, it hasn't received it yet and can service institutional investors only. Some democracy.
"We intend to have approval to accept retail brokerage clients by the time the Ravenswood offering is available," says Bob Hambrecht, who tells
that the company also planned to offer online placement of bids for Ravenswood stock, but only for those retail customers who open an account with WR Hambrecht.
But none of those systems is in place yet. Making them a reality, Hambrecht says, depends upon the grace and speed of the
approval process, something in which he has a lot more faith than many people.
What's more, the online version of the Ravenswood road show -- like those in traditional offerings -- is off-limits to the public, another disturbing facet at odds with both OpenIPO's stated purpose and the promise of Web-enabled disintermediation.
Bob Hambrecht says he actually agrees that road-show information should be available to all. "
OpenIPO is about leveling the playing field, and all investors should have the same information." But once again, Hambrecht says the SEC continues to drag its feet on opening online road shows to the general stock-buying public. As soon as the SEC permits showing online road shows to retain investors, OpenIPO will in turn open them up.
A Rush Job?
Meanwhile, a number of top VC partners who spoke on condition of anonymity said the rough, unfinished nature of OpenIPO surprised them. "I've rarely seen Bill Hambrecht do anything that wasn't completely buttoned down," said one.
"This has all the earmarks of a desperate rush to get their first offering to market before the IPO climate has a chance to turn cold," said another.
So why did OpenIPO open for business before it was ready?
Hambrecht wouldn't offer comment other than to say, "We're in a regulatory environment; the SEC is slow. It takes six weeks to two months from the filing before the deal is ready." He said the lag would give them time to put the missing pieces in place.
So Where's the 'E' in eIPO?
But even after that time, retail buyers without an account at WR Hambrecht will have to do things the old-fashioned way: Ask their brokers to contact OpenIPO. Conspicuously absent from OpenIPO's effort are the major electronic brokerages.
"There's no doubt that Bill Hambrecht should do a strategic deal with
or another electronic brokerage company," says Jim Breyer, managing partner of VC giant
in Menlo Park, Calif. "It will be fundamentally important for him to form these relationships if he is to succeed."
Breyer says, "What will differentiate the next generation of Internet investment bankers is what has differentiated the current generation of Internet leaders -- external partnerships."
Says another VC partner, "Deals with electronic brokerages seemed like a core part of their strategy. I can't imagine why they launched without all the pieces in place."
Hambrecht is clearly embarrassed by the absence. "The entire premise of OpenIPO is that it is open to everyone, and so we would welcome any broker to be part of the OpenIPO network. However, there are many brokers who benefit enormously from the current system, and we expect that they will not transition to an open system until they are forced to do so by their customers."
has learned that OpenIPO conducted detailed discussions and negotiations with both Schwab and E*Trade. What happened? It seems that both dumped OpenIPO after hearing the ins and outs of the plan. At the last minute, they opted instead for online offerings with more traditional investment banking structures and payoffs -- Schwab with
Hambrecht & Quist
and E*Trade with
A tight-lipped Hambrecht would say only that, "If we can prove this model out, then they will come."
Most significantly, perhaps, the unfinished nature of OpenIPO fails to answer the crucial question of after-market support.
Mark Dubovoy, founder and general partner of
Information Technology Ventures
says, "My hunch is that virtual IPOs are going to be a lot more volatile and need a lot more after-market support
than traditional offerings."
Internet IPOs "clearly need more after-market support," says Richard Kramlich, general partner of
New Enterprise Associates
, another gold-plated Sand Hill Road VC in Palo Alto, Calif. Kramlich agrees with Breyer that the Dutch auction system, which presumably will price an IPO to more fully reflect the demand for its shares, creates a more intense need for after-market support than traditional underwritings.
But Hambrecht disagrees, asserting that the OpenIPO way would actually require less after-market support.
"We're putting the stock in the hands of the people who really want it, people who are long-term shareholders. There's no incentive for a flipper in this deal."
But he faces almost unanimous disagreement with the VCs. As for Dubovoy and his firm's portfolio, he says he's in no rush to try an eIPO. "We're going to sit back and wait until it's done a few times. We just don't know how this is going to work."
Kramlich says he believes it will be "at least two years" before eIPOs become widely adopted.
By then, Breyer says, "the Dutch auction system will undergo a number of further iterations" before the market settles on the best method.
All of this illustrates just how hard it is to execute a new idea on the Internet, especially in such a highly regulated industry as securities -- even if your name is as golden as Hambrecht's.
Perdue has been involved in the founding of three technology companies in roles ranging from marketing to chairman/CEO. He has written widely on technology for InfoWorld, PCWorld, Interactive Week Forbes ASAP and many others. Perdue is also the editor and publisher of Wine Investment News. At the time of publication, he held no positions in the companies discussed in this column.