As we continue our trek through Silicon Valley, we
find ourselves in San Francisco at the offices of WR
Hambrecht and Company. William R. Hambrecht is a
Silicon Valley pioneer who co-founded one of the first
technology-based investment banks, Hambrecht & Quist, in 1968. In 1999, he left Hambrecht and Quist and
founded the online investment bank WR Hambrecht and
Company .
In the following interview with Enable, Hambrecht
provides his insights on investment banking and
initial public offerings.
Enable: What needs to be done at the earliest possible
stage to ensure there are no snafus in a public
offering?
Be absolutely certain that your corporate house is in
order. This includes all legal, accounting and
procedural matters. However, the most important thing
is that you must accept the fact that the public
investors will become and remain your partners. You
must disclose everything and run your business from
the point of view of the public shareholders - not
your own.
There is a certain thought process you must begin to
utilize as early as possible. You should think about
that the fact that the public will become your partner
and plan for that as early as possible - legally and
ethically. The right venture capitalists can really
help you here. An experienced venture capitalist can
provide you with the proper discipline to enhance the
entire process and put you in the proper frame of mind
that a public company must have. It is crucial that
you begin thinking long term from the very beginning.
Enable: At what stage should a company contact an
investment banker?
This should be done as early as possible - but there
is no need to begin the actual preparatory work until
you are ready to raise the money. The most important
thing is that you must be very comfortable in working
with your investment banker. Chemistry plays a key
role and therefore, it never hurts to meet with
investment bankers well before you need there services
- so when the time comes you will not be under
pressure and you will be able to choose the best
candidate based on their track record and on how
comfortable you feel with them.
Enable: How does a company know if it is an attractive
IPO candidate?
You must truly recognize in a very pragmatic way how
to go about growing your business. You business cannot
ever be static. You have to honestly be in an area
that can achieve high growth. The number one factor is
growth. If you honestly believe that your company will
be able to achieve constant growth, then you are an
attractive IPO candidate.
Enable: What are the key ingredients of a successful
public company?
The key ingredients are:
- Be able to achieve constant growth: Externally,
once again, the company must be postioned for growth.
It must be able to flow downstream and not upstream.
It must be in an area of the economy that can grow
rapidly.
- Multi-disciplined Management Team: The successful
company must have a multi-disciplined management
team. There are very few successful companies that
have one or two excellent managers. Successful
companies have management teams with depth all the way
down the line. They must be able to interact well and
think things through together - as a team.
- Long-term Point of View: There must be a long-term
point of view. A five, ten, even twenty year horizon.
There is tremendous pressure for quarterly and annual
results. A company must have and implement a long term
plan.
Enable: If you could only give a company going public
three pieces of advice what would they be?
- Be believable
- Be honest
- Tell both sides
Enable: Lets talk about capital raising. How do you
determine the valuation of a company going public?
For companies going public there should be some
comparables. What is their valuation in P/E or other
ratios is a very good start in valuing a company that
seeks to go public.
My personal philosophy is that an auction will set the
fairest price for the company. The Internet allows
buyers and sellers to meet and determine the fairest
value of the company based on a bidding process.
Enable: What do you mean by a bidding process?
We use the Dutch auction system to determine the
valuation of companies that we take public. In the
Dutch flower market, the bidding goes and once you
reach a price, all the flowers are spoken for. It
allows people to bid aggressively but never look
foolish. If you want these people to come back day in,
day out, they can't pay more than their competitor or
they'll look foolish to their buyer.
Enable: So how does the Dutch Auction determine the
fairest value of the particular company going public?
Lets look at an example. The Dutch Auction or Open IPO
allows institutions and individuals alike to bid on
shares in the IPO via a web site. Bidders list the
number of shares they want to buy at their specified
price. Then, the highest price at which all the shares
could be sold becomes the price at which all shares
are sold.
Suppose a company is selling 3 million shares in its
IPO. Bids for 1 million shares come in at $24 each,
bids for 2 million shares come in at $22 dollars each
and other bids for 2 million shares come in at $20
each.
In the Open IPO, all 3 million shares would be sold
for $22 each because that's the highest price at which
all 3 million shares can be fulfilled. The shares
would go to everyone who bid $22 or more.
Enable: OK, so this system provides the fairest
valuation, but isn't the highest valuation better?
Again, companies must look at the long-term and not
just what happens on the day of its IPO. Suppose you
have one of the famous IPOs that comes out and doubles
or triples from the public offering price, the people
who buy it for the long term end up buying most of
their stock at the inflated after-market price. Then,
when the stock settles back, as it does in most cases,
the company ends up with a group of shareholders who
actually have the stock at a loss. You start out as a
loser with people who are really with you.
Enable: What about the founders and key employees?
The same example as above may make them feel rich for
a short time, but they cannot sell because of post-IPO
regulations. So I think it creates a whole bunch of
expectations among employees and owners, and then all
of a sudden there's a deflation. And that can
destabilize a company. So I think a company is much
better off it if gets its money at a fair market price
and having a reasonably stable after-market that
reflects its progress.
My theory is that three to six months after the
offering, the stock probably ends up in the same place
either way. It reaches a market equilibrium, and I
think its better to reach that equilibrium price in an
orderly fashion.
Enable's special thanks to Bruce Mann, the managing
director of WR Hambrecht for arranging the interview
with Bill Hambrecht.
Published by Israel's Business Arena on July 25, 2000.