>William, if you honestly think Kleiner Perkins is anything other than organized crime on a massive scale, then you need to have your head examined.
Hey Kis, Mafia? No! you've got it wrong. KP prefers to be know as the keiretsu .
Speaking about Kleiner, they just put up some money in Sportsline.com. With Joe Namath being the front man.
And now they're into Epoch. I don't like this. It will allow the little guy to get pre IPO shares, which might affect my ability to continue to ride the gravy train.:-(
>January 24, 2000
Epoch's Next-Generation IPOs
Talk About It
The IPO process is a lot like a hot new nightclub in New York or L.A. If you're not a model or celebrity or you don't know someone who can put you on the list, you're just not going to get in. Likewise, the people who get IPO shares at the nice, low offering price are part of a club. They're large institutions -- hedge funds, mutual funds, corporate accounts, and the like -- that do lots of business trading with the big investment bank running the IPO show. If the IPO price rockets up to $100 a share on the first day, as a lot of Internet IPOs have been doing lately, then these investors have made millions in just a few hours. The rest of us have to buy the shares at $100 or whatever outrageous price they land on the first day. Seems a little rigged, doesn't it?
Scott Ryles has an interesting solution. He used to be at Merrill Lynch running technology investment banking out of its Palo Alto office before Kleiner Perkins partner Brook Byers and Charles Schwab CEO David Pottruck came to him with an idea last summer. Pottruck had been thinking about how he could get Charles Schwab's online customers, the Average Joes who buy new IPOs at the outrageous after-market prices, into the IPO club. Schwab's customer base is the largest of any online broker, but to get anything done he knew he'd need critical mass. So he talked Schwab rivals Ameritrade and Waterhouse into joining forces with him. Combined, the three brokerages represent more than 50% of all online investors, or 6.5 million customers. Pottruck then talked to KP's Byers, who said he was interested in funding the venture and together they approached Ryles about running it. Ryles wasn't looking to leave Merrill, but says this was an "opportunity of a lifetime," so he jumped ship.
The venture, called Epoch Capital Partners, hasn't officially launched yet, but when it does Ryles, Pottruck, Byers, and crew (and now Benchmark Capital, too) will be trying to talk tech companies into letting them underwrite their IPOs. Since the world is not exactly suffering for IPO underwriters you might wonder why any new venture would let them do this. Ryles argues that it's because they have a better way to price and distribute IPOs than the old system.
The majority of the IPO shares in Epoch's deals will go to individuals -- online customers of Schwab, Ameritrade and Waterhouse -- who have evolved into not only the dominant investor base in new tech companies but represent a better, more stable type of investor than institutions. In the existing system, institutions get the lion's share of IPO stock, but they don't own it for very long. According to Ryles, most institutions flip their shares it for a quick, fat profit. "In an IPO (roadshow), a company goes out and sees 80 institutions in two weeks and at the end of that process there are probably between six and 24 institutions that really want to own the stock," he says. "Yet the stock gets allocated to 100 or more institutions. It goes in small bits to a bunch of people who have no intention of owning it." Data that Epoch compiled show that in 1999 institutions were allocated 80% of the shares of every technology IPO, yet by the first SEC reporting period, their ownership of those shares had dwindled to 25%. Turnover in accounts at Schwab, Waterhouse, and Ameritrade, on the other hand, is in the low single digits. Every newly public company would prefer to put their IPO shares into hands of investors that will hold the stock rather than sell immediately.
Epoch's pitch is also that their IPOs will be more fairly priced. The reason a stock can be offered at $15 and then start trading wildly at $50 is because it's priced according to what institutions want to pay. The $50 is what individuals, who come in and buy when the institutions sell, are willing to pay. Ryles' theory is that if you sell directly to individuals, or make the secondary market the primary market, companies can get a higher offering price and therefore collect more proceeds from an IPO. "You can't tell me that there isn't a better price between $17 and $50 that's better for everyone involved," he says.
Ryles & Co. aren't the first to attempt an assault on the IPO establishment recently. Wit Capital sells shares directly to its online customers and WR Hambrecht is trying to price IPOs higher by using a Dutch auction model. But neither of these ventures has achieved much success yet. Obviously, Ryles thinks Epoch is different. Nobody else has the huge investor base Schwab, Ameritrade, and Waterhouse's represent. Ryles also hopes that the backing of both KP and Benchmark won't hurt in helping to encourage companies to want have Epoch do their IPO.
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