"The world is Datek's oyster."
Datek raises $300 million in VC funding
By Peter D. Henig Redherring.com May 26, 1999
Calling it a "transformative event" for his company, Edward J. Nicoll, president of Datek Online Holdings, said the $300 million in private equity his company just garnered would allow for a significant investment in technology, marketing, and people.
The money in this massive funding round from Paul Allen's Vulcan Ventures, Europe's Group Arnault, and equity investment firm TA Associates has online brokerage renegade Datek suddenly swimming in cash. And according to research firm Venture Economics, it is the largest venture capital round in history.
"Datek had been running at the razor's edge of how much capital it needed on hand to satisfy SEC regulations ... and they actually got whacked on the hand for it," says Bill Burnham, ecommerce analyst with Credit Suisse First Boston, which served as the placement agent for the transaction. "So this money will give them what they need to grow."
According to Mr. Burnham and others, the $300 million will allow Datek to finally comfortably satisfy the SEC's capital requirements for brokerage firms, while affording it the bandwidth to keep up with the hefty amount of infrastructure and marketing expenditures being undertaken by the other top five online brokerages.
In a strategic coup that sent the clear signal that Datek would not be going public anytime soon, the deal was viewed by Wall Street as a great financial move, as well as an interesting agenda-setting opportunity within the online brokerage community.
"It's a great public endorsement from a savvy investor group," says Mr. Burnham, who notes that the company had come so far so fast it needed to make the "mature decision" to raise more capital.
"I'm not interested in exit strategies," snapped Mr. Nicholl in an interview. "This rules out an IPO, at least in the short term."
By staying private, while accumulating as much, if not more, cash than it would have reaped in a public offering, Datek maintains its independence to pursue both an aggressive broadband strategy alongside Vulcan Ventures' cable and Internet investments, and a potential international expansion with the help of Group Arnault, the private holding company controlling LVMH Moet Hennessy Louis Vuitton.
"LVMH has an expertise in marketing on a global basis, and we look forward to a time when we will also expand on a global basis," said Mr. Nicoll. "And TA Associates is a well-known investment group for financial and technology services, which is exactly the space where we want to be."
The most compelling call to action to emerge from this deal is the strategic investment from Vulcan Ventures and its implications for how Datek will fit into the Microsoft founder's vision for a broadband world. "Paul Allen has the vision for a wired world, which we share, and he has control over many cable eyes," says Mr. Nicoll. He also has access to other strategic properties that are uniquely appealing to what Gomez Advisors senior analyst Dan Burke calls the "hyperactive investor."
In fact, the stars are lining up for Mr. Allen to offer a very robust online financial service through his investment in the Go2Net (Nasdaq: GNET) portal,which also owns the Silicon Investor message boards site and has just bought IQ Charts, a stock quote and charting service.
"With broadband, Silicon Investor, and now with Datek: put it all together and you have a really compelling brokerage service," says Mr. Burke. Amar Mehta, senior analyst with CIBC World Markets, agrees: "The best way to gather people is to put them into a frictionless environment in a low-cost, high-speed way ... that's the way Datek will keep the hyperactive investor ... from there it can then become the Amazon or eToys of financial services."
The compelling competitive advantage Datek has over other online trading firms is that it uniquely controls its online trading technology from one end to the other; from the account holder through to its electronic communications network (ECN) , Island ECN, all the way to its clearing firm.
That's a very compelling value proposition for its new investors, and it means that Datek can continue to generate huge sums of money at many points along the trading process, regardless of any future changes that might alter the landscape of the financial industry.
One analyst also surmised that by staying private and taking the $300 million investment, Datek avoided disclosing the revenues of its ECN and other parts of its business, a move that makes sense given that its CEO, Jeffrey Citron, was already plenty rich and didn't necessarily need the windfall of an IPO.
It also doesn't hurt that Datek stole the headlines this week from crosstown rival DLJdirect, which opted for raising money the old-fashioned way, by emerging onto the public markets on Wednesday with its own IPO.
But as Mr. Burnham says, "With $300 million, the world is Datek's oyster ... they can do anything they want."
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