Another take on Datek's new found wealth.
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.
STAYING OUT OF TROUBLE
"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."
A WIRED WORLD
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."
OWNING THE LOOP
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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