Granddaddy goes back to square one

One of the world’s greatest investment banks carries his name. Yet Bill Hambrecht turned his back on Hambrecht & Quist to set up a brand new tech-based venture. But could the US downturn knock him off course?

A year after founding the investment bank Hambrecht & Quist, Bill Hambrecht found himself in Scotland in search of venture capital. It was 1969 and he met fund managers Martin Currie in Edinburgh and Murray Johnstone in Glasgow. “I was impressed,” said Hambrecht, 65. “The tradition of venture capital runs deep there. Some of these guys were investing in America’s railroads way back in the 1860s.”

As an investment banker and a venture capitalist, Hambrecht is one of the granddaddies of the hi-tech revolution in the US. Although brought up on the east coast of America and educated at Princeton University, Hambrecht exudes the breezy self-confidence that, for some, typifies California.

San Francisco-based Hambrecht & Quist went on to become a leading light in advising and floating tech companies — long before the dot.com boom made such activities fashionable. “When we started out, technology start-ups were not even on the radar screen of the traditional investment banks,” he said.

Hambrecht’s frontiersman mentality paid off handsomely. He is close to some of the luminaries of Silicon Valley, including founders of Apple, Adobe, Intel and Netscape. And Hambrecht & Quist took a wide range of tech firms including Netscape, Amazon, and Pixar to the stock market.

By 1997 Hambrecht, then aged 62, had a change of heart. As chairman of Hambrecht & Quist he found he was isolated from making and marketing deals. H&Q did not share his faith in the democratising power of the web. Hambrecht’s idea was that online stock offerings would be in investors’ interests, since they would let the marketplace rather than investment bankers decide how new stock issues should be priced. But Hambrecht & Quist did not buy into his vision.

So Hambrecht walked out in December 1997 and started his own technology-based investment bank, WR Hambrecht+Co, the following month. Hambrecht, who invested $10m of his own money in the San Francisco-based venture, sees nothing unusual in launching a start-up at the age of 62. With $150m of funding from companies such as American Express, Crimson Ventures, Fidelity Ventures, and Texas Pacific Group, WR Hambrecht wants to break the stranglehold that “bulge bracket” Wall Street investment banks have over initial public offerings (IPOs) in the US.

Hambrecht believes the dominance that Credit Suisse First Boston, Goldman Sachs, Morgan Stanley, JP Morgan Chase and Salomon Smith Barney have over IPOs distorts markets and works against the interests of small investors and companies going for a listing.

But his timing was unfortunate. When he launched WR Hambrecht in January 1998 the dot.com bubble was stretched to bursting. Fourteen months later it burst, since when the outlook for the US economy has looked bleaker by the week — causing IPOs to become thin on the ground.

Traditionally, an investment bank will persuade an issuing company that its shares should be priced at 15% and 25% below their “fair value”, mainly so it can whet the market’s appetite.

This usually means the stock’s value rises dramatically, or “pops” on it’s first day of trading. The banks also have a habit of channelling the initial equity in the direction of a few favoured clients —usually institutional investors, mutual funds and wealthy individuals. This is done on the understanding that, when these clients trade their shares on the after-market, they will do so through the same bank — allowing it to make hefty profits on the transactions.

SOME call it a “stitch-up”, but for Hambrecht the biggest negative is that retail investors are left out in the cold and company’s raise less money than they could. Forced to buy on the after-market, retail investors can only get their hands on the newly floated company’s stock once its shares have “popped”. “There’s a real scam going on. It hurts the market in the long run. It’s both unfair and destructive,” said Hambrecht who draws parallels with the price-fixing scandal that rocked auctioneering, and cost Diana “De-De” Brooks her job as president and chief executive of Sotheby’s.

The IPO scam is of greater proportions according to Hambrecht, but there is a conspiracy of silence about it. It is so lucrative for investment bankers, fund managers and brokers that none have any interest in upsetting the apple cart.

Yet Hambrecht is far from a voice in the wilderness. The Securities and Exchange Commission, the Attorney’s office and the National Association of Securities Dealers are currently investigating the trading and other records of the leading investment banks in relation to IPO allocations during the exuberant years of 1999 and 2000. They want to establish whether bankers took part in “kick-back” schemes.

Hambrecht argues that his OpenIPO method of floating companies on the stock market not only removes the smoke and mirrors associated with traditional IPO’s but also enables companies to raise more money at flotation.

It is also cheaper for the issuer — costing 4% to 5% of the sum raised, as opposed to 7% through a bulge-bracket investment bank — and levels the playing field. Modelled on the Dutch auctions used to sell flowers in Holland and some work by the Nobel-prize-winning economist William Vickrey, OpenIPO enables ordinary punters to get a bigger slice of the action from the start. Hambrecht said: “Corruption is inherent in a preferential allocation system. The only way to beat that is an auction.”

Hambrecht suggests OpenIPO may be a “disruptive technology”, and believes it will ultimately have a major impact on the financial services market. It has already been used to market corporate bonds for a number of US corporations and has been used to market 6% of the IPOs in the US market in the last year. Hambrecht said: “At the low end we’re off the radar screen of the major firms — that’s typically defined as IPOs worth less than $50m. We virtually have that business to ourselves right now, so we are plugging away there.” IPOs to date include Salon.com, Ravenswood Winery, Andover.net, Nogatech, Peet’s Coffee & Tea and Instinet.

“At some point, if this auction method has the legs we think it has, the mid-market is going to say ‘this is a better way to do it – it’s more efficient and more open’. If the mid-market turns our way, then we can become the leading technology investment bank in the world.”

WR Hambrecht has already grown faster than Bill Hambrecht dreamt it would. It is three and half years old but already has some 200 employees in five offices across America. There are plans to set up several overseas operations.

“If this thing works in the US I think it has even more applicability worldwide. Electronic trading is much more acceptable in Europe, mostly because there’s no monopoly to keep it away. The market seems more open. Commerzbank is our partner in the German mortgage debt market. HSBC is now our partner in both the US and European debt deals, and that’s just starting to get going.”

This article was published in the Sunday Herald on 8 July 2001