(Editor’s note: Tom Klein is a shareholder at the Silicon Valley office of Greenberg Traurig LLP. He submitted this story to VentureBeat.)
The conventional wisdom in Silicon Valley since the dot-com bust has been that if a startup is not strong enough to be taken public by Goldman Sachs or Morgan Stanley, then it shouldn’t go public. As venture-backed companies begin to emerge from the recession-forced cocoon, we’re finding that conventional wisdom may no longer apply.
Most CEO’s and venture capitalists defer to the giants in the public offering industry simply because of their brand power. For 7 percent of the deal, the major banks will field a team to prepare and sell the company’s securities. It doesn’t matter if you’re getting the B team or the C team, you still have the Goldman, Morgan Stanley, JP Morgan, Credit Suisse, or Bank of America/Merrill Lynch name behind you
Admittedly, the big banks do have something to offer, but these days so do the smaller banks.
Let’s look first at what you get with the usual suspects…
Major banks offer deep relationships with some of the deepest pocketed “buy-side” institutional investors. The “sell side” analysts at the major banks have long-standing relationships with their counterparts on the “buy side”. The analysts can facilitate an understanding of the company, its financial projections and the estimated public offering valuation. Doing so allows the company executives on the “road show” (when the company executives visit the institutional buyers for in person meetings) to focus largely on company vision and strategy.
The big banks are also very knowledgeable on selling securities to the major institutions and some may also be a “principal” in the deal as a purchaser of some of the offered securities. In addition, these big banks have big balance sheets, and can effect stabilizing transactions post-offering to support the stock in the aftermarket.
Beneath them, a ‘second tier’ of banks also has good relationships with their buyers, who are similar (though perhaps not comparable) in financial strength. They do not, however, have as much depth in the institutional buy-side for initial public offerings.
Deutsche Bank, Citigroup, UBS Securities, and Barclays, though very strong, may not match the IPO experience, financial depth and breadth of the major banks, but may offer a higher quality selling and execution team than the first tier banks for two reasons: The size of the transaction and the attention devoted to the transaction.
A transaction that is not large enough for a major bank, or that might get the second team at the main IPO banks could be a perfectly sized deal for the next level bank and very important to a bank without the cachet of a Goldman or a Morgan. These ‘second tier’ banks will likely always field an A-team for a good Silicon Valley technology company, so that a very effective effort will be put into selling and executing the deal.
The next tier of banks usually offers something unique to the startup going public. While they can’t offer the same kind of support as the first and second-tier banks, they make up for that with execution skill, personal attention and after-market support.
Banks such as Jeffries & Co., Piper Jaffray, Cowen, Raymond James Financial, Oppenheimer, Thomas Wiesel, JMP Securities, and Stifel would make a Silicon Valley technology company their primary transactional focus for the duration of the transaction. These banks will also provide long-term guidance and support to the company long after the IPO, often at competitive rates and fee structures.
Many startups may not have a choice but to use this tier, but even if you’re able to consider the major banks, these are worth a look. The managing principals in these firms – some of whom are veterans of the big banks – often work directly on the deal, get to know the company and advise the board long after the IPO has been completed. These banks will continue to provide analyst coverage to the companies they take public, so there will be continuing after-market support. (Some big banks drop coverage if the company falls below a certain market capitalization.)
Many smaller banks have a deep knowledge of a particular sector, a highly regarded analyst in that area, or may be very well-regarded as a judge of companies in that space.
Other banks that don’t fit squarely into the main banking tiers may offer unique services as well. WR Hambrecht & Co., for example, pioneered the Open IPO, which is a proprietary bidding system for auctioning the issuer’s shares in the initial public offering. (Google used a variation of this auction method when it went public with WR Hambrecht as one of its underwriters.)
Raymond James, meanwhile, has one of the largest retail distribution channels in the world for selling the issuer’s shares. This is a qualitatively different channel than the large banks with their large institutional clients. And Lazard, Evercore, Pacific Growth Equities and others may offer a special analyst, a unique professional or a specialty in one sector that may make them a logical choice for an IPO.
There is a spectrum of banks in the market. For some companies, the big banks will be a natural and correct choice. But for others, smaller financial institutions may have the specialized expertise or high-levels of personal attention and after-market support that make it worth ignoring the old rules of underwriting.