Internet Firms’ Rite of Passage

Deb Triant giggles over the bouquet of long-stemmed roses sitting on her kitchen counter, the latest gift from an investment banker who has been wooing her for several months.

But Triant is already a happily married mother of two: What the banker wants is her business. And there are nine others who have been in hot pursuit. As chief executive officer of Checkpoint Software Technologies Ltd., a Redwood City-based start-up company that makes Internet security software, Triant, 46, suddenly feels like the richest, prettiest debutante at the fanciest society ball.

Triant discreetly neglects to name her eager suitor. “These guys all say the same thing,” she says. “They tell you, ‘All the other banks will lie to you, but not us. With the other banks you’ll get lost in the shuffle, but not with us.

“ ‘We’re going to love you forever.’ ”

In hotbeds of high technology around the country--and especially in Silicon Valley--this mating dance is now being played out over and over again as financiers and company founders race to cash in on the Internet frenzy.

Already, the commercial potential of the global computer network has produced scores of new millionaires--at least on paper--and vaulted fledgling companies like Netscape Communications and Yahoo! to the front of newspaper business pages. And about 15 other Internet-related companies are hoping to rake in some chips in the coming months via the capitalist adventure known as the initial public offering.

Conceptually, the IPO is simple enough: The private owners of a firm sell some of the company--sometimes as little as 10%--to the public in the form of stock. The private owners at that point generally include the founders of the firm and one or more venture capitalists, who have previously invested several million dollars in exchange for a big ownership stake--and the possibility of making 10, 20 or 50 times their money back.

While not all successful start-up companies choose to go public, most do so eventually, and the IPO has become a rite of passage for generations of entrepreneurs--especially in high technology.

But the mechanics of an IPO are intricate and unpredictable, involving a complex set of relationships among the company founders, the venture capitalists and the investment bankers, who assume responsibility for selling the shares to the public in exchange for a piece of the action. And with the IPO market red-hot, the dynamics of these relationships--always fraught with competitiveness, greed and envy--are more volatile than ever.

Some of the extra drama results from the fact that today’s Internet IPOs are among the most speculative in history: Yahoo!, for example, the hot offering this month, earned about $165 million for the company’s two founders, former Stanford University graduate students Jerry Yang, 27, and David Filo, 29. The stock, which was initially priced at $13, began trading at $24.50 and soared as high as $43 before closing at $33 a share--placing the total value of the company, including shares still held by the founders, at a hefty $848 million.

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All that in spite of the fact that the firm’s product--a “search engine” for finding information on the Internet’s World Wide Web--is all but indistinguishable from that of half a dozen competitors and the company is notably lacking in significant revenue or profits.

A company called CyberCash, which went public Feb. 15 at a price of $17 a share, is now trading at about $30--meaning the firm is valued at more than $300 million. Yet the company has virtually no revenue and is $11.2 million in debt, and it is anything but a sure bet in a highly unpredictable market for Internet payment systems.

In contrast, when personal computer software giant Microsoft Corp. filed for an IPO in 1986, it had been in business for 11 years, enjoyed a lock on a key software market and had sales of $172.5 million and a profit of $33.3 million for the previous four quarters.

“Revenues? Who cares? Profits? What’s that?” Richard Shaffer, editor of the ComputerLetter, a New York-based newsletter for technology investors, asked rhetorically about the latest round of IPOs. “Fundamentals have ceased to matter to investors. What they’re looking for is a sector like the Internet that has a lot of momentum.”

They’ve certainly found that. Nearly $30 billion was raised in initial public offerings last year--about $7.5 billion more than in 1994--and at the current blistering pace, this year’s take is likely to surpass the record $34.2 billion amassed in 1993. About $8.4 billion was raised by high-technology company IPOs in 1995--more than in any previous year--and another 15 Internet start-ups are likely to go public sometime this year.

“There’s a saying on Wall Street: ‘When the ducks are quacking, feed them,’ ” Shaffer said.

That means opportunity for people like Bob Emery, managing director of investments for Robertson Stephens & Co., a San Francisco investment bank specializing in technology. Sitting in his high-rise office in the heart of San Francisco’s financial district one recent afternoon, Emery, known to colleagues as the “cowboy in a Porsche,” is fretting about the Checkpoint deal.

He ran through his typical sales pitch, explaining his firm’s vast experience in technology IPOs and its proven track record. The investment banker is responsible for “underwriting” the offering--determining the price, purchasing the shares to be offered to the public and reselling them to institutional investors. It also often acts as a “market-maker” in the stock after it goes public, managing trading by matching buyers and sellers. And the bank’s stock analysts follow the company, giving it credibility in the eyes of Wall Street--and, hopefully, good recommendations.

When not on the road making pitches to executives like Triant who have already committed to an IPO, Emery is working the phones trying to wangle meetings with those who still haven’t committed to a public offering. Exactly how many is he pursuing at the moment? Emery closed his eyes and scrunched his nose: “You know, it’s so many that I don’t really know.”

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Emery’s pitch, of course, differs little from that of his competitors. When this is pointed out, he stops abruptly, leans forward and says, “But I can look them in the eyes and make them believe it.”

The question is whether he’s made Triant believe it. Most of the Internet companies going public hope to get a big New York bank in as their lead underwriter, but they also tend to bring in a technology specialist, a “boutique” like Robertson Stephens.

“The big New York banks have a lot of trading power,” Triant said. “The disadvantage is that a small company can get lost in the noise.”

Signing two banks means two stock analysts would advise its client investors whether to buy, sell or hold. And the technology boutiques have a deeper understanding of the peculiarities of the Internet business, Triant believes.

“Especially at the start, getting written up by the analysts is critical to future stock performance,” she said. “It’s important to get quality coverage.”

Emery has been wooing Triant for more than a year, introducing her to the firm’s stock analyst and inviting her to speak at a recent San Francisco investment conference attended by more than 700 fund managers.

But just two blocks away, at the offices of Robertson Stephens’ archrival, Hambrecht & Quist, Internet analyst J. Neil Weintraut has been working just as hard. In fact, he’s still jet-lagged from a recent visit to Israel to meet Checkpoint’s founders, three young computer scientists who wrote the company’s software in a Tel Aviv attic.

One of the first to track the Internet, Weintraut describes himself as “a propeller-head analyst . . . the new kings of the Street.” The boyish 36-year-old, who once designed IBM computers, spends most of his time on the road meeting officials of various companies. “Like Wayne Gretzky says, ‘I go where the puck is going to be,’ ” he said. “When a deal’s hot, the other firms come in and tell you they love you. We’re in there long before that.”

“There might be five or six firms that understand technology well, but how many get the Internet?” Weintraut continued. “Here, we bleed Internet.”

It was Weintraut who cinched the Netscape deal for Hambrecht & Quist. “Weintraut understood the industry and he understood us,” said Netscape co-founder Marc Andreessen. “That made the difference.” Despite competition from the large New York banks like Morgan Stanley Group Inc. and Goldman Sachs & Co., Hambrecht & Quist has underwritten the most Internet start-ups to date, about 14.

“Is a guy who can make one phone call to an institutional investor and move half a million shares of Microsoft going to spend time selling 100,000 shares of your company?” Weintraut asked. “And when your secretary wants to exercise some stock options, who’s going to take care of that? [Morgan Stanley] doesn’t offer that kind of service.”

It isn’t only the company founders or executives that the bankers must sway in the hot competition for public offerings. They must also build relationships with people like Ann Winblad. As a venture capitalist, Winblad gives a fledgling company its first significant cash injection--getting into the game much earlier than the bankers, but in turn reaping bigger rewards.

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Winblad missed out on the Checkpoint deal, but there are plenty of Internet start-ups that want her money. Winblad will “audition” about 800 companies during the next year. “The number of lounge acts I do is amazing,” she said.

Winblad has $95 million under management, small when compared to the superstar of technology venture funds, Kleiner Perkins Caufield & Byers, with $250 million. But as a former software entrepreneur, she has wide contacts in the computer industry and enjoys a warm friendship with Microsoft Corp. Chairman Bill Gates. “We can pick up the phone and get the CEO of one of the big companies in the industry on the line,” she said.

In an industry in which a partnership with an industry power can mean the difference between success or failure, Winblad’s connections are coveted by young companies. In return, she takes a piece of the company and a seat on its board of directors.

Venture capitalists like Winblad are a big force in pushing young companies to go public because they make their profits only when they sell their holdings in the company. The pressure can get intense.

“We get a couple hundred phone calls a month from people wanting to know if they can buy our stock,” said Jim Bidzos, president of RSA Data Security, a 14-year-old private company that makes encryption software for the Internet. “It’s pretty hard to ignore. I have people who invested early on that I have to think about and myself, I could make a huge amount of money.”

Bidzos instead opted recently to sell out to a publicly traded rival, Security Dynamics, and thus cash in without the distraction of an IPO.

The gold-rush mentality worries some in the business, who fear companies are not being permitted to mature naturally and are thus hurting their long-term prospects in the quest for short-term profits.

“When investors start losing money, the next time around they don’t trust the company or even an entire industry,” fretted Vinod Khosla, a partner with Kleiner Perkins. But that’s easy for him to say: Khosla’s firm invested $5 million in Netscape and netted $500 million little more than a year later.

“Once you’ve done it, you can’t go home again,” said Rob Glazer, a Microsoft veteran who started Progressive Networks, an outfit that makes the popular RealAudio software for the Internet. “We’ve told the bankers, ‘No thanks, we’d like to defer it for right now.’ But in an environment that’s like a gold rush, if you don’t jump into the public market it’s like you have the wrong kind of haircut.”

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Triant is definitely feeling the pressure. Two other companies with similar products--”firewalls” that protect a company’s computers from Internet hackers or thieves--have recently gone public, making it the “sector du jour.”

“Everyone assumes they’re more successful than us because of the visibility they’ve gained from the IPOs,” she said. “The reality is we’re the largest company in this space.”

Now her competitors have a bankroll for expansion and have gained an edge with customers who feel safer doing business with public companies. There’s also the vague feeling that Wall Street’s love affair with the Internet will soon be over, and thus one had better cash in fast.

Rumors were circulating a few weeks ago that Triant had decided on Morgan Stanley as the lead underwriter for Checkpoint’s IPO. But just last week, Frank Quattrone, who headed up Morgan Stanley’s West Coast office, abruptly left the firm along with two colleagues to build a technology practice for the German banking giant Deutsche Bank. Morgan Stanley’s stock analyst Mary Meeker may follow.

Fearing retribution from the Securities and Exchange Commission, which watches closely for stock “hyping,” Triant declined to comment. But suddenly it appears that Goldman Sachs has a shot at the deal because a contract generally isn’t signed until the night before the stock goes public.

And it appears that Checkpoint has agreed to bring in two other banks on the deal--rivals Hambrecht & Quist and Robertson Stephens. Typically banks receive 7% of the money made in the offering; if there is more than one bank, they split it, with the lead underwriter receiving the greatest portion.

When and if Checkpoint goes public, Triant will go on a “road show,” two exhausting weeks of catered breakfasts, lunches and dinners where she’ll hobnob with potential investors invited by the bankers. It’s something like a livestock auction where farmers--in this case, fund managers--line up to check hides and teeth before they buy the steer.

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The excitement drummed up during the road show will largely determine the stock’s opening price. In the days following, the bankers will call for tentative orders. If the amount vastly exceeds the number of shares being offered up, the bankers will then tinker with the price, inching it upward and then calling back to see if the fund managers will buy at the higher sum. Firm commitments to buy are made only a few a couple of days before the stock’s debut.

The goal is to price the stock high enough so that little money is left on the table because the company will collect the proceeds from the opening price.

But it should also be priced low enough so it spikes upward as shares begin to trade, giving the stock the look of a winner that will do well over time.

Before she was brought into Checkpoint by the company’s investors, Triant, who holds a PhD in computer science, had been at established companies, most recently Adobe Systems.

“I didn’t know anything about what a company does to go public,” she said. Soon she’ll have some firsthand experience.