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Move Over, Institutional Investor -- the Little Guy Now Has a Ticket to Ride!

Interview With Walter Cruttenden and Sandy Robertson of E*OFFERING

by Don Hamilton

Copyright 1999 Don Hamilton. All rights reserved.

Tired of hearing about how much money someone made on an IPO on some new Web stock, when you didn't even know it existed until everyone but you had made money on it? Well, the big institutional buyers and their friends have owned this market, and now we little people are about to share. Volatility can be exciting, but not always profitable. In fact, you can lose a lot of money but many of us still want the chance to play.

Somewhere between 14-15% of all trading happens online and it is climbing constantly. The system is still struggling to make everyone happy as more people become comfortable, not only online, but trading their life savings using a Web broker. Every day more and more people trade online and claim to enjoy it, although this results in stress on a growing new system. In the last few weeks, E*TRADE has had several small outages, and so has Ameritrade, but guess what -- sometimes even the human brokerage didn't have enough people to go around to buy and sell, especially at that critical moment when you needed them the most. At least the computers are more random in their failures. Even with these kinds of problems, another change is happening to the financial landscape: IPOs are about to become available to the average person.

How many of us have watched people make several times their investment in one day? It doesn't happen very often but the most common version I see is in the first few days of an IPO. I have also watched the stock drop the next day by the same or bigger numbers, and thought how scary it would be to have a lot of money in that system. You can now go online and begin to follow the companies that are about to go public. Now you can be one of the early investors and take that heart-pounding roller coaster ride with the big guys.

To get a ticket to ride, check out Wit Capital or W.R. Hambrecht & Co., a site founded by William R. Hambrecht, co-founder of Hambrecht & Quist, who is currently offering an IPO of Ravenswood, a California vintner.

The biggest IPO site to hit the Net is about to burst on the scene. E*OFFERING was founded by Walter Cruttenden III, with investments from E*TRADE and Sandy Robertson, founder of investment banking firm Robertson Stevenson. Walter's business card lists him as Builder and Director, but the bottom line is he's the CEO.

Walter (who founded investment banking firm Cruttenden Roth) and Sandy have teamed with E*TRADE to bring the IPO to the common investor. These two investment bankers are and have been powerhouses in the technology stock IPO business for years. Walter is well known in Southern California and Sandy is renowned nationwide.

WWWiz: What kind of companies will you be underwriting?

Sandy: Technology and Web-related. I think one of the reasons that Web-related stocks have been as high as they are is because they have been in short supply and that's going to change very fast. Tens, if not hundreds, of new offering are coming along in the next year with an Internet orientation to them. So the supply-demand equation should change. My old firm has at least 20 coming along and there are a lot of others.

WWWiz: How much money does it take to start a company like E*OFFERING?

Sandy: Well, I can't tell you that, but I can tell you that when we started my old company, Robertson Stevens, we started with a million-two and we were profitable in the first month. I think things have changed a little bit and things are a little higher today.

WWWiz: Walter, tell us a little about your background.

Walter: I grew up in the securities business; my father and grandfather were in it. I founded Cruttenden Roth, which we grew to be one of the largest firms in Orange County, and the largest in the nation in terms of numbers of small cap companies backed -- companies that are under 100 million capitalization. I think we have done 20 per year versus the next best which was probably 10. We did the largest number of deals and the most money raised. We started the business in 1984 and sold the majority of the business last year.

WWWiz: Are you building your software in-house or using existing?

Walter: We're using a combination of both. We have mocked up what we want the Web site to do and then we contracted it out to build the first version. It's not available to the public yet but we do have it running. Currently what the public sees is one under construction. From the first version we did some focus groups and we have made about a million changes. Usweb and TrueNorth (a ModemMedia company) are building the site, and we have a relationship with E*TRADE, who has significant technical expertise. In fact, E*TRADE will host our site.

WWWiz: So the design of the site will be done by Usweb or TrueNorth?

Walter: It's collaborative but we'll give most of the work to them.

WWWiz: When will the whole system be up and running?

Walter: In the May time frame. We can actually participate in some trades before that because we use sort of a hybrid. We'll use E*TRADE distribution but we won't have all the bells and whistles or the ability to prepare the prospectus online.

WWWiz: Describe the experience of an individual who will come to your site.

Walter: There are three constituents: the individual investor, the institutional investor and the issuer. The investor can go to one site to find out what offerings are coming up, what the calendar looks like, and which of their services is hot. He can click right on it and e-read or download a prospectus, or sort by categories and look at summaries only. We think people use this to compare their company to this company and then they click right over to the road show. Right now it's mostly institutions that see road shows and many times we miss the institutions we want to see. You can only go to so many cities in a couple of weeks, so we'll save management a lot of time by cutting the road show down to a few days. From the buyer's point of view they can see it 24-7.

WWWiz: What will the road show consist of?

Walter: Either streaming video of a live road show, or a pitch block where you actually click through the management pitch like you were at the road show, which will allow you to call in at one o'clock, three or five, and ask management questions and have them walk you though it. You can also see the most frequently asked questions. For example, wouldn't you like to know what Fidelity was asking? It's a wonderful time-saving device. Many institutional managers just don't get to the road show, so now they're much more likely to get to them. We can't get to the guys in Reno or Sarasota, Florida, because it doesn't pay. We'll have a much broader distribution of the presentation. It also allows quick research on the company. An IPO is limited because you're not allowed to say much before the deal, but on secondaries and follow-ons, which is actually the bulk of the public market, they'll be able to get instant third-party opinions and information.

Then they can click on the book. The book is sort of a revolutionary feature; we're just offering what is done on paper. When you aggregate all these orders together they are indications of interest. What does it look like, and will it help you price the deal better? If you've been trying to get into IPOs and never have been able to then you can put the high bid in, and it comes out a little higher than normal, but at least you're getting stock in it. It's a unique feature of this system.

WWWiz: Is there an investment requirement or can anyone participate?

Walter: Basically there is no requirement. You should have an online account with some money in it. We will be linked to E*TRADE and that will be the easiest way to buy it though us. E*OFFERING is a button on their site, and there will be an equivalent button on our site leading back to them.

WWWiz: What challenge will you have in putting everything on the Web?

Walter: The whole process should be easier. For example, when you prepare the prospectus a bunch of people fly in from all over the world. Lawyers, accountants, underwriter representatives get together for what they call an all-hands meeting to kick off the process. You get just a little bit of work done, then everyone has to go, and then you use fax or courier or mail this draft to them -- this goes on four, five or six times. It is a very iterative process to get this prospectus down to where it meets all the legal requirements and yet is still a good-selling document and reasonably tells the company's story.

The first light bulb that went off was "Why not build a common Internet site so no matter where anyone is they can just pull up this document?"

WWWiz: What does the issuer get out of all this other than ease of communication during the process?

Walter: The issuer wants to know things like: Who are the best attorneys in my industry that can represent underwriters? What are the fees on my type of transaction? Show me the last 50 deals as an example. So a data-rich environment will give the issuer a lot of information. This will help them quickly calibrate their ability to go public, and determine the cost and that sort of thing.

WWWiz: If one of our readers has a company and is interested in going public, how would he/she contact you? Would it be through your site?

Walter: A lot of people will call us. Instead of sending a lot of information we would ask if they have Internet access and then we would say "pull this site up" and ask if they meet the criteria. If it looks like a good company we can take them to our electronic pitch book. Our book would tell them "here are the things we can do for you and the services that we perform." It makes our salesmen much more effective.

WWWiz: Did you sell your interest in Cruttenden Roth in order to start this company?

Walter: Yes, I did that because I felt there was a change starting and I didn't think my partners wanted to go in this direction. I sold the majority of my interest in that company, but not all of it. I have always been fascinated by the Internet. That sale gave me some capital to fund this.

WWWiz: I saw that E*TRADE will have the option to buy 51% of your company.

Walter: Yes. You'll notice we use their logo and colors on everything; they're hosting our site, they're helping with technical and marketing. We're trying to adopt their whole culture. They're a terrifically successful company; we want to mirror them in every respect. This whole thing probably gets put together a few years down the road.

WWWiz: E*TRADE is a very successful company. Why did they decide to team with you and why didn't they do it themselves?

Walter: I think it was a make-or-buy decision from the beginning. Do they start hiring people from scratch and try to build this whole thing? I think they decided it was a better bet to back a couple of guys that have built very successful firms, get the whole thing going and then buy it. I think it was smart business on their part. From our point of view, we needed their distribution. They have this massive distribution. At Cruttenden Roth I think we had 12,000 accounts and 20 to 30 deals a year. E*TRADE, as of December 31, had 673,000 accounts; it's just unbelievable distribution. They have basically an insatiable appetite for technology offerings. E*TRADE is a dynamite partner for us!

WWWiz: Is there any real competition out there now?

Walter: There are a couple of twists or variations. One is Wit Capital, back in New York, who has received some press. They were the first ones to say that they were kind of an e-manager. I thank them for pioneering some of the SEC issues. They're positioned primarily as a middleman rather than e-offering. They're primarily going to big firms and saying "can we participate in your offering?" and then they go to the online brokerage firms and say "we have some shares for you to sell through your network." Our approach is "let's do offerings, let's leverage the Internet and manage the underwriting" -- not just get a few shares and then underwrite it. We're going to speed up the whole process.

WWWiz: What caused you to take action and start this company?

Walter: I recognized last year that the Internet was coming to my industry. People are investing that way and now the underwriters are going to go that way.

WWWiz: What is the size of your staff?

Walter: We're currently about 15 people and everybody is wearing a lot of hats. If we stick to our schedule we'll be about 100 by the end of the year.

WWWiz: How much business do you expect to do this year?

Walter: We plan to be doing several a month by the end of the year. Each IPO can be $25-50 million; it's a good business.

WWWiz: What would be the ideal company that you would take public?

Walter: Technology is our first area of focus and that's where we're hiring analysts now. Longer-term we'll move into healthcare and other fast-moving kinds of businesses. We would look for a company that has revenues and, hopefully, profitability, and if not profitability, then extremely good partners and excellent backing. It would need to be obvious that they are positioned to dominate their industry.

WWWiz: So you would be an excellent example of a client that you would want to have?

Walter: Yes! [laughs] Just coincidentally, though. Obviously, management is the key; you have to have killer management.

WWWiz: What is your connection with E*TRADE?

Sandy: Years ago in my former investment banking firm we took them public.

WWWiz: What is your experience in IPOs?

Sandy: My firm over the past four years has been the largest underwriter of technology IPOs. I think we've done about 400 of them over the years.

WWWiz: Why did E*TRADE want to invest in E*OFFERINGS?

Sandy: They wanted new issue shares for their client base and it's been very hard for them to get anything other than just a few thousand shares. The deal is that if E*OFFERING does an underwriting, a percent of it gets distributed through E*TRADE.

If you want to meet Walter try hanging around Yahoo Chess. There you can play against people from all over the world, but watch out -- Walter has an 1800 rating so he won't be easy to beat. Walter recently was getting chess lessons from a woman somewhere in Russia. It's becoming a closer world.


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