© 2005 UMFK. 1-1 Wit Capital Chapter 5, Case 4 internet business models text and cases Steven Young COS498

© 2005 UMFK. 1-2 Overview of Wit Capital Introduction Introduction  Online investment bank  Ron Readmond, co-CEO, President  Bob Lessin, co-CEO, Chairman  Capable team investment bankers  Had established key alliances w/other Internet companies  Started co-managing IPOs  Began producing research on leading research internet companies  Golman Sachs and Capital Z (VC firm) invested 25M/each  Went public in June 1999 – Stock went from $9 - $38 in 2 weeks

© 2005 UMFK. 1-3 Overview of Wit Capital Mission and Vision Provide specialty financial products including research and IPO offerings. Be sustainable by expanding into consumer goods, education, and health care. To satisfy the requirements of the Securities and Exchange Commission, Wit Capital required customers to:  Deposit $2K  Limit securities purchased to <10% of income or net work  Have account balance of >= $2K or equivalent securities  >= 2 years investment experience  >= $50K annual income or assets

© 2005 UMFK. 1-4 Overview of Wit Capital History History  Origins in the Spring Street Brewing Company, a small beer brewing company in 1993 by Andrew Klein, a Manhattan securities attorney.  In 1995, needed capital $ to sell the firms “witbier”  Decided to try to raise $ over the internet – developed prospectus and created a website – raised 1.6M in 10 months (860,000 shares to 3,500 investors) B. Founded 1996 as online investment group  co-underwriter and consultant to internet companies  Online retail securities brokerage January 2000 merged with SoundView Technology group (boutique IB specializing in tech stocks) October 2000, acquired competitor E*Offering, the investment banking unit of E*Trade group  Sold E*Trade its 100,000 retail brokerage accounts (each with approx. $10,000 in assets)  Acquired exclusive rights for 5 years to provide initial public offerings (IPOs), secondary offerings, and other investment banking products to E*Trade’s 3M investors.

© 2005 UMFK. 1-5 Goal  Don’t rest on laurels, competition is emerging from both established and new quarters.  Must develop ways to be sustainable.

© 2005 UMFK. 1-6 Strategy Provide 3 products  IPOs – participated in underwriting process as a spcialized co- manager called E-Manager, providing prospectus drafting, road show prep., valuation, due diligence, and selling of shares.  Mergers and Acquisitions – offering internet strategy advice  Research – producing regularly updated reports on firms that it had taken public to enhance credibility and provide value to retail customers.  Evaluate and select call centers based on the firms reputation, capacity, location (near university), and quality of service.  Utilized technology to provide better service  Train new hires for at least 2 months to provide prompt responded to correspondence

© 2005 UMFK. 1-7 The Facts Value Proposition Value proposition To IPO Issuers  Benefits from ongoing relationship – gave issuer access to retail brokerage customers, and 1M customers from its E-syndicate  Credibility – Wit’s investment bankers and executives had good reputations and extensive experience in finance.  Objectivity – clients relied on Wit to provide advice Was a stand-alone E-manager, and was trusted consultant for internet companies about to go public To Retail Investors  Democratic, non-preferential access to financial products and information – The cornerstone of this philosophy – giving retail customers access to IPOs, formerly the “Holy Grail” of institutional privilege.  Free research – any visitor to the website could view proprietary company research.  Discounted trades – offered retail investors a competitive commission structure To M&A (mergers and acquisitions) Clients  One of the only firms capable to provide advice to large companies how their internet strategy and acquisitions will affect their stock price.

© 2005 UMFK. 1-8 The Facts Competitors Competitors  E-Offering (until acquired)  W.T. Hambrecht  Discover Brokerage  Lead Managers

© 2005 UMFK. 1-9 The Facts Economics / Revenues Industry Economics

© 2005 UMFK Primary Stakeholders Ron Readmond – President and co-CEO Bob Lesson – Chairman and co-CEO Goldman Sachs Capital Z SoundView Technology Group E*Trade

© 2005 UMFK GBF Analysis - Winner takes all? Network Effects Yes Economies of Scale Yes, and high profit margins Customer Retention Rates Low

© 2005 UMFK GBF Analysis Get it right fast

© 2005 UMFK Success or Failure? Success