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Wit CapitalChapter 5, Case 4

internet business models

text and cases

Steven Young COS498

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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

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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

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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 brokerageJanuary 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.

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Goal

Don’t rest on laurels, competition is emerging from both established and new quarters.

Must develop ways to be sustainable.

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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 email technology to provide better service Train new hires for at least 2 months to provide prompt

responded to email correspondence

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The FactsValue Proposition

Value propositionTo 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.

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The FactsCompetitors

CompetitorsE-Offering (until acquired)W.T. HambrechtDiscover BrokerageLead Managers

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The FactsEconomics / Revenues

Industry Economics

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Primary Stakeholders

Ron Readmond – President and co-CEOBob Lesson – Chairman and co-CEOGoldman SachsCapital ZSoundView Technology GroupE*Trade

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GBF Analysis - Winner takes all?

Network Effects• Yes

Economies of Scale• Yes, and high profit margins

Customer Retention Rates• Low

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GBF Analysis

Get it right fast

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Success or Failure?

Success