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Category: money

Bill Hambrecht, Google & pricing an IPO with a social network

Published November 18, 2007 by cgerrish

The Google offering happened a while after I left WR Hambrecht + Co, but I can’t believe I never saw this Charlie Rose interview with Bill Hambrecht. It seems like ancient history viewing it now. Looking at the offering price and today’s price one might think the deal was underpriced by the modified dutch auction. As I recall, at the time, many thought the IPO offering price of $85 per share was too high.

Hambrecht’s modified Dutch auction method of pricing IPOs still isn’t understood very well. Basically it’s the idea of the wisdom of crowds (or markets) applied to determining the appropriate offering price for a company’s initial public offering. Think of it like Digg for pricing the initial stock price for a company. It’s a like asking the community of investors what the right price should be— a radical use for a social network.

The method works best when a broad range of people have an opinion on the proper initial price for a company’s stock (a high bid to cover ratio). It doesn’t work very well when the company isn’t well known. In cases like this investors (bidders in the auction) actually have to read the prospectus and attempt to determine a reasonable price. This, of course, is nearly impossible. It would be like trying to rate a new album from a band you’d never heard based on the tax returns of the musicians.

For those in the tech community looking for liquidity events through an IPO (as opposed to acquisition), you’d do well to at least take the time to understand how the Dutch auction works. Back in the day Joe Tennis and I put together a flash animation explaning how Hambrecht’s OpenIPO works. Check it out, it still holds up pretty well.

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Politics of Change • Economics of Change • Value of Change

Published November 13, 2007 by cgerrish

Al Gore

It’s an interesting question. Who has more power to affect climate change: the President of the United States or a new partner at Kleiner Perkins. One way to create change is to make new laws. Another way is to create economic incentives and fund creativity in the business world. Al Gore spent a lot of time trying to change things using the political system, now he’s trying another method. Political solutions always seem to involve sacrifice and high cost to the economy. When a new venture is funded, the expectation is that it’s going to be successful and make money. The fact that it’s a green venture doesn’t make a bit of difference.

It’s a different kind of grass roots politics that Gore’s practicing now. He’s building a constituency in the business world, and by creating value (doing well and doing good) he’ll change more minds than by fighting with politicians. That is, he will if he can show that his portfolio companies can make a buck or two. It’s a large bet, and a very optimistic bet, on the future of human endeavours.

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Decoding Wall St.’s Analysts: Full of Bull

Published November 10, 2007 by cgerrish

Full of Bull

Attended a book launch party last night for Stephen T. McClellan‘s Full of Bull. The subtitle of the book is: “Do what Wall Street does, not what it says, to make money in the market.” The crowd was an interesting and lively mix of financial industry folks, artists and people connected to the world of opera. (Stephen’s wife is a painter and worked at SF Opera for many years)

I haven’t read the book yet, but what I gather from Stephen’s remarks, and skimming through, is that he hopes to help people decode the language of Wall Street. As in Lewis Carroll’s Alice in Wonderland, it’s important not to take things at face value. A “buy rating” doesn’t mean buy, and a “hold rating” doesn’t mean hold. A lot of the communication on the Street is through signaling, in the margins, or outside of the official channels. Information asymmetry is the primary method by which money is made. Clarity in communications levels the playing field and destroys perceived advantages. Muddy waters are the natural habitat of the players in financial markets.

As the market enters a period of uncertainty after an extended bull run, it’s good to have books like this to turn to. An investor looking for advice would do well to learn how to converse in the language of the Street before acting on the latest hot analyst recommendation spewing out of a cable news station.

I’ll be reading Full of Bull in the next few weeks, and you should too. Let me know what you think of it.

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Aggressive weeds in the garden of your social graph?

Published November 7, 2007 by cgerrish

It’s a cold world out there. In the beginning there was the walled garden. AOL was a safe place, but in the end it couldn’t  compete with the wider network of websites. But once we were out in the cold cruel world, we needed someone to help us find our way around. A personal start page like MyYahoo, or a search engine like Google provided an orientation point for any journey into the network.

Social networking sites like Facebook seem to provide a new entry point that filters the larger network using one’s friends as editors; transparantly journals friend activity; and provides the opportunity to create facets, or nodes of connection, through the assertion of interests (preferred modes of attention) within the social network.

The battle for monetizing the network revolves around which company can provide the best orientation point for entering the network. Facebook puts you into the stream of your friend’s activity. Techmeme puts you into the stream of technology news and opinion. Twitter puts you into an edited collection of small moments, stream of consciousness and conversation. MyYahoo is a personal newspaper. Google is ready to show you whatever you’re interested in. Google Reader puts you in an edited stream of blogs. Del.icio.us puts you into an edited stream of categorized bookmarks and pointers. Mahalo is a variation on Google, it’ll show you whatever you’re interested in, but edits the search result to make it more human readable. Where do you want to enter the network today? Perhaps, I’d like to enter through my teleputer…

Trust is hard to earn and easy to lose. This is the primary lesson for social networking sites, what was so painstakingly created and nutured can be destroyed very easily. The structure of a social network is biological, it’s growth is organic. But it is subject to disease (viruses, the madness of mobs, etc) and environmental factors. For instance, you could introduce social objects (nodes) that aren’t individuals, but representatives of corporate entities. You could ask people within the network to vouch for these new objects. You could have just figured out the best way to monetize the social network as an entry point, or you could have introduced an aggressive weed into your garden. In any case, the ecology of the system is irrevocably altered. Trust is hard to win, easy to lose.

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