Chapter 2 - The Beauty Contest, February 1999 - Episode 1Listen to podcast
Early February can be an ugly time in New York City. Outside the east-facing windows of the hackoff.com boardroom, dirty snow swirls towards its doom in the dark East River. The crews of the tankers, ferries, tugs and barges rushing downstream or pushing upstream look cold as they huddle into their coats and parkas. They spend as little time on deck as possible. The passengers in the ferries from Brooklyn, New Jersey, and other Manhattan docks are invisible until the boats reach the Wall Street Landing; then they scurry to disembark, hunched over against the wind and blowing snow.
Inside the hackoff.com boardroom, Chairman and CEO Larry Lazard presides over a board meeting from the middle of the oval table. His back is to the dark snow and river. Larry is a little over six feet tall but slumps as if to look down on shorter people. He has brown hair and eyes. His most singular feature is a dark brow which brooks no interruption as it crosses the bridge of his nose. His large brow and his small, thin-lipped mouth gives his face a triangular look. His well-fitted hackoff tshirt makes it clear that he works out although his muscles are tight rather than massive. He wears casual slacks and loafers with no socks. One of his knees is on the table and his chair is tipped back.
To Larry’s right is CFO and Board member Donna Langhorne. Her naturally-blond hair is just short of shoulder-length and drawn back in a loose bun with an elastic around it. Donna’s face is a classic oval, eyebrows dark, eyes blue, nose small, mouth full but just short of pouting, chin appropriate for the oval but with slightly visible diagonal cleft. She dimples on the left side when she smiles as she is now doing. She’s wearing a bulky hackoff sweatshirt but it doesn’t hide the swell of her large, high breasts. Her jeans are tailored
At the other end of the table from Donna is Board member Joanne Ankers from Big Router Inc. She is an attractive flat-chested woman stylishly dressed in a tailored blue suit jacket. She wears her brown hair short. Big Router’s venture fund invested in hackoff when the company raised its second round of venture capital last September, and Joanne — a junior member of Big Router Ventures staff — became a Board member of hackoff as a consequence of that investment. Joanne is thirty-two.
Aaron Smyth, forty-seven, hackoff General Counsel, sits directly across the table from Larry behind a mass of papers and a laptop computer open for typing. Although not a board member, he is its secretary and prepares resolutions and takes minutes. He is as casually-dressed as his boss except that he wears socks.
The final two board members flank Aaron and face Larry and the window. They are both venture capitalists and are on the board as a condition of their firms’ investments. At six-foot-three with broad shoulders, Joseph Windaw of Windaw Wallar Ventures is imposing. The blond hair on his large head is thinning and going white. He's the only man in the room wearing a sports jacket. It’s clear from both his bulk and his presence that this is a one-time athlete who, at forty-five, keeps vigorously in shape.
Franklin Adams of Silicon Alley ad-Ventures looks New York Jewish, despite his name. He has curly brown hair and skin that hasn’t seen the sun in a long time. Below a large nose, he sports an ineradicable trace of mustache. He’s thirty. Franklin Adams is talking intently. It is what he is saying that's making Donna smile and dimple.
“Strange as it may sound, it's time to start preparing for our IPO. I hear that antihack is already talking to bankers and, if we’re not careful, they’ll get out ahead of us. I know this is a full year earlier than we initially planned; I know we haven’t done all the things I said we’d have to do before we could go public — like get profitable or at least cash-flow positive. But that was then and this is now. There’s never been a market like this one.” Franklin sprays very slightly as he talks.
“It’s a huge distraction while we’re still building critical mass in our operations — still staffing up,” says Donna, without sounding argumentative.
“I agree,” Joanne answers Franklin, ignoring Donna’s intervening comment. “Many of our portfolio companies are already public, some with less actual track record than hackoff. It seems they're all preparing to go. We may be behind.”
There’s a silence. “What do you think, Joe?” asks Larry of the big man.
“It’s crazy,” Joe Windaw says. “There’s never been anything like it, probably never will be again.”
“So you think it’s too early?” Larry asks. “We should stick with the plan?”
“No, we have to do it now,” says Joe. “We can’t NOT take free capital when everybody else is doing it. We’ve got to go.”
“Even if everyone else is crazy?” Larry persists. “My mother would say ‘just because everyone else is jumping off a cliff would you jump off, too?’”
“Your mother was right about cliffs,” says Franklin. “But this is NASDAQ and this is now and now is different.”
“Donna, what do you think?” asks Larry.
It’s unusual for him to seek consensus. His usual chairing technique is either to dominate the discussion or sit back and listen until he gets bored or makes a decision.
“I think we may have to do it, Lar.” Her lips are moist and she is breathing slightly heavily.
“We should do it because it the right thing to do,” says Joanne prissily. “We don’t have to raise money; we are somewhat behind plan, I think, although Donna still owes us some numbers on that.”
“So what DO you think, Joanne?” asks Larry. “I thought you said we should go. Now are you saying we shouldn’t?”
“No, no, not at all,” says Joanne. “I just want to make sure we have all our ducks lined up properly.”
“Are any of our ducks out of line, Joanne?” Donna asks.
“Well, as we were saying earlier in the meeting, we don’t have a great handle on…”
“Yeah, yeah,” interrupts Larry. “We know we have to have everything locked down. We can do that. Donna can do that. Okay, you’ve talked me into it. If we decide now that we want to go public as soon as possible, what happens when? When do we get rich and famous?”
Franklin and Joe both start to answer at once, Franklin at about twice as many words per minute as Joe. Each stops in deference to the other.
Joe gestures to the younger man to go ahead. “You’ve played the game according to the new rules as many times as anyone, Franklin,” Joe says. “Tell them how it’s done.”
“As you know,” says Franklin rapidly, “there are two things we need before we can get on the road in front of investors: bankers and an approved prospectus. By the way, we don’t get rich this time even if the company does. When companies go public this early these days, investors don’t expect insiders to do any selling.” He sprays quite a bit on the twin sibilants of "insiders" and "selling" but Larry leans forward eagerly nevertheless. “We get to sell if and when there’s a secondary, but it’s too early to talk about that,” Franklin pauses then says: “We let the bankers compete for our business,."
“That’s called a’ beauty show,’ right?” asks Donna.
“Right, Donna, a beauty show,” says Joanne balefully.
“So how do they compete?” asks Larry. “I thought the bastards all charge the same commission.”
“They do,” says Franklin. “They’ve got that part figured out. What we really care about is how well they're gonna sell the deal and cover the company afterwards. It's very important that their sell-side analyst — the analyst they're going to have cover us — really understands the company and its story and is well enough respected to sell it. He or she is gonna have a lot to do with the success of the IPO and then with the success of the stock in the aftermarket. We WANNA hear from the VP who’s gonna own the deal. We’ll check our sources for you, that’s part of VC value-add, right Joe?”
Franklin doesn't break stride. “We’ll find out if the VP’s got a big enough dick in the firm to make things happen. There are a lot of deals going on now and we have to do what we can to make sure OUR deal’s gonna get enough attention. We may hear from one of their senior sales guys, but that’s not too important because they all say the same thing — they’re sales guys. They tell you they're closer to Fidelity and Semper and Janus and all the big funds than anyone else and that they’ll get the best set of appointments.
“We may hear from the trading guy, too. They all run pretty good desks but it’s worth listening to those guys to see if you like ’em. The stock’s in their hands once trading opens. They also count the orders during the roadshow so they can give us a handle on what’s going on.”
“How do we hear from these guys? They come here, right?” asks Larry. “Can’t we bargain on commission? What if we did? Wouldn’t we be showing strength?”
“You won’t get anything on commission, Larry, trust me,” says Joe. “As much as these guys are hungry for deals like ours, as much as this is found money to them, they’ve got too much at stake to crack on commissions. They’d rather pass on a deal than do that. They know what happened to the retail side of the business when they had to compete on commissions; they don’t make any money there now. They have to leave most of that to the discount brokers, so they’re not about to crack on the corporate side. The good thing is that, because THIS is where they make their money—“ He presses an index finger into the glossy top of the conference table. “—they work for us, not for the retail accounts.”
“How can businesses be such patsies?” says Larry. “Retail customers bargain on commissions and companies don’t? Doesn’t make any sense.”
“Maybe not, Larry,” says Joe as calm as usual, “but everyone’s making too much money to worry about it.”
“So we’ll get the usual guys in,” Franklin resumes, “Lehman and Barcourt and Morgan Stanley and Oppenheimer — Merrill is probably too retailâ€‘oriented — maybe a few of the boutiques who could end up below the lead on the deal. But we want a bulge bracket (he means the big, huge investment banks everybody’s heard of) to be the lead. Joe and I can call them if you want…”
“I know someone at Oppenheimer,” says Joanne. No one looks at her.
“We’ll refer them to Donna,” says Franklin. “She can set up the meetings.”
“You guys wanna be there?” Larry Joe and then Franklin.
“If I can be helpful…” Joanne starts.
“No,” says Joe after exchanging nods with Franklin. “Too hard to schedule if we get involved. We know a lot of these guys and there has to be rapport between management and the bankers or the roadshow doesn’t play well. You guys do it. Call us when you want help. Give us the short list and your recommendations. Of course, the final choice has to be a formal Board decision.”
“And the final commission?” asks Larry.
“Drop it, Lar,” says Donna gently.
“So bankers we get,” Franklin continues, “but an approved red herring is gonna be another story.”
By “red herring” he means the prospectus which is the official solicitation for investors. Before a company can solicit investors, the Securities and Exchange Commission must approve every word of the prospectus which, according to regs, is the only substantive written communication the company can make while marketing its new stock. Other than the prospectus, companies are forced to enter a “quiet period” just before and after their IPOs.
“So the problem,” Franklin says, “is that the SEC is overworked right now, to put it mildly. Every Tom, Dick, and Harvey is going public and there just aren’t enough examiners to keep up with the volume. They can’t hire more because Congress is feeling a little pissy about the boom and won’t give them more budget. So we could wait longer than we’d like to get approval...”
“How long?” asks Larry.
“Used to be thirty days, now forty-five minimum,” says Franklin. “Depends.”
“On what?” asks Larry.
“Just depends,” repeats Franklin. “Don’t know. How big the pile, how slow the examiner. Whether there’s a supervisor free to review it. And that’s just for the first round of comments. Then we get the comments back and we gotta respond to every one of them. Then we gotta have to wait for their responses back to our responses. Those usually take at least ten to fifteen working days if there aren’t too many comments. Important thing is that we’re out on the road by July. August everything shuts down. Slip past July and we have to wait until September, and then it really gets crowded.”
And so it is decided that hackoff.com will go public forthwith.