Bill founded Hambrecht & Quist with his partner George Quist and is the founder and Co-CEO of WR Hambrecht+Co an investment bank focused on bringing transparency and

fairness to the capital markets through its OpenIPO^® process. Bill co-manages Hambrecht Ventures I focused on disruptive technologies and Hambrecht Geneva Ventures, a software venture capital fund.

Throughout his career Bill has been one of the most innovative bankers in the technology industry from his early pioneering in raising venture capital to his current drive to bring the logic and efficiency of OpenIPO to capital raising.  In this issue we discuss Bill’s thoughts on private investing and what he has learned about evaluating young companies during his career.We hope you will enjoy our discussion with Bill!

Hambrecht & Quist was one of the first investment banks that integrated venture capital with investment banking and that is when I realized how intellectually engaging venture capital can be.  Some of the most compelling and interesting challenges for me during my time at H&Q were the smaller companies with big ideas.  They are full of talent and drive and have the potential to change the world, but also face risks that make public financing inappropriate.  Private equity is an area which fascinates me as we try to figure out the winning combination of people, ideas, technology and business model to create a successful company.

For the investor, private financing can offer compelling valuations and great returns.  Private companies will typically trade at 50% of the cost of a similar public company.  From the company’s perspective, I am a big believer in going to the public markets if you can, even for smaller companies, but an IPO is often unavailable for a company facing significant enterprise or financing risk.

Enterprise risk is the risk that the business model just won’t work: the demand for the company’s products just doesn’t exist.  It is very hard for an equity analyst to determine if people will buy a personal computer or sell their beanie babies online until the products are available for sale.

As a corollary to this, some companies will need several rounds of funding as key milestones are passed. Public investors are wary of companies whose success is contingent on future financing, and for a good reason: negative results can be a self-fulfilling prophecy.  As a company’s prospects for future funding weaken, for whatever reason, the market will mark down the value of the company, making it even more difficult to raise the necessary capital.

Public investors are much more willing to take the risk of financing young growth companies than most investment bankers give them credit for, but private investors are more able to take the time to evaluate and mitigate the enterprise and financing risks of a private company and will reap the rewards of doing so.

First, you have to cultivate a good deal flow.  The easiest way to get people to show you deals is to be known for being an astute investor by doing deals.  We have been very fortunate at both H&Q and WR Hambrecht + Co in receiving a lot of opportunities.  Hambrecht & Quist was an investor or banker to some of the great start-ups of the Silicon Valley revolution including Apple, Genentech, & Adobe and that experience and reputation has carried over to our work at WR Hambrecht with companies like Salesforce.com, Overstock and Google.

Second, venture capital is a team sport.  Being part of an organization of bright, smart investors is a key advantage.  At WR Hambrecht + Co, our research analysts and venture capital team can quickly gather incredibly valuable information in evaluating an investment.  But it’s not just the internal organization: the ability to reach out to an extended network of other venture capitalists and company executives who we have worked with in the past is a crucial resource.

Finally, when evaluating a company we look for disruptors in the sense Clayton Christensen uses the word: companies that plan to deliver 80% of what the current leaders do, but at only 20% of the cost.  Clay is on our board at WR Hambrecht + Co and his view of the world matches mine.  For a truly disruptive company or idea, it is impossible for an incumbent to beat them without abandoning their own successful business model.

Software is one of the most exciting areas for us right now.  Software as an industry has always had a fantastic business model: low capital needs; no inventories; positive cash flow, usually exceeding reported earnings, resulting in strong balance sheets; quickly adjustable overheads; and stock options that attract talent at reasonable cost and significant tax advantage.

But beyond all of the historic reasons why we like software, this is an especially exciting time because we are seeing the enablement of new business models driven by the rapid adoption of the latest web technologies.  As usual, the last cycle’s winners have become the platforms enabling the next generation, whether it is Salesforce.com in the software as a service model, or Google in web advertising. New companies can now use these mature technologies in creating their own solutions and it has been amazing to see what they have come up with.