Hot IPO allocations for venture capitalists too: "perks of being a player"
A Wall Street Journal story (along with an amusing cartoon of Bill Tai and Bob Kagle) (subscription required) on how venture capitalists such as eBay director and Benchmark partner may have profited not only from venture investments in technology companies that rose in value rapidly thanks to the stock market boom of the late1990s as well as from their relationships with Wall Street.
Indeed, the practice of allocating hot IPOs to venture capitalists may have been just as widespread as to corporate executives, some investment bankers and VCs say -- "one of the perks of being a player," is how one Silicon Valley VC describes it. Wall Street also showered hot IPOs on executives of private-equity firms, which generally make later-stage investments in young companies.
Critics say such mutual back-scratching was part of a cozy relationship between Wall Street and its investment-banking clients. "A small circle of preferred clients were given vast access by the investment banks to IPO shares and reaped large profits on the sale of these shares ... at the expense of the average investor" who could only buy at much higher prices after the IPO shares began trading, asserted Richard Baker (R., La.), chairman of the capital-markets subcommittee of the House Financial Services Committee, which released the Goldman IPO data earlier this month.
Mr. Kagle and Goldman say there was no quid pro quo for the IPO allocations. Mr. Kagle says he didn't expect quick profits because he planned to hold for the long term. Also, he adds, the value of the IPOs was just a small percentage of the amount of his own investments in the Benchmark companies. The stock underwriters, he says, were generally picked based on which bank could provide the best long-term research coverage, and best understood the company and its business.