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The Big Casino: Reopen for Business as Usual

Apr
25
2004

It’s shocking, I know, but the New York Times has – gasp – discovered Silicon Valley’s “friends and family” culture. Better five years late than never, I guess.
Gary Rivlin, making his front-page debut as the Times’ non-Markoff man on the scene, hands in a nice, almost-an-insiders’ look at the Google public offering and details the ways in which the valley takes care of its own. Rivlin is relying on some of the reporting he did for his good but unfortunately overlooked book, “The Godfather of Silicon Valley,” a brief look at Angel Investors’ Ron Conway and his prodigious schmoozing skills.


Rivlin is sure to mention that investment banker Frank Quattrone – now on trial in New York for obstruction of justice – will participate in the Google offering presumably through his close friendship with Conway. There are other details that flesh-out Rivlin’s story, however. One of Conway’s closest friends, Bill Campbell, has been a presence at Google for many months now. And Rivlin doesn’t talk about the relationship between venture capitalist John Doerr and Andy Bechtolshiem, one of Google’s original funders and a man famous for his deal-making acumen. Doerr, no slouch in this department himself, backed Bechtolsheim’s first company, a little venture called Sun Microsystems. That’s where Google CEO Eric Schmidt worked for many years. Doerr and Campbell are also close business associates having last worked closely together on the Netscape offering. Oh, and Monday’s Wall Street Journal reports that Credit Suisse First Boston — the bank that once employed Quattrone — and Morgan Stanley are Google’s bankers; the WSJ isn’t clear but it seems to be saying that CSFB is, at minimum, co-lead on the deal.
You see now – you really see – how important Quattrone’s trial is for the valley. If he’s not convicted it will be the final proof that, really, very little about how Silicon Valley works has changed or needs to change, despite all the talk about outside directors, the bans on early allocations of public offerings (known at Quattrone’s bank as “friends of Frank” funds) or the heightened scrutiny by the Securities and Exchange Commission. With Google, the usual group of insiders – mostly folks who participated in Conway’s Angel Investors Funds and pretty much everyone did – are going to make money on the difference between the private, insider price they paid for Google in oh, 1999 and the price the stock is expected to reach once it begins trading.
The argument in favor of the profit taking is that early investors took tremendous risk. And that’s a fair and legitimate argument to make. It is, indeed, how capitalism works. But many people buying stock in the public market don’t understand this “through the looking glass” state of affairs. They think their risk and that of private investors like Conway’s angels is the same. It’s not. For many of the valley’s insiders, the risk is affordable, not to mention – given Google’s star-power backing from Stanford University to Kleiner Perkins – pretty safe. They’ll do well off a little. The same scenario, with some of the same players, I’d bet, is taking place at Salesforce.com and Shopping.com, both headed to the stock market this summer.
How much money are we talking? Who knows? But let’s be conservative and say the Angel investors, Stanford, and the venture capital houses Kleiner Perkins and Sequoia Capital paid $5 for each share of Google (the venture firms, probably much less). The offering will price well above that. Given demand, I’d say pricing will be at least $15 a share. Okay, $15 minus $5 is, uh, $10. That’s a 100 percent return, maybe more if the stock takes the bounce everyone expects it to. And, well, a front page New York Times story, isn’t going to slow anything down, either.
CORRECTION: A bunch of people who know more about high finance, er, more about finance than I do, have written in to very nicely say that a $5 investment that returns $15 is a 200 percent return. Now, back to our original program.
This is how Silicon Valley gets rich. It’s how it’s stayed rich through the collapse of the Internet stock bubble. It’s why it’s coming back.

Share  Posted by Chris Nolan at 1:51 PM | Permalink

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