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TMF: First off, I would like to ask you to give us a capsule description of your business and what you guys are doing.
Readmond: Wit Capital was established in 1996 and was born to take advantage of the most efficient distribution characteristics of the Internet and revolutionize the capital formation process through adoption of the Internet.
We became a broker-dealer in September of 1997, and in 1998 began to put into place the management team and the long-term strategy to expand our impact in the area of capital formation. It's important to understand that we are not an online broker, but rather an Internet company engaged in the capital formation process. The online brokerage part of our business is really a consequence of the capital formation activities, which require a distribution channel.
Our business grew through 1999 and toward the end of 1999, we announced the acquisition of SoundView Technology Group that was completed Jan. 31. The combined firm has begun to do business as Wit/SoundView.
TMF: We covered that announcement here. I wonder if you could talk a little bit about what the thinking was behind it and how investors might want to track your progress in integrating SoundView.
Readmond: There are a number of key points. We realized because of the services that we provide to issuers that there was a need for us to develop some institutional sales and trading capability.
Secondly, we have a strong desire to expand our focus from Internet and Internet-related companies to the underlying technology that supports the digital revolution, and we got to a point where we had to make a choice between building and buying. Fortunately, we identified SoundView as a potential partner and, as I said, completed that transaction in the end of January.
"We think that the business-to-consumer rage is over."
Just to put some numbers around the transaction, Wit Capital had 35 investment bankers, SoundView had 23. Wit Capital had 14 research professionals, SoundView had 30. So when you look at the combined professionals focused on all aspects of the Internet and technology, there are now over 100 investment professionals, which we think is larger than virtually any other firm in the industry.
Our companies under coverage went from 45 to 235, and we now have the ability to offer issuers an institutional capability, our Internet-based individual investor distribution capability, superb research, and after-market support through our trading facilities.
TMF: I read recently in somebody else's institution of research that your investment banking division laid out five areas in which it plans to concentrate its efforts in the foreseeable future. I wonder if you could talk a little bit about those areas and sort of where and how you are looking for opportunities to invest.
Readmond: Well, there has been an evolution in what I refer to as the digital revolution. We think that we are in the early stages, not the late stages, of the digital revolution, and that both Internet applications and the underlying technology will cause us to shift focuses.
One area cools down and another area heats up. An example of that is that we think that the business-to-consumer rage is over. It costs far too much today to establish a new brand, so we see this as the year that bricks-and-mortar companies will begin to migrate and adopt Internet strategies. That ties to our strategic advisory business, where we provide advice to CEOs on precisely that point. But the "B-to-C" rage will not be quite as important this year and in fact there will be some consolidation of B-to-C companies that were not able to spend their money wisely enough to build a brand in a short period of time.
We think that there will be a number of technology breakthroughs in areas like wireless and broadband and photonics, and given the spectrum of our research coverage, part of our strategy is to shift our emphasis to the areas that are requiring capital over the next 18 to 24 months and give the public the opportunity to participate in those transactions.
TMF: Maybe about two to three years ago, I think a lot of people forgot that the real reason that B-to-C companies were going to benefit from the Internet was more the traditional companies finding ways to use it as opposed to new companies being formed. Was that just sort of a bubble that's popped, and now people have had it with these kind of pure online plays, and are now looking to see just traditional companies improve their operations?
Readmond: I think that's exactly right. I'm not sure I would describe it as a bubble that popped because there were a number of new entrants in the B-to-C space that were successful and continue to revolutionize. I would certainly put eBay (Nasdaq: EBAY) in that category. I would put Wit/SoundView in that category.
TMF: What's been the differentiating factor?
Readmond: Luck. [Laughs.] Well, obviously a little bit more than that. I think in our case, we were focused very early on the importance of brand, reputation, and track record. We had something unique that was not otherwise available to individual investors, and that was access to initial public offerings. So unless you've got something that really differentiates you, it's virtually impossible to build a new B-to-C brand today. I have seen the same attributes in eBay and other successful B-to-C models that have come to market over the last several years.
TMF: So many companies find access to huge amounts of capital right now with the market responding the way it has. How do you guys pick and choose between deals? Are there red flags that sort of say, "This is something we don't want to get involved in," or is there almost an environment now where it almost gets difficult to lose?
Readmond: No, I think it's as difficult to win as it ever had been. We see hundreds of deals a week. I would say 80 out of 100 are just dismissed because they're "me, too" ideas. They don't have any uniqueness. But as you look at business on the Internet, there is a very simple measure, and there is one question you can ask that really separates the wheat from the chaff.
This may be counterintuitive but the question is "What is your analogy in the physical world?" If the entrepreneur has an answer for that -- "Well, my business is a lot like John Smith's used car business" -- that's a clue that it's not really an Internet business, but just a copy of the physical world. And to the extent that you're copying a process that exists in the physical world, the bricks-and-mortar company that owns that process is in a far better position to be effective. We look for companies that have business ideas that don't exist in the physical world and could not exist if it were not for the Internet.
TMF: Maybe we could switch gears for a second now and talk a little bit about your brokerage services division. Maybe you could address sort of where you see the opportunities for growth, not just for Wit but also in that industry as a whole.
Readmond: Well I think one of the things that's happened as a result of the accelerated implementation of the Internet is that distribution really becomes a commodity, and a lot of the products that you find routinely available in the online brokerage segment are really commodity products.
As I said before, we view our online brokerage not as our core business but as a consequence of the capital formation business. There are a lot of people competing for accounts, competing for assets, competing for mindshare, and my view is that the people like Charles Schwab (NYSE: SCH) won that war years ago, and has spent hundreds of millions of dollars building brand, building technology, and offering products and services, and that's an area where we will never compete aggressively or compete head-to-head.
Even execution becomes a commodity with the advent of Electronic Communications Networks, the ability to trade after hours or away from traditional marketplaces, and that's not in our area of focus. We do think the opportunity in the long term is to take various financial products that benefit by the scalability of the Internet and do for those products and services what we've been able to do for the individual investor in the IPO market.
Number two, we think since the Internet is 24-7 and there is nothing at all domestic about it, that anyone that is in an Internet business that is not thinking about global implications for that business really misses the real power of the Internet. So we think we've got a scale. We think we've got to introduce new products and services that are not currently available on the Internet and we think we have to take a global view toward our business.
"We look for companies that have business ideas that don't exist in the physical world."
TMF: It does sound, though, like you are saying that the barriers to entry for getting into the brokerage space are significantly higher than getting into investment banking.
Readmond: Just the opposite. There are no barriers to entry to getting into the online brokerage business. There are substantial barriers to entry to getting into the investment banking business.
TMF: Yet the opportunity in the investment banking business is greater?
Readmond: Absolutely. That is where there is opportunity for disintermediation. There is opportunity for distribution of information over the Internet and making research available to individual investors the way institutions used to have it available first. So I think there is more friction there, they are wider spread, so there's a much greater opportunity on the capital formation side of the business than there is in the secondary market trading side of the business.
TMF: With that in mind, how do you envision Wit Capital's business developing over the next 10 years?
Readmond: I think that we will have a global platform. I think we will focus obviously on our core business in the United States, but we've already established a joint venture in Europe and another joint venture in Japan. I think you'll see us grow to Latin America and South Asia either in direct participation or joint ventures. I would expect that we will focus virtually every six months on the major technology release that fundamentally changes the way part of that process is now being conducted.
TMF: Do you find that as you look and you consider global opportunities, that maybe an American investor might be surprised at the nature of the technologies and businesses that are being developed overseas that are markedly different?
Readmond: I really think it's the other way around, and Europe is a good example. There is a lot of money in Europe which is looking to participate in the digital revolution, and, as you know, Europe is probably two years behind the United States in terms of adoption of the Internet. In financial services, they are probably 10 years behind the United States because large parts of banks have dominated that business throughout the Continent.
So there is a lot of money looking for investment opportunities in Europe and I think two things will happen. Number one is that start-up companies, which have been successful in the United States, similar kinds of start-up companies that have developed here will begin to develop in Europe and that would pull some money from United States investors into Europe. I think the larger opportunity is capturing and directing the European money into investment opportunities that are not currently available.
Related Links:
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Fool Plate Special, 11/1/99: Wit Capital Buys SoundView
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