Silicon Valley’s money-making engine is stalled as technology start-ups find it harder to sell themselves or go public.
Part of the blame, entrepreneurs and investors say, falls on the big investment banks. Even if a start-up ready to go public attracts the attention of the big banks, it is less likely to get the service of a top partner, venture capitalists say. A start-up looking for advice on raising money or merging will have an even harder time.
For Frank P. Quattrone, the dot-com banker sidelined for four years as he fought and ultimately beat charges of obstruction of justice, that vacuum has provided the opportunity to insert himself once again into Silicon Valley’s thorniest negotiations and most lucrative deals.
Mr. Quattrone, a star Silicon Valley investment banker who advised hundreds of companies during the dot-com boom of the late 1990s, has been quietly counseling about 20 technology companies since March of last year, when he started Qatalyst Partners, a boutique merchant bank.
His fingerprints are showing up on prominent deals, including EMC’s acquisition of Data Domain for $2.4 billion in July. He advised Google during Microsoft’s unsuccessful takeover bid for Yahoo . But he is also taking a hands-on role advising much smaller venture-backed start-ups on how to navigate the new Silicon Valley.
In an interview, Mr. Quattrone said the advisory role that big banks used to play has faded. They have “expanded into one-stop commercial supermarkets, and bankers became product salespeople, not necessarily advisers,” he said.
He envisions his role in Silicon Valley as “a catalyst, and possibly senior adviser, cheerleader, truth-teller, participant.”
A little more attention is welcome in the Valley. “The big banks have just exhibited really bad behavior the last few years in backing away from the Valley,” said Marc Andreessen, a founder of Netscape and a partner in a new venture capital fund, Andreessen Horowitz. “But especially when you’re a small or midsized company, scrambling to make your way in the world, especially when things get bad in the broader environment, that’s when you need the help. Frank is walking into a market that’s just wide open.”
During the 1990s, young technology companies were served by big investment banks and smaller ones, including a group of boutique banks known as the Four Horsemen — Robertson Stephens, Hambrecht & Quist, Alex. Brown and Montgomery Securities. After the bubble burst, the small banks went out of business or were acquired, and the big banks shifted their focus to large companies that paid bigger fees.
Recent consolidation in the banking industry has made the situation more dire. Today, fewer than 200 investment banks actively underwrite public offerings; a decade ago, there were almost 300, according to Thomson Reuters.
But now, a new breed of banks — the Web 2.0 version of the Four Horsemen — is slowly emerging. Instead of initial public offerings, which are rare these days, the banks focus on mergers. Most advertise hands-on service and will not only take on a historically small $100 million deal, but also will assign it a name-brand partner. In addition to Qatalyst, these banks include Montgomery & Company and Allen & Company, an older bank newly interested in technology.
Mr. Quattrone rose to fame when he helped touch off the dot-com boom by taking Netscape public in 1995. He was the banker behind more than 100 public offerings of small technology companies, including some that became very large, like Amazon.com and Cisco.
After the dot-com crash, Mr. Quattrone spent four years fighting obstruction of justice charges in connection with an investigation of Credit Suisse, where he ran the hugely successful technology investment banking practice. A federal appeals court overturned a conviction against him in 2006, and Mr. Quattrone and the government reached an agreement under which the charges were dismissed in 2007.
He decided to get back to the business he knows best: advising technology entrepreneurs who want to “change the world to make it a better place,” as he put it — and making lots of money in the process.
Running a boutique bank is a job Mr. Quattrone knows well. Though he has spent most of his career at big banks — first Morgan Stanley, then Deutsche Bank and Credit Suisse — he essentially built boutiques within them.
Mike Kwatinetz, now a partner at Azure Capital Partners, who worked as head of technology research for Mr. Quattrone for many years, described it this way: “Our brand was Frank. It wasn’t Deutsche Bank or, later, Credit Suisse. It was Frank.”
Mr. Quattrone’s experience and contact list, his willingness to dig into the details of a negotiation and his deep knowledge of both finance and technology extend his advice beyond mergers and acquisitions, those who have worked with him say, including Aneel Bhusri, chairman of Data Domain.
In May, NetApp, a storage company, offered to buy Data Domain, which makes backup technology, for $1.8 billion, about twice its market value. But a few days before that deal was to be announced, EMC, a NetApp competitor, asked for a meeting.
The Data Domain board then had to decide whether to check to see if other acquirers might express interest. If it did, it risked slowing the deal, sharing confidential information with competitors and potentially losing the NetApp offer.
Mr. Quattrone suggested a different strategy: accept NetApp’s bid but leave the door open to other suitors.
“That advice turned out to basically set up the bidding war dynamic that ensued,” said Mr. Bhusri, a venture capitalist at Greylock Partners. The back and forth continued. Data Domain “needed to provide some incentive for the party with more firepower to bid more,” Mr. Quattrone said. In July, EMC agreed to buy Data Domain for $2.4 billion, more than three times the stock price in March. The deal closed that month.
Mr. Quattrone recently advised a start-up in the portfolio of the venture capital firm Accel that was attracting interest from two large public Internet companies, said Jim Breyer, an investor with Accel.
The company’s management came up with the sum it thought the company was worth. Mr. Quattrone bluntly told them it was worth less, Mr. Breyer said, and walked them through an analysis of the valuation, potential outcomes and what the public markets might look like in a year.
The company remained private. It is now more realistic about its valuation and what it needs to do to go public, Mr. Breyer said. Start-ups like this “need to depend on the boutique investment bankers perhaps more than ever,” he said.