Venture Capital Firms Team With Brokerage Supergroup

Online brokers Charles Schwab, Ameritrade (Nasdaq: AMTD) and TD Waterhouse (NYSE: TWE) announced today that they will join three prominent Internet venture capital firms to open an Internet-based investment bank by early next year.

The companies say that the yet-to-be-named bank will be based in Silicon Valley and will focus on initial public offerings, with an emphasis on giving online customers access to the red-hot IPO market.

“This new firm, through its relationship with Schwab, TD Waterhouse and Ameritrade, will be designed to respond to online investor demand for new issues, which to date has not been fully satisfied by the traditional offering process,” said CEO designate of the new bank, Scott Ryles. “This bank, together with the online brokers, will seek IPO pricing that better reflects the total underlying investor interest in pending IPOs.”

Ryles is a former managing director and head of Technology Investment Banking at Merrill Lynch.

Swing Your Partners

Joining the online brokers are three venture capital firms with name recognition of their own. Trident Capital, Kleiner Perkins Caufield & Byers, and Benchmark Capital will all take a piece of the new venture.

The companies say that the bank will focus upon information technology and Internet companies. It will also provide research to institutional investors, and private placement and advisory services to issuers. The bank will eventually invest in later stage private companies.

Together, the three online brokers account for more than 50 percent of online investor accounts and bring a cumulative sum of nearly $750 billion (US$) in customer assets to the table.

Charles Schwab is the largest of the three, with third quarter revenues of $884 million. The company has three million active online accounts, which account for 67 percent of Schwab’s total trades.

Ameritrade booked fiscal 1999 revenues of $268 million and pushed its accounts up from 300,000 in 1998 to 560,000 by last month.

TD Waterhouse has 1.1 million active accounts and booked third quarter revenues of $243 million. The company had its own initial public offering in June, raising over $1 billion.

Venture Capital Funding Skyrockets

This partnership comes shortly after the release of the PricewaterhouseCoopers Money Tree Survey of capital venture, showing a steep acceleration of capital investment flooding into tech firms. By the third quarter of 1999, venture capital hit $21 billion, beating all of 1998’s venture capital by over 50 percent.

A full 86 percent ($18 billion) of the capital rushed into technology companies.

“Venture capital has become a strategic core of technological innovation,” said James Atwell, managing partner of the Venture Capital Practice in the Global Technology Industry Group. “Technology companies are attracting venture capital at an astounding rate.”

Venture Capital Binge

Investment directly into Internet-related companies jumped five-fold in 1999’s third quarter, to $5.2 billion, up from 1998’s third quarter of $1.1 billion. Internet growth also affected other classifications in 1999’s third quarter, including software and information ($2.2 billion) and business services ($1.3 billion).

“The Internet was a driving factor for half of all companies,” said Atwell. “Every facet of the industry showed record increases, including business-to-business, business-to-consumer e-commerce, infrastructure, content and software.”

Regionally, Silicon Valley companies set a new investment record of $3.3 billion, surpassing the $3 billion mark for the first time in one quarter’s investments.