Larry Page and Sergey Brin, the thirtyish founders of Google, are doing something so courageous that it has never been risked before, not even by the bold Silicon Valley iconoclasts who preceded them. Not by Microsoft's Bill Gates. Not by Netscape's Jim Clark. Not by Oracle's Larry Ellison. Not even by Apple's Steve Jobs.
The Google guys are telling Wall Street to drop dead.
For all their talk about reinventing the world, those entrepreneurs from an earlier era played the game of going public the way it had always been played. Before Google came along, when a company was ready to sell shares, it hired big Wall Street investment firms such as Goldman Sachs and Morgan Stanley. The firms offered the stock to their favorite customers at a big discount to what it would command on the open market. The privileged few were guaranteed quick profits, but the company received less money for its IPO than it had a right to expect.
And the newly public company paid a ridiculously high price for the honor. The investment firms' commission was typically as high as 7% of the money raised by the sales. That fee could run into the hundreds of millions of dollars.
Page and Brin aren't putting up with this racket. As this issue went to press, they were preparing to use a public auction to offer the Internet heavyweight's shares to anyone willing to pay the market price, not just the elite who have friends in high places at the Goldmans and Morgans. Google stands to receive an estimated $100 million more by handling the sale this way. And while major firms like Morgan Stanley will manage the auction, their role — and their fees — will be much diminished.
Why did such famous risk takers as Gates, Ellison, and Jobs put up with the Wall Street shakedown? They didn't have much choice. The brokerages were able to act like a cartel partly because they held a near monopoly on information. Even as recently as the 1980s, CEOs had no idea what was happening to their stock price on a given day unless they called their brokers. And the buyers of equities were mostly big institutions — mutual funds, pension funds, insurance companies — that paid high commissions to the big brokerage firms for research and advice. The investment houses essentially gave them kickbacks by cutting them in on IPOs.
Cracks began to appear in that cartel in the late 1990s, when WR Hambrecht & Co. and Wit Capital pioneered the auction approach. But few entrepreneurs chose these Wall Street reformers for their IPOs. Why? For one thing, many founders and CEOs wanted in on the old back-scratching game. WorldCom's Bernie Ebbers, for example, allegedly earned $11 million from IPOs handled by Salomon Smith Barney between 1996 and 2001 — a time when WorldCom paid Salomon $107 million in investment-banking fees. Entrepreneurs also picked traditional investment banks to take them public because they wanted the services of the firms' "analysts" — those folks who notoriously hyped clients' stocks under the guise of providing objective stock research.
Page and Brin built Google by applying their hypermathematical logic to the Internet; now they have focused the same laserlike rationality to the IPO industry — and they have found that business to be badly wanting. They have forsaken the traditional way of launching IPOs for the smart way. In so doing, they might revolutionize Wall Street just as they revolutionized the Internet.
Of course, the huge popularity of Google's brand helps make it possible for the company to bypass Wall Street even during these tough post-tech-bubble times. Still, it takes guts to make the break. The Google guys are making a big bet that the public will understand the old way was collusive and corrupt while their way is rational and fair. That's a great leap of faith.
Even an iconoclast such as Virgin's Richard Branson, who made billions fighting the establishment, was taken aback by the riskiness of Google's IPO. Google's populist approach means that much more of the new stock is likely to be bought by individual investors than is usual. And Branson worries about the backlash that the beloved company might face if its stock price falls dramatically and its loyal customers-turned-investors get burned. "Google must have enough confidence in the future that it doesn't mind bringing in hundreds of thousands of small investors," says Branson.
Alienating the powers that be in investment banking has risks, too. The first time the newly public company reports any sort of disappointing results (something that is sure to happen someday), Wall Street will look more like Main Street in High Noon — a dangerous, lonely canyon where everybody is gunning for Google and few allies are to be found.
Page and Brin are willing to take that chance. There's a consistency and clarity to their vision that constitutes true leadership. Google is based on the twin principles that brains trump brawn and that a democracy always supplants a hierarchy. This democratic impulse forms the very core of Google's technology: The search engine ranks results based on calculations of popularity among the Web's vast community of users. So it goes with the IPO: Google has vested its future in the people, not Wall Street.
Larry and Sergey are not your archetypal courageous leaders. They're gen-X nerds who like to goof around on Segways and Rollerblades. Yet Page and Brin are in the vanguard of a new breed of technocrat kings who are gambling that they can outthink — and outflank — the status quo.
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Larry Page's and Sergey Brin's choice for an unconventional IPO is perhaps the strongest display of courarge from the dot-com world. If Google's stock flops, will their legacies be as pioneers or as reckless failures? How is it fairing so far? Think of other bold moves by companies regarding financials or new products; how has time treated their boldness?
A version of this article appeared in the September 2004 issue of Fast Company magazine.