MOGULS BY THE MILLION

By MICHAEL KRANTZ/SAN FRANCISCO

One of the best things about being really rich must be how easy it is to get even richer. And this means not the odd $5,000 that earns a cool 18% a year on the eternal bull market (though we're not complaining, either, Mr. Greenspan) but the odd $5 million that returns 18% in four hours in the latest initial public offering (IPO)--as long as you're loaded enough to get offered such a deal in the first place.

This makes Andy Klein angry--or at least aware of a market niche. His company, Wit Capital, which launched last week, is an online broker that lets small investors not only trade stocks and mutual funds at cut-rate prices but also buy into the high-end IPO and venture-capital deals that were once the sole province of Wall Street's biggest kahunas. Until now, the Little Guy could only watch and drool as well-connected initial subscribers bought millions of IPO shares at insider offering prices, then "flipped" them to the clamoring public for instant fortunes: Netscape's IPO opened at $28 and zoomed to $174; Yahoo jumped from $13 to $33 in its first day.

Wit's idea: pool investors' money into bids that win a 5%-to-10% share of some of these deals. The site witcapital.com already has the specs on Wit's first IPO, an Israeli networking-software firm called Radcom Ltd. Now, whether Radcom will make you a quick killing or make you the quick killing is unknown. The big news is that you and I can read Radcom's prospectus and purchase its stock as early as the chairman of Goldman Sachs.

It's a canny play in a market whose stakes dwarf any product or service the Web has yet to offer. A recent report by Forrester Research puts the amount of assets invested online in 1997 at $120 billion and projects that by 2002 the number will rise to $688 billion. Already, cyberspace brokerages like E*TRADE and e.Schwab are filching millions of dollars in business from land-based icons like Merrill Lynch and Smith Barney by using the Web's data-processing efficiencies to cut pricing to the bone. E*TRADE charges a commission as low as $14.95 for a 100-share trade. e.Schwab's online fees are $29.95. A trade by phone through Fidelity costs $48. E*TRADE CEO Christos Cotsakos says he has 220,000 active customers with accounts valued close to $7 billion in assets.

With the demand for equity still strong, IPO deals could swell this river of money with new revenue streams. Today's IPOs, Klein argues, constitute extortion visited by ruthless financiers upon under-funded entrepreneurs. The problem, from his guerrilla perspective, is that the lead underwriter who puts together an investment syndicate to take a company public offers it $12 a share, then prices the stock to the public at $15. Theoretically, some of that $3 a share could be the company's. So the stock hits NASDAQ via the traditional underwriting route at $15, then races to $18, or $20, or higher. Whereupon those retail investors who come in late at $22 watch the stock's grim slide back down to $14. "It's a sinister game that is played very, very intelligently by the banks and their preferred customers," says Klein. "You talk to these companies right after an IPO, and they feel like they've been eaten by sharks."

The sharks in question have a different perspective. Underwriters do get a discount for, in essence, buying in bulk, admits Michael McCaffery, CEO of the investment bank Robertson Stephens. "The immediate premium of 15% or 20% is an accepted convention." But evaluating untested companies, he adds, is difficult; the rewards we ogle in the newspaper come with considerable risk that the company will flop, leaving its bankers holding the bag.

Still, McCaffery believes, small investors will have their day. "If you create more demand," he says, "you should have an impact on price." If 10,000 Little Guys keep collectively offering $14 for IPOs whose syndicates are offering $12, wouldn't IPO candidates start urging their underwriter to give small investors a place at the table? And might not these populist wrinkles--Wit plans to sell similar venture-capital shares in pre-IPO start-ups--affect numerous deals down the line, shifting profits from bankers to entrepreneurs and the masses, perhaps even changing the way whole industries get financed? Might Andy Klein have just sparked a financial revolution?

If so, he owes it all to beer. Klein, 37, is a law student turned securities expert who had his '90s-dropout experience when he fell for two things: a Dutch woman who became his wife and a spicy Dutch brew called witbier (wheat beer), which became his first start-up. The Spring Street Brewing Co. was born in January 1993, and its growth-fueled cash crunch gave Klein his big vision of offering stock to his customers via the Internet.

It was, like Post-it notes, an idea so impeccable it's hard to imagine that it once didn't exist. Some 3,500 intrepid souls bought $1.6 million in stock via the Spring Street Website; 18 months and numerous SEC consultations later, Klein hopes that by year's end 100,000 customers will each have invested around $16,000--a total of $16 billion--in Wit Capital.

He won't have this business to himself. The two online brokers, E*TRADE and e.Schwab, have each announced similar initiatives that are, unlike Wit, tied to specific underwriters. E*TRADE will offer IPOs managed by McCaffery's Robertson Stephens; e.Schwab will work with Hambrecht & Quist. E*TRADE's Cotsakos envisions the same tiny 100-share minimum as Wit, while e.Schwab's minimum, a snooty $100,000, writes off the Little Guys that Wit hopes to empower.

Some advisers think the high minimum isn't such a bad thing. Maybe betting the nest egg on hype-heavy IPOs is just another way for middle-class families to lose their shirts to financiers who wear nicer shirts to begin with. What will happen the first time Wit sells shares of some loser at $12 and they promptly sink to, say, $4? "These deals tend to be highly volatile," says a banking executive. "They appeal to people who can afford a certain amount of risk. But the mom-and-pops? God love 'em. It's not easy."

What's worse, Wit penalizes customers who flip their buys for quick bucks. Selling Wit IPO shares less than two months after you buy them will not only cost you 5% of the sale price but also land you at the back of the line next time around. Klein admits this radical strategy--aimed at both encouraging stay-the-course investing and stroking the underwriters who want to stabilize their young companies' stock--removes one ace from his customers' hands. Still, he argues, buying and holding at the offering price is a better bet than buying during the run-up and betting you'll be able to avoid the fall.

The lesson is that as an investor, you're still on your own. Wit and E*TRADE will balloon your net worth faster than the average high-growth mutual fund only if you do your homework and deduce which deals are worth betting on. "We're only going to be as good as our reputation," Klein says calmly. "We do the due diligence, we investigate the company, we determine what we think is a fair price." Klein thinks that's a winner, but then it's easy to be sanguine when you've got wheat beer to fall back on.