Andrew Klein made waves in 1995 when he raised $1.6 million for his New York City microbrewery by offering stock to potential investors over the Internet. Magazines and newspapers nationwide trumpeted the first Internet-based initial public offering (IPO), grabbing enough attention for Klein to pull in 3,500 individual investors for Spring Street Brewing Co., which specializes in Belgian-style wheat beer.
While online brokers had been selling stock over the Internet for some time, Klein, 38, bypassed traditional investment banks to appeal directly to qualified investors. And with thousands of entrepreneurs asking him how to raise capital the same way for their own companies, he launched Wit Capital (wit is the Flemish word for wheat), an online investment bank and brokerage firm that grooms companies for IPOs to the firm's member investors.
Most of those who followed Klein's lead were not nearly as successful. "We raised capital because we were first and got lots of media attention," Klein says. "Since then, most companies that have gone online and tried what we did have failed."
And in cyberspace, with the inherent potential for fraud, even modest bids for capital, such as private placement opportunities, have no guarantee of success. "There are real risks in investing online without an investment bank," Klein says. "If there's no intermediary, you're taking the company's word for [its success]."