Cliff and Lisa Sharples

The road show, the friends and family list, the big day, and the aftermath: The inside story of garden.com’s IPO.

March 2000By Comments

In October 1995 Cliff Sharples, his wife, Lisa, and their business school buddy Jamie O’Neill pitched Austin Ventures on a start-up idea involving gardening and an untested concept known as e-commerce. They left with a check for $20,000 and instructions to investigate the idea further. More than four years later, having pocketed nearly $50 million in five rounds of financing, the three founders of garden.com presided over an initial public offering—the holy grail of high tech here and everywhere.

Three months after the big day, during the week of the last Christmas of the millennium, the Sharpleses talked to Texas Monthly Biz about their IPO: what came before, what it was like during, and what has happened since. Their story is their own, but it will resonate for their counterparts at many companies in Texas today—and for a few counterparts-to-be who are still rooting around for seed money.

Texas Monthly Biz: When did you first start thinking seriously about an IPO?
Lisa: At the beginning of 1999, once we understood that this was really working, we decided to do a private placement round of financing. We wanted to raise $12 million to $15 million—later that became $20 million—and we understood that when you’re raising that much, you need an investment bank to help you. So we hired Hambrecht & Quist, out of San Francisco. And it was right after this round that we really started to talk with our board about going public.

TMB: What were the timing considerations?
Lisa: A public offering is a very involved process for the management team. Our business is seasonal, and the busiest time is the spring. We didn’t want to take our eyes off the ball to do a road show. Whereas in the summer, everyone is done gardening—there’s a lull. Summer was one of the only times we could actually go out and do an IPO.

TMB: What do you mean by “involved process”?
Lisa: Well, you have to prepare the prospectus that will be distributed to people who want to buy shares. That takes about a month. In it is the history of the company, how much money has been put in, who the owners are, and the risk factors of the business. Most of the information is financial, but there’s also some about the way the business is run. Once you prepare that document, you have to submit it to the Securities and Exchange Commission for review. There are lots of lawyers and banks involved at this point, because everybody wants to make sure that the document is as good as it can possibly be before it goes to the SEC. The SEC has a review process that it goes through to make sure the security can be traded in public markets, and they come back with comments; the whole process can take a good number of days. When we were doing it, there were so many people filing to go public that there was a backlog.
Cliff: And while all this was going on, we decided to do another quick private round of equity financing.

TMB: That ended up being how much?
Cliff: $22 million.

TMB: Same type of investment bank deal?
Lisa: Yes, we did it with Hambrecht & Quist as well.

TMB: How did you prepare for the road show?
Lisa: We put together a presentation about the company, and then the bank called public investors they felt might be interested in participating in the IPO, and they set up meetings for the management team to go to.

TMB: How long did it take?
Lisa: About three weeks. We did the first week in Europe, then came back and did the second week on the West Coast and the third week on the East Coast.
Cliff: In London, where we started, they totally got it.

TMB: Internet-savvy folks?
Cliff: Definitely. Then we went to Zurich, and it was completely different: less feedback.
Lisa: But they asked great questions.

TMB: I think it was an interesting decision on the part of your bank to send you to Europe.
Cliff: They didn’t want to, but we told them we wanted to go. Gardening is actually more popular in Europe than it is in the U.S. Also, at some point we want to be an international company, and we wanted to start planting early seeds.
Lisa: And as a management team, you have to practice.
Cliff: The kind of momentum the investment banks set up with the schedule is interesting. You start either in Europe or with investors who are not necessarily your first targets. It’s a warmup, so you can get better at presenting. And you want to end up in Boston and New York, because that’s where the big investment houses tend to be.
Lisa: Those guys are the biggest investors in Internet stocks.

TMB: So how did it go back in the States?
Cliff: In San Francisco we had some of the best meetings with some of the brightest people. Really great chemistry.
Lisa: I thought New York was kind of cool too.
Cliff: Although we were there in adverse conditions.

TMB: How so?
Cliff: The third week of the road show was the big crash of Internet stocks. The bottom just fell out.

TMB: And you’re there to sell . . .
Lisa: . . . another Internet stock . . .
Cliff: . . . at a time when they’re all losing money. I remember at one investment bank in New York, they said, “You know, we love your business, but quite frankly, we’ve lost hundreds of millions of dollars on companies like yours in the last few days. Can you just wait? We don’t know which end is up. We think you have a great business, but your timing couldn’t be worse.”
Lisa: And we were planning to go public the following Tuesday, in the second week of August.
Cliff: There was another issue we were running up against: The rule of thumb on Wall Street is that in the second half of August, the only place you’re going to find investment bankers is in the Hamptons. So we were racing to get it done. We decided by the Thursday before that it didn’t make sense, that we should delay the offering rather than try to go out in incredibly stormy conditions. We had $20 million in the bank. We didn’t need to go public. But it was definitely an emotional blow.
Lisa: It was a bummer because we thought we’d have to go on another road show.
Cliff: That was our first question, actually: “If we delay, at what point do we have to redo this entire nightmare process?” The answer was, “If you have to delay more than a month, you may have to go on another road show.” About four weeks later, on September 16, we went public.

TMB: The stock opened at?
Cliff: Twelve.

TMB: How was that determined?
Cliff: It’s kind of an interesting process. One of our board members told us that when you decide which investment bank you are going to go public with, they pitch you and tell you how much you are worth as a company and estimate what your opening stock price will be. It’s nice and rosy, and you’re all excited. And then you go through the whole road show, and you talk about your valuation with your bankers, and you gauge the demand. And then, the night before the IPO, all of a sudden there will be this guy you’ve never met before named Sol, who’ll come out of the basement with a calculator, and he’ll be, like, “I think it’s gonna be x.” And everybody will be, like, “Where did that number come from?” That’s kind of the science of it.
Lisa: What they do is set a range before you go out on the road show. When you pitch the business to different investors, you tell them what the range is. The price you go public at is a derivative of that range plus the level of interest. Obviously, if there aren’t that many people interested, you’re going to open at the bottom of the range.

TMB: So you opened at $12. How did it work? What were the mechanics? What did you do? Where were you?
Cliff: The investment bank said we could go to NASDAQ that day and be on the floor and watch the stock trade. A lot of CEOs do that. We said, “We’d rather be home with our company than in a room full of traders because it’s not about us; it’s about the company getting another round of financing.” So we decided to be in Austin.

TMB: Did you sit in front of the computer, like day traders, and watch the activity?
Lisa: All day.
Cliff: Everybody was on. They downloaded real-time stock quotes.
Lisa: We had a keg party at the office because we knew no one was going to be working anyway.

TMB: And where did it end up at the end of the day?
Cliff: At about $19. We were pleased.

TMB: Did you expect it to go higher? Was there a discussion with the bank that if it closes at x, you can consider it a success, but if it’s y, you should consider it a failure?
Cliff: If it’s below the offering price, it’s a bummer but not a failure, because you’ve still raised millions. But it didn’t close below. One way or the other, we sold stock for $12 or more a share and suddenly had $50 million. That was the objective for the company, and we met it.
Lisa: You want your investors to be happy that they bought it at $12. It went higher than that. They made money.

TMB: You can look at me with straight faces and tell me that the banks and the investors were satisfied?
Cliff: Yes.
Lisa: Especially because of the market.
Cliff: The day we went public there was the threat of a hurricane on the East Coast, and the first piece of news was that the stock exchanges might not open or they might close early.

TMB: What else could go wrong?
Cliff: The market was slow that day. Every Internet stock was down. NASDAQ trading was way down. It turned out that garden.com was the seventh-most-heavily-traded stock, and the only stock that went up. So we had the biggest gains on NASDAQ that day.

TMB: Here’s the question that everybody wants to ask: How much richer were you two on paper at the end of the day?
Cliff: Jointly, we own about 2 percent of the company. We were worth roughly $4 million.

TMB: At the office, was there euphoria at the end of the day?
Cliff: Yes. It was a huge party. We had a band behind the building.

Lisa: There was a DJ and champagne. We partied late into the night.

TMB: Something else that people are curious about is the concept of friends and family shares. How did it work in your case?
Lisa: It’s the biggest pain because, first of all, we don’t control it. “Friends and family” is a misnomer, because the bank really directs how the whole process is going to go. The way it works is, you take a portion of the offering and you earmark it for what you call the friends and family list, and then people try to get on that list to buy at the offering price.
Cliff: You start hearing from people you haven’t heard from in a long time.

TMB: But how much lower was it?
Lisa: You got shares at $12, the IPO price.

TMB: Nobody got it at, like, two cents?
Cliff: No. When you go public, there is an initial public offering price set, and you are preselling. Basically, the whole road show is preselling to investors at whatever the price is going to be—in our case, $12. The friends and family list is also invited to participate at that price. Often it goes up before it starts trading, based on preactivity. The way it worked was that Jamie and Lisa and I were the gatekeepers of the list, which we started putting together a month before the IPO.
Lisa: All of the employees were on the list. All of our investors.
Cliff: My brother. All of our venture capitalists and their friends.

TMB: Can you give me an example of someone you hadn’t heard from in years who tried to weasel onto the list?
Cliff: In the summer of 1995 there was a retreat that somebody had scheduled up in Lake Tahoe for a bunch of our friends from business school—a get-together to talk about our careers. Jamie, Lisa, and I were thinking about a business plan for an e-commerce company, so we hosted a session at which we talked about our idea. There were maybe twenty people there, and they told us what they thought of it. Well, a week before we went public, we got an e-mail from this woman whom we had literally not heard from since the retreat, and it said, “Hey, you know, it’s so-and-so, and I really want to get shares. You know, if I can’t get on the friends and family list, then maybe you’ll remember that I gave you consulting advice. I think it’s probably adequate payment to participate in the IPO.”
Lisa: We were like, “O-kay.”

TMB: Did you give her shares?
Cliff: No.
Lisa: And we haven’t heard from her since.

TMB: One last question: How have your lives changed?
Cliff: Not that dramatically, to tell you the truth. It’s kind of like acting. First you rehearse and then you dress-rehearse and then it’s opening night, which is the IPO, and suddenly there’s an audience. Then the show runs for a while, but there’s still an audience. Well, we’re public now, so investors are watching. There’s an audience. And that’s the difference.
Lisa: The first month was disruptive—everyone had stock tickers on their monitors—but eventually it got boring.
Cliff: One aspect that I didn’t actually anticipate and only heard about a couple of months later was the stress on the managers and directors responsible for aspects of the business. Once we were public, all these expectations were there: We’ve got to make sure we hit our numbers. Definitely some people took the weight of the world on their shoulders. But after we did our first earnings release, when we’d gone through our first quarter as a public company and had great numbers that beat analysts’ expectations, everyone thought, “Okay, this isn’t so hard.”
Lisa: “We can do this.”
Cliff: You know, you have opening-night jitters, and you’re really nervous. And then, after a week or so of running the show, it starts to become second nature, and you realize that it’s not so bad to have an audience.

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