Let the Money Flow: Why Tech Banking Is Hot Again
By Melanie Warner

(Business 2.0) – Forget about watercooler indicators like office vacancy rates in Palo Alto and traffic on Highway 101. You know a recovery is taking root in the tech world when San Francisco investment banks are hiring again.

Consider, for example, JMP Securities. Having doubled trading volume, nearly tripled revenue, and increased headcount by 40 percent last year, 120-employee JMP is one of the fastest-growing investment banks in the country--and it has plenty of competition right in its own backyard. Within a 15-block radius of JMP's offices are a cadre of burgeoning boutiques like ThinkEquity and Pacific Growth Equities--which increased staff last year by 80 and 25 percent, respectively. W.R. Hambrecht recently hired a team of 13 bankers from SoundView Technology Group, a Connecticut brokerage firm. And, after several years of layoffs and restructuring, even the battered veteran Thomas Weisel Partners has resumed hiring. In the first quarter, these five firms underwrote security offerings or advised on mergers with a total value of $6.2 billion. That's up 4,800 percent from the same period last year.

It wasn't so long ago that San Francisco's financial district looked like a ghost town. JMP opened its doors in early 2000, just months before the Nasdaq tanked. "People thought we'd go out of business within a year," recalls JMP co-founder Carter Mack. Plenty of the Bay Area's premier investment banks did just that: Firms like Robertson Stephens, Montgomery Securities, and Hambrecht & Quist were either gobbled up by Wall Street giants or vaporized when the bubble burst. "It was brutal," recalls Rick Osgood, chairman of Pacific Growth Equities.

The end of those lean years is good news for entrepreneurs and VCs thinking about exit strategies, as well as for small corporations looking to raise money again. Boutique banks like JMP serve as intermediaries between big capital and tech outfits that are too tiny or geeky to interest white-shoe firms like Morgan Stanley or Credit Suisse First Boston, the pair leading Google's IPO. The little banks' comeback is a sure sign that institutional investors are ready to emerge from their state of cryogenic preservation and put money into small tech companies again.

Of course, these are the same investors who were fed to the bear by the last generation of investment banks, so it's understandable that JMP president Craig Johnson is eager to dissociate his organization from bubble-era excesses. But there's little hard evidence that things will be different this time. To underscore the difference, Johnson points to JMP's research, and says his 15 equity analysts are expected to publish what they think, regardless of the consequences for banking clients. "You've got to be true to your research," he says. Yet JMP currently rates just a third of the companies it follows as "sell" or "hold"--and 11 percent of those are banking clients. In late 2000, when banks competed with each other to flatter clients, roughly the same proportion of stocks got the thumbs-down from brokerages.

Still, it's clear that institutional investors have a growing appetite for research into small tech companies, and JMP and its West Coast competitors are often the only sources. Wall Street outfits have essentially ignored the recovery in small and midsize firms, largely because they've laid off most of the staffers who used to follow them. Even now, 39 percent of all Nasdaq stocks have no analyst coverage whatsoever, which makes it tougher for those firms to attract capital. Supply-chain software developer i2 Technologies, for example, has watched 31 banks, including those that took it public, drop coverage of its stock since 2001. "A firm like JMP is essential," says Barry Sievert, i2's head of investor relations.

If business gets too good for the West Coast banks, the New York firms may come courting, as they did in the late 1990s. Or the Easterners may try to elbow in on the action themselves. Yet Mack is confident that the big banks will have a tough time horning in on his game. "They don't have the passion for this," he says. Riding out hard times and catching the next wave gives a company that sort of assurance. Or do we mean hubris? -- MELANIE WARNER