Private Matters

Just past the peak of the Internet boom in October 2000, Bryan Rutberg did what the really smart investment bankers did at the time — he quit.

But instead of taking the money and running to a Pacific Island, Rutberg left his position as lead Internet investment banker at UBS Warburg to launch a new investment bank focusing on wireless. While the concept — along with the timing of heading into a disastrous three years for telecom investment — should have doomed the newly formed Rutberg & Co., the boutique outfit is still around to tell war stories.

“I thought it was a good idea, but we started at the absolute worst time,” Rutberg said. “At the time, one VC told us no one has had an exit in wireless that made money. When there's precedent examples like that, it makes life difficult.”

The company made it through in part because Rutberg focused not on the soon-to-be-drier-than-the-Gobi-Desert public equities market, but on the thousands of privately held entities. Like any investment bank, Rutberg & Co. generates revenue from fees on mergers and acquisitions. But at the same time, it also brokers private equity deals. In the three-plus years the San Francisco-based company has been in existence it has worked on 25 deals, which won't put it in the league of Wall Street firms, but is enough to give it plenty of credibility.

In addition, Rutberg & Co. relies heavily on its research desk to build authority among the 2800 venture-funded private companies in wireless that it now tracks — so much so that oft times Rutberg describes his firm as an research-driven investment bank. The desk, led by Rajeev Chand, also provides information to venture capitalists looking for outside opinions on potential investments in wireless.

“We saw some big inefficiencies in this space,” Rutberg said. “Even though the VCs are sophisticated, if you look at the way people get information from the private market, it's not very sophisticated.”

The primitiveness of the information gathering process is to some extent a result of the nature of private companies. Ferreting out information from the 5000-plus publicly traded companies is standard practice for most investment bank research departments and the truly diligent investor. Sure, the really juicy stuff like how much the CFO is being reimbursed for that country club membership is buried in the SEC forms, but with enough time and knowledge, most of the significant information about a company can be gleaned in those tediously — in some cases intentionally so — long reports.

It's the private entities that tend to be a little more difficult for investors. Under no legal requirement to report earnings, or anything else for that matter, private entities often guard information under lock and key. Rutberg gets past that natural inclination toward hesitancy by building trust.

“Every piece of information is considered confidential, and we make that very clear up front,” Rutberg said. “Secondarily, for us to really understand a company and give them rough guidance, they are willing to share information. They want to pick our brain.

“In terms of getting information, that's really not that big of a deal. The issue is taking that information, rendering an opinion in the space without revealing too much.”

Having Chand, a former research director at VC firm iSherpa, on staff and working only with wireless companies also positions the company as a sort of trusted confidant that would be hurt severely by a chatty reputation.

“We stay very company-agnostic,” said Chand. “People find value in that. There's also a void in the mid-market. There's nobody providing information to VCs in support of a banking practice.”

Supporting a banking side that focuses on private entities also is something that hasn't really been tackled because of its fundamental inefficiencies, he added. “There are hundreds of acquirers and thousands of private companies.”

And while measuring success in M&A is relatively clean cut, benchmarking the research side of any investment bank is a little more amorphous. Leave it to an analyst to figure out a way to quantify it.

“On the research side, our metric has changed,” Chand said. “When we started the research group, the question was whether we could get the second meeting with the VCs. The way I measure the research now is by [looking at] the percentage of times that a venture investor calls us before they do the deal. Right now we're getting five to six calls per week.”

Like an investment banker, Chand uses a series of matrixes to assess vendors (he doesn't cover carriers) including the type of technology they produce, the type of network it enables and whether the company is relying on disruptive technology or is more of a time-to-market play.

“We are cautious toward companies that don't have a disruptive technology,” he said.

Out of that analysis, Chand has come to believe in a handful of macro-growth trends: a significant uptick in wireless data penetration; the race to put one billion subscribers on wireless networks in emerging countries; fixed broadband; and the overall growth of subscriber bases in developed markets. Like much of the early-money market that he advises, Chand is seeing a lot more reasons for hope among wireless vendors.

“Starting in '02, we started to see some movement particular in developing countries,” he said. “I think we're beginning to see some sincere movement.”

And while it's too early to call any particular technologies he's currently following a slam dunk, Chand likes what he's seeing from RF semiconductors and fixed broadband wireless — particularly in the sub-10 GHz range-sectors. On the former, Chand believes the major question facing vendors is figuring out how to compete against the twin towers of wireless chip development, Motorola and Qualcomm.

“There's huge technology risk, but if it does work, the next RFMD is out there,” he said. “We think there is new interesting technology spinning out of labs and academia.”

On the latter, the greatest potential lies in using wireless to help countries with low tele-density leapfrog the normal wired infrastructure. “We're seeing projects flourish in emerging countries,” he said. “Fixed wireless is not about the incumbent carriers. It's about municipalities and some of these countries like Latvia. We see most of the incumbent [vendors] like Siemens, Alcatel and Lucent starting to really look at this space. From our perspective, it's a fertile environment for M&A.”

And like virtually anyone involved in any aspect of wireless investments, Rutberg is looking closely at emerging WiMAX companies and “everything that has to do with 802.11.

“There's enough industry interest to warrant a strong investment thesis,” he said regarding the entire fixed wireless environment.

Far earlier in the product pipeline, Chand is giving high marks to handset power amplifiers from vendors like Axiom, noting that handsets can be made significantly more efficient by focusing on the more mundane aspects like power amplification.

“This is extremely early stage, but we definitely like this space,” he said. “Forty percent of wastage is due to the power amplifier inefficiency. There's lots of focus on the base station but I think the handset is even more interesting.”

Even further down the road, Chand is looking at companies that can help transform mobile devices into lifestyle devices that take on functions such as identification and enabling commerce.

“It's not food and water, but it's something you don't walk outside without,” he said.

Chand of course isn't alone on that thought track. Qualcomm is already looking at pushing the concept as part of its next generation of chip sets, figuring out how, for example, a high-quality MP3 player or multi-mega pixel digital camera will become just another function on the handset. Such melding of consumer electronics and wireless handsets has been going on for some time and typically doesn't take away from one or the other but adds to the overall pie, said Jeffrey Belk, senior vice president of marketing for Qualcomm.

“If you're a gung-ho photographer you're still going to buy the high-end camera with all the manual controls,” Belk said. “But this kind of blurring of the lines of how different devices interoperate is something we're taking a very close look at.”

Whether that research leads to the M and A activity that Rutberg and every investment bank lives on is still uncertain. However, according to Rutberg, overall movement in both mergers and acquisitions and private equity placements are starting to heat up with the general economic forecast. By focusing on the long-ignored private company market, Rutberg believes he's built up enough credibility to be a force in those transactions.

“I wanted to build the highest quality boutique as possible but people are only going to talk to me if they think I can bring value to the table,” he said.