Auctions Always Win

Strategy consultants frequently like to remind us that “specialists always win.” When it comes to markets, auctions always win.

Today’s column by Joe Nocera in the New York Times is about Bill Hambrecht, the master of the Open IPO process. His firm, WR Hambrecht, specializes in doing auction-based open IPOs – totally different from the closed big boy process historically used by the big investment banks and institutional investors when they do public offerings.

I recently heard Hambrecht speak about his experience – at the watershed event of the Google IPO where the Open IPO was sorta used but not really. Hambrecht’s learnings from that exercise (he was an advisor to Google) came him the strength to stand up and not compromise his process going forward. As a result, companies selecting the Open IPO process raise more money than they otherwise would as their initial offering pricing is, by definition, closely tied to market supply and demand factors.

Hambrecht, besides being a very smart guy himself and street smart in the ways of Wall Street, had the good fortune to have Clay Christensen at his side as his company pursued the Open IPO. Christensen’s advice – to enter from below, serving the unserved and the overserved, is his mantra for disruptive new approaches attacking the big entrenched incumbents. This was a classic “textbook case” – in this case, the text book having been written by Christensen himself.

But, back to the main point: auctions always win. They represent the near perfection of market functioning when they’re done right. The hard part, of course, is doing them right. First, by enabling enough potential buyers to find out about what’s being sold and, then, by enabling an efficient bidding process with fluid, open feedback.

Perhaps the most powerful aspect of the Internet will come to be described by historians looking back on our age as the effect that it had on opening up auction-based markets? But huge markets remain that aren’t yet served by auction-based processes. Think about how merchant fees are set, for example, in the credit card industry.

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