Making a Mint Overnight

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Instead of waiting years for a firm to repay investments in the form of profits, an entrepreneur can sell future earnings to outsiders in the form of shares. In a rising stock market, investors are willing to pay a premium for the anticipated returns from young, fast-growing companies. That is why firms like Diasonics, which makes medical diagnostic equipment, can go public at a per-share price equivalent to 70 or more times its current income at the same time that General Motors stock is selling for only about six times its net profits per share.

As Financial Journalist George J.W. Goodman, who writes under the nom de plume Adam Smith, observed in The Money Game, a 1968 analysis of the stock market: "Really big money is not made in the stock market by outside investors. I am talking about multiples of millions rather than just, say, one lousy million. Who makes the really big money? The inside stockholders of a company do, when the market capitalizes the earnings of that company ... I am not making any value judgments. This is the way things are."

For the head of a company that is going public, an initial stock offering is like a 21st birthday, the arrival of an heir or a bar mitzvah. It is a period of intense activity and emotional strain that transforms a firm from a little-known private business into one that must operate under the merciless scrutiny of lawyers, analysts, competitors and investors. Sometimes the pressure is so great that the smooth running of the firm suffers. Says California Venture Capitalist Thomas Davis: "Baseball players have to perform when people boo and shout. Companies have got to learn to live with the conditions of life."

The process begins when a young firm has outgrown the money it originally raised to launch the company. The corporation may need the funds to finance research, expand facilities or launch new marketing campaigns. In addition, the founders and early investors often want to get cash in return for some of their holdings. If the firm has good potential or a good product, it has usually already attracted the attention of investment bankers, who aggressively seek out prospects to earn the profits that come from underwriting the initial public offering. Says Chairman Thomas Unterberg of New York City's L.F. Rothschild, Unterberg, Towbin, a leader in new issues: "Getting there first is very important. The firm that gets the deal is usually the one that got there first and then spent the most time."

Since most of the big investment banking firms are based in New York, while many of the promising new companies are in Northern California's Silicon Valley, minidramas of the new-issues scene are often played out on the long nights from New York to San Francisco. Well-appointed investment bankers heading out to call on clients stretch out in first class. Farther back in the cabin, rumpled entrepreneurs, tired from a day trying to raise money, punch away at their calculators. Occasionally the coach passengers glimpse a bright future ahead. Well before Zitel, a small computer-memory company, went public last month, President Robert Welch was overheard confiding to a colleague on a flight, "I can smell the Ferrari now."

Once a decision is made to go public, the company founders sit down with investment bankers to decide how much money they want to raise and how much of