When the coronavirus pandemic froze the world, Renaissance Capital’s co-founder and principal, Kathleen Smith, shifted into survival mode.
“We survived the internet bubble, we survived the financial crisis of 2008, so, I thought, this is just another one of those,” said Smith, who runs the institutional research and asset management firm with her husband, Bill, and a partner, Linda Killian.
But it turned out completely different.
This time around, Smith’s clients couldn’t get enough of new companies that had gone public in the last two years in sectors such as technology and health. Names that resonated with investors included a video conferencing company Zoom, messaging system Slack, cybersecurity firm Crowdstrike, and COVID-19 vaccine hopeful Moderna.
Smith approached the new challenge with an old approach – the cost-benefit analysis – she had learned while growing up in a Philadelphia suburb with six siblings, a father, who was a newspaper editor, and a mother, who was a home economics college graduate.
Her father kept her on her toes, Smith said. When she wrote letters home from college, he would mail them back to her with edits to grammar and spelling.
He had “a thousand and one questions” and dinnertime was always filled with conversations that challenged her thinking.
“The money, or lack of it, didn’t matter,” Smith said. “It was the intellectual content that mattered. It’s helping me to this day.”
Smith chose Penn State, a state school, because she could pay for it herself by working, taking out loans, and a number of small scholarships. She decided to study Chinese, counting on demand for professionals who knew the language, just as the U.S. – China relations were beginning to thaw, starting with the “ping-pong diplomacy,” an event that paved the way for former U.S. president Richard Nixon’s visit to Beijing in 1972.
After college, Smith worked at the State Department, and, later, at the National Academy of Sciences, writing newsletters and reading Chinese papers for a team that sent U.S. scientific delegations to China and welcomed Chinese delegations to the U.S.
But after a year, not feeling challenged enough by the government environment, she decided to apply to Wharton Business School to learn investment banking.
Washington still kept its tabs on her, though. During her summer breaks, she worked at the White House and Treasury Department.
“It was a great experience and, even better, the salary was good and offered housing,” Smith said.
When she graduated from Wharton and applied for investment banking jobs, two questions always came up during interviews. One was about why she hadn’t gone to an Ivy League college and another about why she hadn’t worked in an investment bank in the summer.
“I did what I could do, and some of it was just financial,” Smith said.
She got her first investment banking job at a Chicago-based bank Bache Halsey Stuart Shields, later acquired by Prudential. Three years later, she moved on to Merrill Lynch, where she was involved in many initial public offerings, or IPOs, of technology companies.
She quickly realized she was one of few women on Wall Street at the time.
“Me and only one or two other women in the investment banking department basically had the entire women’s bathroom to ourselves,” Smith said of her early years at Merrill Lynch.
It was a very competitive environment.
“There was no room for a wall flower,” Smith said. “You had to stand your ground.”
When an aggressive telecommunications banker wanted to enter the tech turf, he threw down the gauntlet, saying that any company with a phone on its desk was part of his territory. Smith’s answer was that any company with a PC on their desk was part of tech coverage and thus her territory.
“I figured the trend was with me on that one,” Smith said.
It was always the guys in the investment banking group who weren’t so sure about how good the girls were, she said.
“And that’s because they were just using their own sensibility about it,” she said. “On the other hand, the corporate clients recognized our worth every time.”
But Smith began to realize that no matter how good she was at her job, her livelihood was dependent on the volatile financial markets, and employees were always first to go when banks cut costs.
After seeing many of her colleagues lose their jobs through no fault of their own, around 1990, during a weak period in technology IPOs, she felt she could soon be on the chopping block, when Merrill Lynch decided to scale back its technology investment banking group.
With her savings, a thick contact book, and substantial IPO experience, Smith set up her own shop.
“I didn’t want to build a franchise for another company anymore,” Smith said. “I wanted to work for myself.”
Two of her Wharton fellow students agreed to join her, her husband, Bill, who had experience in corporate finance and restructuring, and Linda Killian, with a research and money managing background. With the internet still in its infancy, investors didn’t have much access to information about companies preparing for IPOs. They saw an opportunity there.
“We had good computer skills, and it seemed to me that we could build a business using technology to quickly supply that information” Smith said. “And it turned out to be surprisingly easy.”
Their first product was a one-page research with data about companies preparing to enter the market and their peers.
“You had to do one page,” Smith said. “No one could tolerate a really long report coming over fax.”
They used Apple’s program, FileMaker Pro, that helped them collect and share data, and a fax modem that automatically sent the research.
“Immediately, we got many institutional clients,” Smith said. “I remember one of them asked us whether we worked all night, because they saw our research come through, and it dawned on me that they didn’t realize we had automated it.”
As Renaissance Capital was taking off, so was the IPO market. Encouraged by its success, the company decided to launch a mutual fund that invested in newly public companies. But it had to close it two years later, when the internet bubble burst.
“Suddenly, no one was interested in IPOs,” Smith said. “We struggled to hold onto assets.”
Purely cash-flow driven, without any outside capital, Renaissance shifted into survival mode, adapting its research platform to the internet, hoping that, eventually, the markets would come back.
“Generally, some of the best returns in the IPO market are made after a market crash,” Smith said. “But it took a longer time than usual for investors to believe in tech companies following the internet bubble.”
Then the financial crisis of 2008 arrived.
“Luckily, we weren’t leveraged and had cash flow,” Smith said.
By that time, they also had a solid institutional client base with a subscription-based service.
The company built indices with FTSE to demonstrate the returns in this previously un-indexed space, and, in recent years, it launched two exchange traded funds (ETFs) that track those indices hold. Now the company has $150 million under management.
Other analysts on Wall Street, such as Dan Ives at Wedbush Securities, have nothing but praise for Smith.
“She is an extremely respected voice on the Street, especially around IPOs,” Ives said. “In a crowded view of Street experts, she is at the top of the list, in my opinion.”
Business consists of a lot of trial and error, according to Smith.
“Keep up the effort, learn from failure, adapt,” she said. “Sometimes it’s not the idea that is wrong but the market timing.”