If Emmanuel Friedman is right about the future of Washington's economy, the investment firm he helped create more than a decade ago could be standing on a virtual gold mine.
"This area is going to be bigger than Silicon Valley in 10 years," predicts the 53-year-old chairman and co-CEO of Friedman Billings Ramsey Group Inc.
It's a bold attitude, but one that has spurred the firm's emerging presence in the world of tech investing around the nation's capital -- a move that finally is earning the company some attention from Wall Street.
After languishing between $5 and $10 for six months, Friedman's stock last week jumped 50% to close at $15. The price is still off the 52-week high of $21.25 reached in April, when the firm launched its online investment bank.
Last week's climb came after FBR announced its stake in Fairfax, Va.-based webMethods. The online business-to-business software provider made its highly anticipated initial public offering on Friday, closing the day at $212.625, up a whopping 575% from its offering price of $35.
Part of the problem with Friedman's stock price, says president and co-CEO Russ Ramsey, is that Wall Street hasn't fully appreciated that the company is more than just the brokerage it was when it went public in 1997 at $20 a share.
"The market (hasn't) understood our Internet investing or digital bank to value them appropriately," he says. "So the market has undervalued the company as a whole."
gold rush is on
Yet any misunderstanding from Wall Street hasn't stopped the firm from hatching ambitious plans to expand its venture capital and investment banking activity. But like any gold rush, competitors are staking claims to the same mother lode Friedman sees around the nation's capital: A growing mass of tech and Internet start-ups begging for investment dollars.
To meet the challenge, Friedman's strategy is twofold: Maintaining its foothold in Washington while capitalizing on the demand for investment money elsewhere.
"FBR has some degree of home-field advantage, but that's no guarantee of success," cautions Michael Flanagan, an independent brokerage analyst in Fort Washington, Pa. "Nevertheless, it is an advantage that has to be capitalized on."
That's only one of its strengths; the company has been in the right place at the right time. And its top executives have shown the foresight to weave it into the fabric of Washington's tech investment world.
The company is headquartered in Arlington, nestled among the many Internet firms that dot Northern Virginia, an area rapidly becoming known as NetPlex.
Begun in 1989, the firm has grown from a boutique focused on specialty research that generated money for securities trading to a company with a lineup that includes venture capital, investment banking and online financial services.
The founders -- Mr. Friedman, Mr. Ramsey and Eric Billings, the third co-CEO -- have watched their company grow from 19 employees to 400. A quarter of them have been added since 1997, when FBR began focusing on Internet investing.
"It's a lot like a tech start-up in terms of going from a small entrepreneurial group of founders to a full-fledged national player," says Bob Smith, Friedman's chief operating officer.
Like many of its clients, Friedman has benefited from the explosion of the Internet.
In addition to its $200 million technology venture capital funds, last year it created fbr.com, its online investment bank. The site gives retail investors access to IPOs and provides investment services.
Since its launch last April, fbr.com has participated in 28 IPOs, and eight others are in the pipeline.
The company's revenue reached $139 million last year, a 13% increase from $122.9 million in 1998. But the company points to its fourth-quarter earnings as a sign of its growing momentum.
For the last three months of 1999, revenue leaped 255% to $67.6 million from $19.1 million a year earlier. Earnings were $10.2 million, compared with a loss of $3.8 million in the fall 1998 quarter.
Its Internet focus primarily drove the revenue increase, most of which came from investment banking activity and investments in companies in and around Washington.
The strength of the area's tech muscle has also attracted Deutsche Bank Alex. Brown, headquartered in nearby Baltimore, to set up shop next month in Tysons Corner, Va.
That's a short hop from many of Virginia's top Internet companies, including America Online Inc. in Sterling and Internet backbone powerhouse PSINet in Reston.
George Stamas, a well-known Washington lawyer and power broker, will head the DB Alex. Brown office. Executives say they are making the move because the region holds the potential to rank among the top three areas of investment banking activity in five or 10 years.
Friedman execs say they aren't concerned about the newcomer. They explain that it illustrates the wealth of opportunity in the area.
feeding on itself
"A lot of the growth in technology on the West Coast was driven by the presence of several investment banks," says Mr. Smith. "So this might drive more business. The more activity is fed, the more it feeds itself."
Besides, he says, DB Alex. Brown "has not been visible here until this latest announcement with George Stamas. They have some catching up to do in the local area."
While the area usually has been perceived as home to little more than the federal government and lobbyists, now Internet and telecommunication company employees outnumber federal workers. And, 50% of all Internet traffic flows through the Washington area.
"I'm sure numerous competitors will find the market attractive," Mr. Flanagan says. "But FBR is a very agile, aggressive and opportunistic firm that is reinventing itself. It has already established a foothold there."
Still, the company isn't putting all its eggs in the capital basket. It plans to open venture offices in four other regions, including the Northwest, Mr. Smith says. The company already has investment banking offices in Southern California, Boston, Chicago and London.
"Our feeling is that successful venture capital, and successful financing, is driven by a combination of the money and the value-added advice," he says. "And that advice is best given if the venture capital firm or investment banker is close to the client, geographically."
But, he says, the firm will avoid Silicon Valley, which is already chockablock with venture capital. Rather, Friedman Billings is looking for areas that resemble what Washington was three years ago: rife with entrepreneurial activity and a shortage of venture capital.
Mr. Friedman says the company hopes to have another $700 million available by the end of the year to help its venture capital efforts beyond Washington.
Despite their new Internet focus, company execs say they haven't abandoned what was their bread and butter for years: the real estate and financial services sectors.
"The markets have not been kind to real estate and finance," Mr. Smith says. "But rather than shifting from those sectors to technology, we've added tech. Our belief is that there are, and will be, opportunities in those sectors."
Mr. Flanagan says FBR executives are doing the right thing.
"The company is overcoming a softness in what had been its primary business," he says. "It is changing not only the way it's doing business but the way it looks at the business. It's demonstrating a high degree of agility, which larger companies have difficulty doing."