Crazy Guide to the Internet

Last week Thomas Weisel Partners announced that it is shutting down its small cap research offering, Discovery Research. The 8-K filing says

Thomas Weisel Partners Group, Inc. (“Registrant”) announced today that it would discontinue its Discovery Research coverage of U.S. equities. That coverage is being discontinued as a result of the recruitment of key Discovery Research personnel to BNP Paribas Securities (Asia) Limited, a BNP Paribas affiliate. Thomas Weisel Partners is pursuing its legal remedies in connection with these departures. Discovery Research, a subscription-based research product, was produced out of Thomas Weisel Partners’ office in Mumbai, India. Thomas Weisel Partners intends to continue to conduct other business and operations through its Mumbai, India office.

There are two different reasons why I find this news interesting.

One, if what TWP is alleging is true, (they have filed a lawsuit in San Francisco) this is perhaps one of the worst victims of uncontrollable attrition in India that I have come across. To have to close down a business because of the loss of key (and what apperas to be most) personnel, is bound to leave you bitter. Ergo, the lawsuit. BNP also made an announcement and it seems that the team will be covering Indian stocks unlike Discovery.

Attrition is a big problem for anyone employing white collar workers in India today. Most of it is due to the hypergrowth in some sectors like IT and Financial Services. But some of it is also because young people starting out in careers undervalue the importance of learning which comes from working with a good team and over a decent period of time. More on this some other day.

The other thing that is interesting about Discovery Research folding up is that it was doing small cap research on US stocks but in a different model. All the research activity - analysis, model building, channel checks, even management discussions - was being carried out from India, to keep costs down.

Small cap research is an interesting opportunity area. There is evidence that traditional sell-side as well as independent research coverage of small caps is on the decline. Commission flow to research isn’t what it used to be and its an easy decision for research shops to cut coverage on small caps to make both ends meet.

So what happened here? My guess is that Discovery’s traction in the market was middling to low. Otherwise, TWP would have done something either to retain the team or to rebuild it. Or maybe they just got tired of managing an itinerant workforce, to whom Discovery was just a short stop on the way to the next job. Regardless, small cap research remains a good opportunity for low cost, scalable solutions.