In investment banking, as in e-commerce, catering to consumers over the Internet just isn't enough anymore.

Online investment banks such as Wit Capital (WITC:Nasdaq - news) started out with a sort of idealistic notion that individual investors ought to get more of initial public offerings, in which companies raise money from the public by issuing stock. Technology would let the firms bring deals to more investors at lower costs to the issuers.

What Wit and others, including well-bred newcomer Epoch Partners, have discovered is that individual investors alone don't have the firepower to make an IPO work. As a result, the banks have had to adjust their businesses to Wall Street's established IPO structure by developing institutional sales and research units.

That's not to say online investment banks are abandoning individual investors. If they can convince issuers they're different from their off-line competitors, the convergence of online and traditional investment banking may put more shares in individual investors' hands.

Online brokerages began offering their customers the chance to buy IPOs a few years ago, with companies such as Wit and E*Trade (EGRP:Nasdaq - news) leading the pack. Others have followed, and now every major online brokerage has a deal with one or more established investment banks to sell shares. (Wit agreed to buy E*Trade-backed online investment bank E*Offering in May and to transfer its brokerage accounts to E*Trade in a deal that essentially increases Wit's retail reach.)

But it's never enough to satiate demand.

Charles Schwab (SCH:NYSE - news), for instance, wants to increase the number of customers that can get shares in IPOs, according to Linnet Deily, president of Schwab's retail group. Schwab previously offered shares in IPOs from three investment banks through Schwab's network of financial advisers or to select customers with more than $1 million, but now Epoch alone carries the list.

"As we have more product coming to market, I'd like to expand beyond that universe, but I don't want to raise expectations. I don't want to expand now and have everyone thinking they're going to have that ability and there's not enough product to go around," Deily said. "When Epoch comes to full force with more product, we hope to be able to expand it."

Schwab is one of six companies that launched Epoch last November. TD Waterhouse (TWE:NYSE - news) and Ameritrade (AMTD:Nasdaq - news) also took stakes in the start-up alongside three venture capital firms: Kleiner Perkins Caufield & Byers, Benchmark Capital and Trident Capital. The San Francisco-based bank, run by former Merrill Lynch banker Scott Ryles, is just getting going this summer.

If Schwab is hoping for help from Epoch, Epoch is counting on Schwab, Ameritrade and TD Waterhouse's combined 7.2 million online accounts (according to a recent Salomon Smith Barney report) to attract issuers interested in spreading their shares among retail investors.

Retail investors can be more attractive customers than hedge funds because, unlike a fund, their brokers punish them for selling shares for a certain time after the IPO. And, during the raging bull market for new offerings in 1999, they were also likely to bid a stock up to astronomical levels during its debut, making the officers and employees wealthy in the process.

In addition, issuers want the kind of data they can extract about how online investors have traded stocks in previous IPOs to see how they might trade in the future, Wit co-President Mark Loehr says. And Epoch's Scott Ryles says, since retail investors end up owning the majority of a new public company's shares several months after the IPO, issuers and their venture capital backers are listening.

But even an investment bank aimed at online investors needs to sell to institutions, and Epoch plans to start its own institutional sales force this fall.

Ironically, it may be that having some key institutional contacts brings bigger chunks of deals to firms born of the individual investor. Without those institutional clients, he says, Wit wasn't able to graduate from simply distributing shares for the established investment banks.

"They'll add you to the deal, but they won't take you as counsel," Loehr says. That means getting maybe 5% to 7% of the shares instead of a co-manager's 20% or 25% or a lead manager's 50%.

Having an institutional sales force certainly helped the flow of deals to Wit. "The acquisition of Soundview was critical to Wit Capital's longevity," says Thomas Weisel analyst Geoff Beard. Thomas Weisel has done underwriting for Wit.

Since buying Soundview Technology in November 1999, Wit has been lead or co-manager on 28 IPOs this year. That compares to Goldman Sachs' 58 IPOs, according to Commscan, a New York investment research firm. Even so, when it comes to deal value, Wit is still light years behind Goldman in terms of dollars raised. But it is clearly far ahead of E*Offering, which co-managed eight deals through May, according to Commscan.

Other upstarts have not been as fortunate.

Bill Hambrecht, founder of Hambrecht & Quist, launched online investment bank W.R. Hambrecht with hopes of reinventing the IPO process as an auction but hasn't done a deal since May 18 and recently lost seven technology bankers to Dutch bank ABN Amro.