10 Lessons Learned from Interviewing MicroCap CEOs

No one in their right mind would ever actually set out to interview hundreds of CEOs, but as a co-manager of a hedge fund that invested hundreds of millions of dollars in more than 500 micro-and smallcap financings, it was part of the proverbial job description.  Here are 10 important lessons learned.

microcap

1)    Preparation – there is no reason to waste your time and someone else’s by sitting down with a CEO to discuss their company without preparing – really preparing.  To me, “really preparing” doesn’t mean looking at Yahoo Finance for a few minutes in the taxi on the way to the meeting, or flipping through the company’s PowerPoint on your phone.  That kind of preparation is akin to walking up a few flights of stairs with some grocery bags to get ready for climbing Mt. Rainier.  To be really prepared for a first meeting means reading/skimming the most recent 10K, the most recent 10Q, the most recent proxy filing, the management presentation, any previous management presentations (more on this later), a recent sell-side company or industry report, and an Internet search of the management team’s backgrounds (with particular emphasis on any prior SEC, NASD, or other state/federal legal problems).  It’s hard to overemphasize how many would-be micro-cap investing disasters can be headed off at the pass by reading what’s said, and not said, and then having the opportunity to ask the CEO directly about what you’ve found.

2)    Non-Starters – for better or worse, the micro-cap world is home to some “colorful” management teams.  After all of the time served in this regard, absolutely nothing surprises me anymore.  I have found CEOs who were simultaneously running 3 companies, CEOs who were banned from running a public company by the SEC, management presentations that were largely plagiarized, CEOs who shouted profanities in response to basic questions about their “skin in the game,” and CEOs who not only didn’t understand Reg. FD, but clearly didn’t even know it existed.  When in doubt, it’s much better not to invest at all than to make a bad investment; fortunately there are always thousands of other companies to consider.

3)    Company .PPT – these presentations speak volumes about what kind of company you are dealing with if you’re paying attention: a) my colleagues and I came up with a golden rule during my institutional investing tenure, namely that the length of a .ppt presentation is, more often than not, inversely proportional to the quality of the micro-cap company being presented (i.e., any micro-cap company that can’t be adequately presented in less than 20 slides is a problem, and 15 is even better); b) if the slides are too complex to understand on a standalone basis then either the company has a problem or you’re about to invest in something you don’t sufficiently understand – neither is good; c) NEO bios, market information, service/product/IP, strategy, financials, and use of proceeds should all receive equal billing (when buying a house, would you go and visit a house with an online profile that only features pictures of the front yard and the garage?); d) .ppt formatting and spelling/syntax problems are akin to showing up at an important job interview with giant pieces of spinach in your teeth; e) when reviewing use of proceeds (for a prospective financing) or milestones, look up prior investor presentations to see how well they did with prior promises – history often repeats itself; f) treat forward looking projections for what they typically are – fanciful at best, and violations of Reg. FD at worst; and g) micro-cap companies that flaunt celebrities as directors, partners, or investors should be approached cautiously.

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