Where to Focus IR Resources
in a Down Market
The past three years have seen the dot com boom go bust, the onset of an economic recession and a series of high profile accounting scandals. This has resulted in widespread investor disillusionment, increased regulatory action, declining analyst credibility, and an intense scrutiny of corporate governance practices. It has been a difficult time for all public companies, but especially for the smallest companies that trade on NASDAQ's Small Cap Market and OTC Bulletin Board.
These "microcap" companies are often in the development stage, have little or no revenues and are a long way from profitability. Their continued survival depends upon the availability of capital. However, there has been a marked downturn in available funding, especially for the smallest publicly traded companies.
Meanwhile, the cost of remaining a public company continues to escalate. D&O insurance premiums have risen sharply, and a listing on the upcoming BBX exchange will cost companies is estimated at over $100,000 per year to maintain.
Company executives have responded by cutting expenses to conserve cash and seeking alternative sources of capital. Many of these alternatives are linked to equities which have been beaten down to record lows in both price and liquidity. No one wants to see their company destroyed due to a poorly planned financing, but the list of options is getting shorter by the day.
Almost any public company executive or investor relations (IR) consultant will agree that investor sentiment is at record lows. Companies may be tempted to slash their budgets to help improve their bottom line, but this is a misguided strategy. A company's ability to raise capital is closely tied to its share price and liquidity. These can be improved and maintained through an effective IR program. Below are three suggestions for how to make your company's IR program as effective as possible during this difficult period.
Focus on the Basics
Given the current background of scandal and investor mistrust, microcap companies may have one inherent advantage: their simplicity. Smaller companies are usually focused on a handful of products and services. Their business plans are simple compared to larger corporations, and their accounting is much more transparent. In the current environment, investors may be more likely to appreciate a simple, but strong, story.
Companies should make the most of their IR resources by developing a clear strategy that maximizes the value of basic IR tools. Use press releases, fact sheets and slide presentations to clearly explain a company's value proposition. Describe what makes your company unique. Focus on revenues and sales trends. If your company is not yet profitable, describe management's plan to get there and how long it will take.
Identify your company's strongest points and then highlight them at every opportunity. If your management team has the experience and vision needed to move your company up to the next level, let investors know. If your company has intellectual property that raises barriers to the competition, make sure investors recognize that advantage. If you have a high profile customer, ask them to provide a testimonial regarding your products.
Keep the Pipeline Full - Generate Leads
A typical shareholder base is dynamic. Over the course of a year, a company will lose many of its investors, so it is important to constantly work at attracting new investors. Since most institutions will not consider "penny stocks," smaller companies should focus on the retail investor.
Should a company IR officer be calling individual investors? Of course not. That's the job of a broker. However, the vast majority of brokers are unable or unwilling to introduce their clients to companies that come under the SEC's "penny stock rule." Those few that are willing to consider your company, though, can make a positive impact on your stock price and liquidity.
The best way to access these brokers is to work with an experienced IR consultant with established relationships in the brokerage community. Traditional brokers have lost many of their clients over the past three years and are actively seeking to rebuild their book. You can get their attention by helping them.
There are a number of ways to develop leads. Examples include online programs and direct mail. Your IR consultant should have access to these programs. Once the leads are collected, a list of viable leads can then be provided to the brokers who have agreed to contact them. Since these people have already requested more information on the company, brokers do not have to make "cold calls." They are instead calling to follow up and provide more information. This results in a much higher success rate.
Once the brokers start developing new clients, you should see a positive trend develop, both in the demand for your stock and in the number of new shareholders. It is truly a win-win situation.
Don't Forget Who Brought You to the Dance
While you are trying to attract new investors, do not forget your existing shareholders, especially the top ten or twenty to make up your core group of investors. These people already believe in your company's potential and are your biggest supporters. Make sure you keep them on your side by maintaining a constant line of communication.
Use email to send your shareholders press releases, articles, and other news. Keep them up-to-date on the company's progress through letters from the CEO. Make sure that they have a point-of-contact at the company to call with questions. Also, be sure that you are open to their comments and suggestions. Let them know that you take them seriously and value their opinions.
If they believe in the company and see it making progress, many shareholders will see it as a buying opportunity when the stock it is down. They are you most receptive audience, so do not forget about them.
Remember, smallcap investor relations is all about the story and how you present it. Your job is to craft the right story and then use the basic tools of IR to make sure that investors understand it. If you do it correctly, you can decrease volatility, increase liquidity and build your shareholder base, even in these trying times.
Wayne Jenkins is president of IR Specialists, Inc., a boutique financial communications firm focused on helping smallcap companies. His firm provides expertise in investor relations, mergers & acquisitions, and venture capital.