Whether a company is considering a traditional IPO, uplisting from a junior exchange or a Reg A+ offering, every small-cap company listing on Nasdaq or NYSE faces a very different capital markets ecosystem than even just five years ago. Scrutiny from institutional investors on executives, on boardrooms, and on performance has never been more exacting. And, like in other areas of life, first impressions are critical. Ask any seasoned institutional investor, and they will say that newly public, small-cap companies often make four lethal mistakes:
- Failing to adequately prepare for the rigors and precision of quarterly financial reporting and related investor communications;
- Believing that they have an extended grace period to acclimate to being an exchange-listed company;
- Looking, acting, and operating more like a “private company that happens to have a ticker symbol” as opposed to a “real public company;" and
- Failing at “Storytelling 101" (particularly technology and life science companies).
Third Creek Advisors strategically and tactically collaborates with CEOs and boards both before and after listing to exceed investor expectations. Our unique value-driver is that unlike virtually every advisor in the capital markets, we’re not speculating about how institutional investors will react to your critical decision making… because Third Creek’s founder was a small-cap institutional investor.
WE SPECIALIZE IN :
- Delivering the only buy-side driven, pre-listing website audit available in the market (i.e., your post-listing investor meetings will be over before they even start if you don’t understand how institutional investors analyze your website).
- Optimizing the manner in which your company is conveying its story to investors (again, we’re definitely not speculating about how investors will react).
- Uniquely analyzing board composition so that companies get a comprehensive sense of how institutional investors and proxy advisors will assess their corporate governance infrastructure post-listing.
- De-mystifying investment banker selections to minimize dilution and maximize post-listing trading support (i.e., choosing the biggest bank that shows interest is not going to benefit your shareholders nearly as much as the right bank will).
- Providing frank feedback on your company’s professional service providers (i.e., too many small-cap companies utilize law, audit, and investor relations firms that are not well-regarded by the buy-side, and they don’t find out until it’s too late).
- Educating CEOs and boards about what is actually expected of them post-listing.
My SPAC Experience Summed Up in One Acronym: PCWTS
An awful lot of attention has been afforded the raging SPAC marketplace. Some of the commentary has been objective and additive, while much of it has come from those who either don’t understand SPACs or those who have a conspicuous dog in the hunt. When you get beyond all the uninformed, conflicted stuff, fast-tracking a company from privately held to publicly traded has both benefits and detriments – full stop. In the midst of any mania, facts and precedent are often cast aside. But experienced investors know better than that; they focus on issues that are largely ignored by others. So, first a few high level observations, and then some practical takeaways from my own experience.
Most are small-cap. The overwhelming majority of public companies are small-caps, and the same is true for companies that consummate SPACs. For example, the median market cap of the 64 companies that de-SPACed in 2020 is approximately $1 billion. Why does that matter? Investors know that even small-caps that have been operating for years as public companies are fraught with risk. When you take a private company and accelerate their approach to being publicly traded, the risk barometer moves north… quickly.
Preparation-lite. The SPACs my firm has interacted with were understandably overwhelmed by the merger process and undertook almost no preparations whatsoever to be a public company. In practical terms this means that internal audit, compliance, reporting, and governance mechanisms are, at best, skeletal, and, at worst, virtually nonexistent. The good news is that several CEOs and board members with whom I’ve conferred are expressly cognizant of their knowledge gaps, and they know the learning curve will be steep. The bad news is that others I’ve spoken with believe that the transition to public company life is much ado about nothing. Beware small-cap officers and directors who don’t know what they don’t know.
Oversight? My firm has interacted with SPACs with some highly experienced small-cap board members, where management understands the need to have objective, proactive, value-added governance. I’ve also spoken with several board members who, though inexperienced, have embraced their lack of preparation and lack of governance knowledge, and are keen to remedy both in short order. But several executives I’ve spent time with either don’t seem to care at all about corporate governance, or they feel they’ve solved the problem by loading up their small-cap companies with large-cap board members. Seasoned small-cap investors know to be very leery of the latter, and they also know that “governance-lite” is the reason most shareholder activism is in small-cap companies.
Reading past all the sensationalism, SPACs are not new, and they are perfectly credible financing mechanisms. Is the current trajectory sustainable? Probably not. But particularly for non-technology and non-life science companies – those smaller growth companies that might otherwise have a less certain road to a traditional IPO – SPACs can be a terrific choice if they find the right fit. And just like with companies that go public through traditional IPOs, some SPACs will become great success stories and others will fail.
Now, about that acronym.
One risk seems clear to me from comparing the pre-IPO companies my firm advises to the SPACs, and it arises out of a determination we often used to focus on when I was a fund manager.
Some small-caps look and feel to institutional investors like “real public companies,” while others are much more like “private companies with ticker symbols” or PCWTS. Savvy investors have learned the hard way to approach PCWTS with extreme caution, and their costs of capital, institutional sponsorship, and valuations reflect the same.
PCWTS have some shared attributes:
- Officers and directors with little/no public company experience
- Websites and investor presentations that are amateurish and/or hyperbolic
- Irregular/poorly calibrated communication
- Quarterly earnings calls that evidence incomplete/misguided preparation
- Needlessly dilutive financings and/or late regulatory filings
- Unusual service provider selections
- 1-on-1s with management that convey a lack of capital markets/regulatory awareness
Most of the de-SPACs my firm has interacted with are PCWTS. It’s not a close call. I’m not suggesting that this is true for all de-SPACs, and I’m not even suggesting it’s true for most of them. It’s just been my personal experience in 2020 and 2021.
Unless the officers and directors of PCWTS figure out what they don’t know – and endeavor to learn those things as fast as possible – their small-cap life is not going to be profitable or enjoyable. The buy-side has seen this movie over and over… and over again.
When the dust settles from a SPAC, investors don’t really care how they got to be a public company. They are going to be judged like every other public company, and they won’t get any grace period. Astute management teams and boards will realize that the SPAC process – though complex, time-consuming and somewhat nerve-wracking – was actually the easy part. The hard bit is the de-SPACing: the relentless accountability of being a public company.
To those companies that didn’t have time to adequately prepare for public company life, be smart: (1) pick out some publicly traded peers that are 2-3x your current market cap, and start emulating them; (2) reach out to some experienced investors and have them recommend expert, small-cap investor relations counsel so you avoid communications missteps; (3) make sure your board members attend some foundational corporate governance continuing education programming ASAP; and (4) if you’re shepherding a public company for the first time as CEO, find a mentor who has successful experience running a public company your size.
I innately root for all legitimate businesses to succeed, and any legitimate financing mechanism that helps them. But there is a danger that SPAC euphoria will grossly simplify what it takes to succeed as a public company. In reality, there is nothing simple about it, and experienced investors can spot PCWTS from a mile away.
POST-IPO LIFE LESSONS
1-on-1 Investor Presentations: Seven Mistakes Small-Cap CEOs Commonly Make… That Drive Fund Managers Crazy
The goal of this free, 60-minute webinar is to provide some frank, differentiated, buy-side observations so that your company can meaningfully optimize future 1-on-1 presentations.
Though the webinar is geared principally towards public companies, private companies seeking venture financing will be able to benefit from the feedback as well.
If You Knew How Institutional Investors Actually Assess Company Websites, Yours Would Look… A Lot Different
Most officers, directors, attorneys, investment bankers and investor relations professionals don’t sufficiently understand how institutional investors review corporate websites, what they actually care about, and, almost as important, what they definitely don’t care about.
Tune in for this free one-hour webinar for frank, actionable steps to help your (or your client’s) website be an asset, instead of an exit ramp for institutional investors.
Boardrooms in the News
EXCLUSIVE AND PRIVATE, BI-WEEKLY COMMENTARY ON TOPICAL BOARDROOM RELATED NEWS STORIES
I met Adam in his capacity as a teacher/mentor at the Nasdaq Entrepreneurial Center in San Francisco, where my company, Public Recreation, was part of the Milestone Maker program. We immediately felt like Adam was a 'secret weapon' as we sought to refine our capital raising presentation, because he’s a well-known, former institutional investor, who has literally heard 1000s of pitches. From a founder’s perspective, Adam is everything you want in an advisor: he’s a frank, personable, pragmatic expert, who is all about results. After only a few minutes with him, you’ll understand – like we did – why Nasdaq sought out Adam to help advise paradigm-changing startups like Public Recreation.
Jennifer Pattee, CEO, Public Recreation
If you’re a CEO, your board should be a decisive competitive advantage, but many see them as ornaments. We wanted to make that point as emphatically as possible to the attendees of our recent ‘Startup Exit Masterclass,’ so we reached out to Adam, since he’s a nationally recognized thought leader on this subject. Adam has a dynamic stage presence and made very clear with memorable examples what the upside of a real board could be. We all look forward to working with him again.
Benjamin Joffe, Partner, SOSV VC Fund & HAX Hardware Accelerator
As a teacher at the Center, Adam inspires founders to think differently about company oversight and gives them tools to support growth while creating long term, sustainable value to shareholders and stakeholders. Adam has a unique and passionate way of breaking down the principals of corporate governance through stories and experiences that highlight actionable steps any entrepreneur can take to make their business stronger and better able to overcome the big challenges that come their way.
Celena Aponte, Director of Strategic Initiatives, Nasdaq Entrepeneurial Center
HIRE TO SPEAK
Adam is retained to speak by corporate governance organizations, corporate boards, law firms, audit/consulting firms, investor relations organizations, and investor conferences. In the last several years, he has appeared internationally more than 100 times. As a former large-firm lawyer, operating executive, and institutional investor, his topics include: small-cap boardroom best practices, capital markets, corporate finance, hiring/managing professional service providers, small-cap enterprise risk management, and small-cap board composition.
Whether he’s sharing the stage with Fortune 100 board members and former White House cabinet members, or presenting global keynotes, Adam is invited back over and over again by iconic companies due to his well-chronicled thought leadership, candor, humor, and practical takeaways.
BEST SELLING AUTHOR
The Perfect Corporate Board: A Handbook for Mastering the Unique Challenges of Small-Cap Companies (New York: McGraw Hill, 2012), is the first of its kind resource created specifically for small-cap corporate directors. The Perfect Corporate Board addresses a long-standing void in corporate governance. Though nearly 80 percent of the public companies in the U.S. have less than a $500M market capitalization, corporate governance best practices have historically been one-size-fits-all. As a result, small-cap companies are routinely stymied by unique governance issues for which there has been no objective, practical guidance. Just as operating a $100 million company is a vastly different undertaking than operating a $100 billion company, governing the two different sized companies is different as well. By failing to collectively acknowledge this distinction, the historic one-size-fits-all approach to corporate governance has handicapped the biggest sources of American jobs – small-cap companies.
The Handbook of Board Governance: A Comprehensive Guide for Public, Private, and Not-For-Profit Board Members (New Jersey: Wiley, 2016) provides comprehensive, expert-led coverage of all aspects of corporate governance for public, nonprofit, and private boards. A collaboration by subject matter experts, this book combines academic rigor and practitioner experience to provide thorough guidance and deep insight.