Have you ever seen a microcap stock go from unknown and illiquid to a 10X price jump and a 1,000X liquidity increase? I know I have and, if you have been around the microcap space for more than a few hours, you probably have too!
Just the idea of buying a stock for pennies and becoming a millionaire overnight is enough to drive countless retail investors to buy microcap stocks every day. Unfortunately, that “get rich quick” mentality is killing the microcap space! Not only are high school kids, trading on their lunch periods, enchanted by the idea of fast cash but more and more microcap CEOs are too.
In my opinion, microcap CEOs can be split into 3 buckets;
1. CEOs who are trying to build businesses with real value,
2. CEOs who are trying to build a market for their stock,
3. a combination of both.
In my experience, 1s have the highest chance of success, 3s can succeed, and 2s are destined to live the life of penny stock hustler (unless they change).
1s and 3s usually understand that they need to build value in their company and, eventually, their stock’s value will follow. 2s usually think the opposite. For 2s, they need to have a $100 million market cap and trade $1 million a day so that they can raise millions of dollars to build their business.
Unfortunately for 2s, it’s nearly impossible to create a liquid, high-priced stock with no underlying business value. If a 2 somehow manages to do it, there are very few investors looking to invest significant capital in a company with little tangible value.
Now it isn’t necessarily the 2s faults. Many CEOs went public thinking a public stock was a license to print money. When they find out it isn’t, many end up believing market cap and liquidity will turn on the money machine. While liquidity and market cap can help generate funding, it is usually smaller amounts, less company-friendly, and short-lived (not to mention, generating liquidity and market value without tangible value is expensive!).
In short, don’t be a microcap CEO who is chasing the quick money and don’t let others divert your focus. Build a business with real value and eventually, the market will realize that value and reward you!
What do you think? Do you know any 1s or 2s? Have you ever seen a 2 succeed?
Ben Kotch is a managing director and investment committee member at Acquis Capital, LLC, a private investment firm that specializes in acquisitions. He has extensive experience with both private and public companies. Ben graduated with an economics degree from Bentley University where he concentrated in entrepreneurship and law.
For more, please follow on Twitter.
B. M. K. 