Finding Investors For A Micro-Cap IPO

When approaching a micro-cap initial public offering (IPO), getting to know your investors is sometimes overlooked entirely or left to the last days of the roadshow. 

Connecting directly with your investors, getting to know them and educating them on your company story is an integral part of the IPO process. It will go a long way when you finally operate as a public company. 

Micro-cap investors operate within a community and often co-invest within the same network. Knowing your investors may prove helpful in the future as your micro-cap company matures and you need support in the future for strategic initiatives. Investors have different strategies, and it is crucial to know who you are inviting to take ownership of your company during the IPO. 

Getting Investor Attention

One of the biggest challenges for a newly listed micro-cap company is gaining investor attention to purchase shares in the IPO and open marketplace. Unfortunately, many micro-cap companies do not prepare for investor awareness leading into the IPO nor do they have a plan to create visibility. This becomes especially difficult during the quiet period required by the Securities and Exchange Commission (SEC), which starts when you publicly file your registration with the SEC. 

Before going public, invest time getting to know potential investors at various investment banks and industry conferences that offer companies a chance to present their businesses and hold one-on-one meetings with potential investors.

The quiet period regulation restricts companies from doing undue promotions that may influence or condition the market and affect the opening price of your IPO. That said, there are several ways to work with investors before you go public to properly educate them on your story and the plans you have for the future. First, companies may create a customary and consistent way of marketing and promotion, which may be continued during the quiet period.

Companies should create a media and awareness campaign at least a year before the IPO and set a high standard of customary marketing to the public. Unfortunately, most companies fail to create this program, and upon entering the quiet period, they realize the need for the public's attention, only to find that the option is now closed. 

Understanding Your Investors

Your bankers will bring investors to the IPO and drive the distribution of IPO share allocations. You have a certain amount of influence on the allocations and a say in who gets to purchase your shares. Before pricing, it is essential to do your homework on the investors and understand whom you want and don't want in the IPO. 

Micro-cap investors often have high churn rates and tend to look for structured financing with common shares and warrants. Focus on understanding the investors' investment strategies and goals, especially those who show they were oriented around long-term holding periods. 

Identify which investors may have high churn rates of selling their IPO shares early. You can conduct searches for high-quality investors globally by researching shareholders in your peer companies and tracking the size of their investments and their churn rate. This churn rate gives you some idea about how long they may hold your shares. Then, you can map that information to the time frame you have to achieve significant company milestones. 

Global investors are seeking investments in your company's story and growth prospects. When it comes time to price your IPO, provide higher allocation to investors who express a longer hold period and give the company time to mature. Look for investors who are open and honest about their investment strategy. You'll recognize them as the ones who want to understand your company story and your vision for creating long-term value.

Recognizing that investors will come and go when you are a publicly traded company is important. Often the most challenging part of being a public company is dealing with the ongoing naysayers creating short-sell opportunities for themselves with no basis in reality. However, over time, you can see trends in the changes in your shareholder base and better understand the activity in your shareholder base.  

Investor Relationships 

Maintaining ongoing investor relationships creates a strong foundation as a public company. Communicate with your investors often and consistently to gain investor trust by being open and honest with them about your wins and challenges. Update your investors regularly and stay directly connected to them as much as possible. This takes consistent work to cultivate but forms the basis of a great relationship when done correctly. 

Communicate the good news and, even more importantly, the bad news consistently to strengthen investor relationships. Creating trust and goodwill with your investors will pay dividends in the future. The investors you want to obtain your stock, of course, should have a long-term view of your story, and that story should manifest itself over the investment timelines of those investors.

Investor Volatility 

Many micro-cap investors represent themselves as long funds, which is where they will hold your IPO shares. But many of these same funds also maintain a hedge fund operation with short holding periods and short positions. A short position would occur when selling shares of your stock the investor does not own. Investors who sell short believe the price of the stock will decrease in value. If the price drops, they can buy the stock at a lower price and make a profit, which is a common practice. This volatility is part of the dynamic of becoming a publicly traded micro-cap company.

Trading volatility can be expected after your IPO as your company has a limited number of shares in the market to fight off market manipulation. You can battle the volatility (to a degree) by working hard with your good investors to ensure they understand the company's real story and your growth strategies and performance. Unfortunately, very few micro-cap IPO investors will hold your stock long-term. So it's worth learning to accept and embrace the volatility of being a micro-cap public company as a part of the world you will live in post-IPO.

Developing investor relations continues to be a strategically important function that signals market trust and confidence. IPO-bound companies that establish investor relations function well before their IPO and instill trust and confidence in that market. In turn, capital markets are more likely to reward the company with a higher valuation when its leader rings the bell and it functions as a public company.

Featured Photo By Oren Elbaz on Unsplash

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