It’s important to acknowledge that micro-caps are very different from large public companies and make the necessary adjustments to help them better inform their shareholders. The biggest difference for micro-caps, or companies with a market capitalization under $300 mn, is quantitative. Larger, more mature companies tend to have significantly more revenue that allows for deeper financial analysis, like discounted cash flow.
And even though many micro-cap companies attempt to project their future earnings, the reality is that they can’t do so with much accuracy. This is because micro-caps often lack substantive revenue or even an initial product offering for which customers can pay them, so they are effectively start-ups, albeit publicly traded ones.
Micro-caps must therefore rely on more qualitative updates for their shareholders. They must tell their story, but it’s an ever-evolving narrative. Candidly and consistently, micro-cap leaders should duly inform shareholders, telling them what’s going well and what isn’t, even owning up to any mistakes that are common in early-stage companies. More specifically, they should answer these four questions: who is on the team? With what product offering are they trying to create value for customers? How is the marketplace responding? And how much time do they have left to figure it all out?
If these questions sound familiar, it’s probably because they are a mainstay in most investor presentations, usually detailed in the ‘use of funds’. Before investors are going to back a company, they usually want to know the hiring plan, product roadmap and go-to-market strategy en route to a proven business model. Yet many micro-caps lose sight of this when updating their shareholders; their narratives become choppy and difficult for investors to follow. Whether updating shareholders monthly, quarterly or annually, here is what should be included.
Micro-caps should update their shareholders on their human capital. Has the company’s headcount increased? Decreased? Either way, they must explain what’s happening with the team. How is the culture? Does the team buy in? How has the team improved since the last update? Does the company have a strong backlog of candidates vying to join the cause? As former IBM CEO Lou Gerstner said: ‘In the end, an organization is nothing more than the collective capacity of its people to create value.’
For example, Amazon uses the ‘bar raiser’ method, which is detailed in the book, Working Backwards. Simply put, each new hire must make the organization better. It’s a painstaking process but highly effective, often credited for much of Amazon’s success. Human capital is especially critical for small companies, like micro-caps, because one key hire can make a huge difference. But firms must be careful because a bad hire can also sabotage the culture and possibly torpedo the company.
Micro-caps should update shareholders on their product roadmap. When will the product be ready? How has the product offering advanced since the last update? Were there any major breakthroughs or milestones achieved? Were there any unforeseen impediments encountered, like supply-chain issues? Making it easy to fluidly inform shareholders, there is a wide range of product management software, like Asana or Monday. Companies that don’t have this infrastructure won’t build as efficiently and may never get a desirable product into the marketplace.
Since the early days of Google, product management has been a key area – as well as where former Yahoo CEO Marissa Mayer got her start. She later helped create the Associate Product Manager program at Google, which Reid Hoffman refers to as a school for young ‘superheroes’. Micro-caps must have this cornerstone in place and be able to speak to it with investors.
Micro-caps should update shareholders on their sales pipeline. The reality is that the product offering is either gaining traction in the marketplace or it isn’t. Does the company understand its target customer and the problem it’s trying to solve? Would customers recommend the product to others (such as via net promoter score)? Does the business model truly scale? Is there a chance the company needs to pivot? If so, when?
This is all part of the go-to-market strategy and it is commonly overlooked, sometimes leading to a company’s demise. Is the company doing the right things with enough focus? Or is it possibly trying to do too many things simultaneously? As billionaire venture capitalist Bill Gurley says: ‘The thing that doesn’t get talked about enough is go-to-market, on both the consumer and the enterprise side.’ As public companies, micro-caps can face scrutiny, but it’s critical to get the business model right in the long run, even if it means enduring criticism or even embarrassment as the company finds its way earlier on.
Micro-caps should consistently update shareholders on their cash balance and burn rate. As a public company, it’s pretty easy for the outside world to see when a micro-cap is going to run out of money. Therefore, it’s prudent to stay in front of it and articulate where the company’s current plan will take it. Will the current runway help the business begin generating revenue? Will it put the business in a position to scale? Could the company even become cash flow-positive?
Like most start-ups, many micro-caps have to keep raising money before everything clicks. It may not be pretty at times, but there are many micro-caps that have found their stride and gone on to produce phenomenal returns for their shareholders. But being transparent and clearly explaining these things can help shareholders set their expectations.
One final note is that biotech micro-caps can be more nuanced because their path to market is highly regulated. In general, however, micro-caps should update their ongoing narrative, as it keeps the business aligned, both internally for the team and externally with its shareholders. Lastly, any investor relations firm that takes the same cookie-cutter approach, regardless of the company’s size, should be avoided.