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Small Companies: So Why Are You A Public Business Again?

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So Why Are You A Public Business Again? by AdventuresInCapitalism

Now, I’m the sort of guy who likes to ask taxi drivers for recommendations—everything from best street food to favorite bars—especially when I’m visiting a new city. So, as we piled into the taxi from the airport, I asked the driver for some recommendations. “Don’t leave your hotel—it isn’t safe.” Ok, we’d already been warned the same by pretty much everyone we knew. “Avoid the white hookers, they work for the police—the black ones are fine <wink wink>” Yes, the taxi driver was offering some very unsolicited advice, and we were on the way to downtown Detroit for the invitation only, MicroCap Club Conference.

Here’s an epiphany—no matter what you think of Detroit, it probably isn’t true. To start with, no one took a shot at us and there is more to the local economy than cooking meth. In fact, Detroit seemed a whole lot nicer than we expected, after you look past the part about it desperately needing a paint job. The people were friendly, the food was excellent and we wandered around late at night in some “unsafe neighborhoods” without anyone once threatening us. Instead, everyone kept coming over, to warn us that it wasn’t safe and that we should go home—no wonder tourist numbers are down!!

However, I didn’t set out to write the story of Detroit—this is the story of the MicroCap Club Conference. To start with, 75 of the smartest investors were invited to hear pitches from 13 companies that were selected by the club. I was amazed at just how deep the group’s knowledge was—if there was a good business out there, they all knew about it—with a focus on those with a market cap of under $50-million. Which brings me to an unfortunate point, most of these businesses shouldn’t be public in the first place.

I kept hearing great pitches, but over and over again, my question was the same, “So why are you public again?” It all boils down to this, it’s a massive nuisance to be public and it’s quite expensive. You only go public if you intend to raise capital—lots of it—the idea that you can be public and raise a few million at a time, every few years, is just ludicrous. You need to be thinking of raising at least $25 million every five years–if your business plan doesn’t include massive equity-funded growth, you should go private.

I only want to invest with smart operators—how smart can you be if you have $2 million in EBITDA and you pay $1 million a year to be public? You could go private and make 50% more, talk about an accretive transaction, especially if management already owns a huge chunk of the company. If you cannot see that, then I don’t want to invest with you in the first place.

What good is a company that has minimal float, monthly trading volume of about $100,000 and no need for capital? Sure the shares are cheap and the business is growing rapidly, but the cost of being public will only grow with increased regulation. I went to this conference looking to buy shares, but I should have been thinking of buying whole companies. Over the next few years, hundreds of really great businesses will choose to go private—they shouldn’t have been public in the first place. The guy who figures out how to orchistrate this process will make globs of money for his investors. In the interim, there are a whole lot of companies to learn more about in preparation for this trend. You get explosive growth, plus a final take-out premium when they go private. Happy hunting…

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Adventures in Capitalism

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