This article explains how smaller-cap companies with illiquid stocks can create sustained, significant trading volume with investor relations (“IR”) firms, thus enabling them to attract investment firm capital and investment analysts. Sustained, significant trading volumes are necessary to attract investment firm capital and investment analyst coverage, as illuminated in earlier articles of mine.[1]
CEOs of smaller-cap companies with illiquid stock trading volumes often ask me, “How do I create sustained, significant[2] trading volume in my company’s stock?”
The answer is simple. The company needs to attract Main Street (retail) investors, rather than Wall Street (investment firm) investors. When enough retail investors begin buying and selling a company’s stock, the trading volume will increase to a sufficient level such that an investment firm will consider making an investment in the company.[3]
Attracting retail investors typically requires your company to hire an IR firm to perform “market awareness” activities, i.e., efforts directed to informing potential Main Street investors of the opportunity to purchase the company’s stock through the open market.
Company CEOs also often ask me: “Why is it necessary to hire an IR firm to get “more eyes” on my company’s stock; isn’t producing excellent financial results, or having a unique product, or having a compelling business model, or having a huge market opportunity, etc. – isn’t that enough to attract Main Street investors?”
The answer is … “No – that’s typically not enough. Sorry.”
Think of it this way. There are approximately 15,000 publicly-traded companies in the US, including those traded through the over-the-counter (OTC) market. Common sense suggests that the average Main Street retail investor is NOT going to find your company’s stock from among these 15,000 companies without your company implementing targeted, effective initiatives to “market” your stock to retail investors.
Of course, there are companies that do not have to implement stock marketing campaigns to attract retail investors: some CEOs are well-known and have a public following, or the company otherwise has become known to the investing public, or the company is in a “hot” investment sector (biotechnology, cannabis, etc.). The reality of the capital markets is this: a company that does not fall into these categories must implement targeted, effective initiatives to “market” its stock to Main Street investors and motivate them to purchase the company’s shares through the open market in order to achieve sustained stock trading liquidity. Period. Paragraph. End of discussion.
The next questions invariably are: “What exactly do investor relations firms do, anyway?” and “What initiatives are effective in marketing an illiquid company stock to Main Street investors to create sustained, significant stock trading liquidity?”
The services performed by investor relations firms often vary from firm-to-firm. The services typically performed by investor relations firms appear below: some firms perform all of these tasks, while some perform only a few.
- Designing that portion of the company’s web site that is directed toward investors. (That portion typically resides under a tab named “Investors Relations.”)
- Writing the script for investor conference calls.
- Introducing the company to potential investors via one-on-one meetings or via group meetings at breakfasts, luncheons, etc.
- Sending the company’s press releases to the IR firm’s “proprietary” distribution list of potential investors.
- Phoning potential retail investors and asking them if they would be interested in receiving information about the company.
- Implementing social media and digital campaigns about the company directed to retail investors.
- Drafting company press releases.
- Securing articles about the company in newspapers, magazines, online venues, etc. or securing television or media interviews.
- Introducing the company to high-net worth individuals.
- Introducing the company to investment firms (including, so-called “family offices”).
One IR firm may NOT actually offer all of the above services. In fact, your company may not need all of these services. It is remarkable how often it turns out that a particular IR firm that is heavily courting your company does not provide the services your company actually needs. Hence, as the CEO or CFO, you need to be thoughtful about which of these services your company actually needs and compare that list to the services the firm actually provides.
The next question for examination is: which of the services above are actually effective in bringing your company to the attention of retail investors who might actually purchase your company’s shares through the open market? Be aware that IR firms typically do not work on a contingency basis and expect to be paid a monthly cash retainer (and perhaps an additional equity “kicker”); hence, you will want tangible and measurable value from hiring an IR firm.
Different people have different views of the efficacy of the services noted above in increasing sustained, significant stock trading liquidity. See below for my opinion as to which of the aforementioned services are effective at creating sustained, significant stock trading liquidity for a currently illiquid company stock:
- No.
- No.
- No — unless the company convenes such meetings with hundreds of potential retail investors and has effective phone follow-up.
- Unlikely.
- Yes, if enough potential retail investors are contacted.
- Yes.
- No.
- This is a good start – an article in USA Today obviously is more valuable than an article in the local newspaper and an appearance on the Fox Business channel is more valuable than an appearance on local news.
- Typically not, as the high net worth individual typically would not want to invest in the company through the open market because of the stock illiquidity, although the introduction might result in a direct capital investment or the investor might prefer to wait until the company has sustained, significant trading volume.
- No — and a special word of CAUTION. As illuminated in one of my earlier articles, investment firms will NOT invest in a company whose shares do not have sufficient trading liquidity. Hence, if your company has insufficient trading liquidity to attract investment firm capital and an IR firm proposes to introduce your company to investment firms (including, “family offices”), your company is either (a) wasting its time/money or (b) the investment firm will be offering you a “toxic” financing (a topic of a future article).
In sum, as a practical matter, a “mosaic” of the “yes” activities are usually necessary to attract retail investors in sufficient quantity to create sustained and sufficient trading volume to attract investment firm capital. Further, some of the “no” activities have value as well; they simply do not have material value in creating sustained, significant stock trading volumes.
There are dozens of reputable IR firms. Caveat emptor: there are also many more that are disreputable or reputable, but ineffective.
Generating sustained, significant trading volume is a combination of art and science, similar to creating and executing an effective investment “pitch.” What works for one company will not necessarily work for another.
Good luck! Connect with me through LinkedIn if you have questions.
Up next: Beware the short-seller attack and “bear raids.”
© Ronald A. Woessner
December 31, 2018
Mr. Woessner mentors and advises companies in the start-up and smaller-cap company ecosphere and helps them raise capital. He also advocates in Washington DC for policies that create a more hospitable public company environment for smaller-cap companies, enhance capital formation, support small business, promote entrepreneurship, and increase upward mobility for all Americans, particularly minorities. For more information on Mr. Woessner’s background, see https://www.linkedin.com/in/ronald-woessner-3645041a/.
[1] See the article here (stock liquidity necessary to attract investment firm capital) and here (stock liquidity necessary to attract investment analyst coverage).
[2] The article here explains how to estimate the trading volumes that will be necessary to attract any particular amount of investment firm capital.
[3] An earlier article illuminated that stock trading liquidity is a necessary, but not sufficient, condition for an investment firm to consider making an investment. In addition to stock liquidity, the company typically must have a compelling business model, large market opportunity, credible management, excellent products, etc.
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