HOW TO FUNNDAMENTALLY VALUATE FUNN
This lengthy post is simply a collection of many posts I have made over the past couple of years. They were created from a basis of education and experience, an accumulation of many years in the thick of things. They are more or less tied together, polished up and added some new thought. If you decide to brave it, and get to the end prior to falling asleep or getting redirected to an enticing cat video, I hope it provides some reasonable insight or general value to you.
This post is more generalized against all OTC / Penny stocks, but the important part is: This is how I look at start ups / growth companies. When I put FUNN through these questions and paces, FUNN has ALWAYS come out on top. This is WHY through day in and day out, while the company chips away at the audit and new infrastructure, I have NEVER lost a night of sleep, and in fact have greatly increased my position over the past year.
A little bit on me: I’m going on 27 years in Silicon Valley start-ups. I have advanced education in Business and Science. I’ve been chiefly in medical device, clinical diagnostics, and NGS. (Next Generation Sequencing) I’m on the operations side of things: I’m the guy who helps you with a design transfer process: I.e. scale your process from development or pilot to full production, install larger operations management systems, pass regulatory requirements like ISO / FDA / CLIA, organization design, process improvement / CI, and lead the company to a higher level of operational maturity and leadership.
I can also easily say when building a company from scratch: Nothing, nothing, nothing ever goes as fast as anyone wants. EVER. Why? Because, real business, takes real time and real shit happens in real life. I say that a lot as well. Why? Because it is true, flat out true.
I do believe my years of experience in start-ups, and education have helped give me decent insight to what it really takes to build a public company. What the markers of success really are, and expected timelines. Since I also deal with a lot of regulated entities, I know how painstakingly slow they can be, and how they simply are not budged by external factors. They generally get it done, but at their pace given the resources they have to apply to the situation.
But just like everyone else, I rely on publicly available company news, company financial for what we have, my own due diligence, and anecdotal evidence (Like instagram photos, online reviews, 3rd party articles) to create a supportive narrative for any company.
I have many years in the otc market, and have a solid understanding of how the pink, QB, QX marketplaces operate. While I am comfortable with TA, I am NOT a super TA person. I VALUE TA, I take it as analytical input for creating the narrative around a company.
There is a tendency to make pink marketplace stocks viewed as 'All or Nothing' it is either a 100% scam going to zero, or its 'Going to the moon'. When the reality is; every company is simply a risk profile.
Key Point: Every company is a story. Every company is a Risk Profile
You will NEVER have all the information you want on any given company. You will have both qualitative (descriptive/narrative) and quantitative (analytical / numerical) data.
The data combine will create the STORY (Quantitative) and ultimately create a RISK PROFILE (Quantitative)
All Pennies are inherently HIGH risk HIGH reward stocks. What we are trying to do here, is look deep enough at a company to make our own risk profile assessment. This process of discovery is where knowing how to valuate companies without tons of infrastructure, without tons of information, even questionable information. We are attempting to discover companies that are highly performing yet circumstantially undervalued. Companies with high class (ROI creating) challenges not low class (core business issues just to keep lights on) issues. But the money you are investing here SHOULD NOT be anything you need, short term, for life essentials, for retirement plan A, and beyond a buffer savings so you don’t find yourself having to sell something just because x happened and you need $5k TODAY.
Despite what the pink marketplace is supposed to represent: A type of exchange which provides small/micro/ground floor businesses an opportunity / avenue for funding and operating as a public company. The reality is the Pink marketplace is extremely controlled and manipulated, plus very emotionally traded and the SEC does little to enforce what are supposed to be the rules. (Its like looking back in history on what ideas / values the political parties were founded on, and how they operate today.) So, if market makers are being fined $10000 for every $1000000 they can make, not much impetus to slow down and the SEC gets a revenue stream where they are under resourced. Not much impetus to change how things work.
The majority of pink investors / traders LOSE money. It is already hard enough, but recognize how much people make the odds worse for themselves. MORE importantly their trading patterns or moves CAN impact your stock GREATLY in the short term. Then you WILL also hear about it on the boards in negative forms. Invest in the COMPANY, PLAY the daily action.
For the concept of hindsight, sure it would go without saying 'if I only knew', that is a platitude that can be applied across the board in all markets, in all of life... There will always be stories of 'well If I only sold X and bought Y I would be a gazillionaire, and since Z didn't happen on MY timeline, its someone else's fault' There will also always be stories from others ‘I’m glad I sold X to buy Y, I made 500% in a day! X is dead!’ Internalizing oo much of this, can impact your investing behavior. Just remember the reality behind those stories is way different that the stated one.
Way, way, way more often than not, attempting to time the market is incredibly less lucrative than finding a solid company to invest in the long. Plus, way more often people sell X to buy Y and lose money in Y, then lose it in Z then lose it in Q. Where if they simply stayed long in X, they would have a great return.
marketplace traders / investor behaviors that lower the odds of success:
- Investing on a specific time table. The shorter the worse. The OTC is NOT on your time table. You GREATLY stack the odds against you doing this. The ‘I’m going to invest in X, but I HAVE to have this money back by Y’ just really bad idea
- Chasing something shiny. We’ve all done it, BUT when you sell a position in something else to chase, that really should be avoided UNLESS you had independently had assessed the sold stock as needing to go. What MORE often happens, is this thought process:
- ‘Hmm, stock X hasn’t moved for month. I still want it, but I hate hate hate money sitting still!’
- ‘Oh damn!!!! Look at stock Y…Oh Damn it’s crazy man, I want IN! I crave the action!’
- ‘Dammit I don’t have any money.’
- ‘Screw it, I’m dumping X to buy Y, after I triple Y, I’ll sell it buy back double X and have more money to PLAY ACTION!’
- ‘I’m a freaking genius investor’
- ‘Oh SHIT, NOOOOOOOOOOOOOO Y CRASHED, WHY AM I CURSED????’
- ‘Wait… What? X FINALLY TOOK OFF??? NOOOOOOOOOOOO!!!!!’
- This scenario, is a LOT more common than you might think.
- Buying in to FUD (Fear Uncertainty Doubt) We have ALL been spooked and done something we wished we hadn’t. LEARN from it. Look at the forest: stick to your plan, your due diligence, your story, your risk profile. Be prepared to swallow a pit, your pride and your friends for months over even a year+. As LONG as the due diligence still paints the long path, stay the course.
- Not selling something Poor selling behavior leads to less profits and higher losses. I’m not going to go in to anything deep here, but give yourself a real self-assessment and grade on your ability to sell. Plenty of articles and videos to help you, do the research if you don’t like the grade you give yourself. I will say one thing I’ve come to notice: Many investors are very ‘all or nothing’ oriented. They are either in a stock or they are not. For investors who can shed, always take some profits and ideally enough to cover initial and extra and the rest free or can accumulate more on dips. If you are an ‘all or nothing’ investor, sell when you think is right for you, ideally in the green and know making money is making money. Do your best to not watch after, IF it drives you crazy. If you can watch for information to further improve your future assessment skills, by all means watch. But if, you see it make you crazy and if impacts future sells in a chaotic manner, that is not good. Avoid watching after selling and know making money is good, or minimizing losses is also good.
The only defense really (for INVESTING, plenty of short term trades can be done on momo stocks, we've all traded in companies we know are 100% scams but simply don't care, we are all just playing a calculated game of chicken.) is to be long and buy with current information we have, and believe in our due diligence.
If you are truly investing, you are investing for the long and the risk profile tells you the risk is worth it. If the markers you see for the company growth continue to be positive, then the short term doesn’t matter. (and truly short term is 2-3 YEARS, which is an INSANE thought to most pink marketplace trader, but again if investing, you are investing in a COMPANY, not trading a PPS MOVEMENT)
There are millions of examples of this in stocks, real estate etc. Netflix went from 20 to 300 to 65 before splitting 7:1 and back to 300. If one bought at that first 300, how, down 80% to 65 in the short term but up 700% in the longer term. Invest in the COMPANY
THE IMPORTANCE OF THE CEO
While we are investing in a COMPANY, remember at this stage the CEO is MUCH more critical than big board stock CEOs for companies where they are greatly removed from the day to day. i.e. you can count on forecasts for the year, etc.
Remember: YOUR CEO WILL NOT BE PERFECT. Your CEO is also faced with much different challenges than CEOs of larger, established companies. You most likely won’t have a 30 year veteran of multinational conglomerates. You need to listen to them and watch their behavior closely. Do things line up enough for you? Remember what I said about ‘Nothing, nothing, nothing ever goes as fast as anyone wants. EVER.’ Don’t line up the project timelines and exact revenues, some level of dilution, and all the things the company wants to accomplish and talks about. Every small company CEO has ambition in general. They want to get the company off the ground. Not all things will pan out, strategy will change to fit a changing landscape. Doesn’t mean lies necessarily, doesn’t mean bad at all necessarily. Just means new information made for a change in plan. What you NEED to look for are TRENDS through both company releases and all other sources of input.
Important note: It is OFTEN the case the CEO that gets a company from the ground to point A, is NOT the CEO that takes you to the next higher level. There are CEOs and skill sets, experience and aptitudes for every stage in a company from tiny to multinational conglomerate. So if you find your company is progressing well, but your CEO gets a ton of criticism for whatever reason: too green, over head, needs to go, etc etc. IF the CEO is GROWING the company (The Forest) to the NEXT LEVEL, then that will be a HIGH CLASS problem to have in the future. The money gets exponentially bigger and those things tend to sort themselves out. You are not getting Bezos for pennies. But you can get one that creates value over time, so the possibility that you could have a Bezos in 20 years exists.
Your company may not have a CEO with years and years of CEO experience yet, or experience with a multitude of business situations. However, is he or she being a true CEO?
There is an ugly truth for many OTC stocks: Where just some shitty business person creates a public company with some whim but has ZERO experience in actually running a business. They do not necessarily ‘get’ what being a CEO means. Then, they find out its hard work and then the toxic spiral begins as they look for fast ways out, or don't give a shit how bad the company's position becomes as long as their lunches are paid for. Your CEO should not show that behavior; that is not someone you can trust.
It is not to say the company won’t face challenges and even core issues, or have to make hard decisions. But how did the CEO react to the problem, what actions does he or she takes and how is it communicated?
You are looking for the CEO do BUILD a COMPANY overtime, regardless of any short term issues. Does the CEO have a healthy forest overall?
Does the CEO:
Build the core company? Is infrastructure being built to handle larger scale business?
Run a fiscally responsible ship? Has the CEO’s actions hurt long term shareholder value? Too much dilution? Toxic financing? Crazy amounts of debt / convertible notes? Lots of insider issuing of shares? Is the CEO setting the stage for long term value and growth, while keeping the company together so it is not ruined before it even gets out of the gate?
Increase revenues overtime? Assuming there are revenues? Regardless of pps and other issues / challenges, and the fundamental ratios improving overtime?
Communicate? Does the CEO provide a reasonable amount of information, for both current and long picture? Does the CEO speak to the long investor, and do you have current information that lines up with previous communications from the CEO? Does the CEO create a vision and marches the company towards it?
Now, the question to ask yourself is.
DO I trust this CEO?
If you do not, DO NOT invest. Period. Maybe trade if you believe in the momo, or a very small position that reflects the distrust. If you gain trust over time, you can buy in later.
It you cannot trust the CEO of the company you are invested in, the emotions may overpower discipline and reason. You are simply now moving towards investing against yourself.
If you DO trust the CEO that is surrounded by the positive evidence outlined above, that in itself is a rare find in the OTC, and severely under-appreciated.
Take Note: Your company is GROWTH COMPANY
What does that mean for investors? It means you don't valuate is quite the same as a big board fundamental company. Though much is the same, the importance is ROI they are getting for aggressive growth as measured by revenues, and what type and how much financing they are using to growth.
What does the forest look like?
There will be dead trees in your company. There will be a sick patch here and there in your company. There will a lot of statements made around those issues and they may or may not be accurate. However, the important thing is to always look at the forest. What is the full company’s narrative?
What does the qualitative data tell you over time?
How are the metrics for:
Decent AS / OS
Low to No dilution
% over time Growth
Future growth potential
Currently undervalued pps
Future market potential
Sexy industry
Products and services
Brand potential
CEO that gives a shit about shareholders
CEO that gives a shit about the company and community
Potential to move up in marketplaces with ideally a long term NASDAQ potential
What does the quantitative data tell you over time?
What kind of numbers can you see?
REVENUES (High quality recurring?)
FUNDAMENTAL RATIOS
GROWTH
UPWARD TRENDS ORDERS / ACCOUNTS / LOT SIZES
AS / OS
DEBT QUALITY (TOXIC / TRADITIONAL / MARKET RATE)
DEBT RATIOS
INVENTORY TURNOVER
INDUSTRY TRENDS
SUPPLY CHAIN
There WILL complaints, screw-ups, miscommunications, some failures, along the path. Accept it! However, if they are temporary process focused, not long term core business focused then your forest is healthy.
Reviewing a growth company
When reviewing companies in this space, it is important to look holistically at the business: The market/industry(s) it is involved with/in. When reviewing a growth company, one needs to look at how the business continues to further itself and look at the challenges the company faces.
Real business is no joke, and not a single successful one gets it all handed to them. An important part of evaluating a business is to look at what kinds of challenges exist between the company and success.
WHAT KIND of Challenges does your company have?
DO NOT underestimate this, and how important this concept is. EVERY single COMPANY since the dawn of time has had issues and challenges. But what kind are they? High Class or Low Class? Does the effort and resources spent on the issue generate an ROI in the long run, or are they core issues that put pressure on the company to finance further under undesirable conditions? i.e. treading water.
Low class core issues for business:
Core function problems indicate the company is DYING: Activities towards staying alive but not as ROI focused) such as:
- Poor Business Model, the math doesn’t work for the space they are in
- Lack of Revenue
- Lack of market potential
- Lack of accounts
- Lack of quality people wanting to work for you
- Toxic Financing
- Poor share structure and continued mass dilution
- Lack of interest for a MJ growing solution
- Poor quality products
High class growth challenges for business:
EVERY company will have issues: while problems always need attention, the high value issues indicate the company is GROWING. i.e. The effort spent on the issues directly leads to a better ROI, and further scaling of the company.
- Build scaled corporate accounting dept. and fiscal oversight
- More JV / External fiscal investor interest than can process
- Need to work with 3rd party facilities construction, and dependence on news release timing
- Have deals but cannot construct other 3rd party facilities faster
- Limited resources to make choices to focus on
- Finding new locations facilities or production lines
- Need more warehousing for increased distribution / logistics
- Need more employees to handle scaled functions
- Integrate acquisitions faster, especially foreign ones
- Smooth out tech transfer for new product production processes
- Engage reputable professional investor relations firm
- Increase marketing for continued brand exposure
- Negotiate larger deals with larger clients
-Upscale accounting department and Corp Oversight
- Project Management on new products
- Engage institutional investors and larger financiers
- Accomplish Spinoff and other legal entity company structure dealings
- Navigating moving in to international space
So many pinks never even get CLOSE to having these kinds of 'problems'. THESE 'issues' are what comprises a GROWTH company.
A big factor in your company’s scoreboard is the revenues, which ideally keep growing. It is a fact most pinks can't even get to dollar ONE, let alone MILLIONS. If you are going for a company pre-revenues, be sure to keep an eye on progress towards them, and how it is impacting shareholder value over time.
If your company’s issues all fall in the high-class problem bucket, you need to recognize so much RIGHT had to have happened in the first place, to be in such a state to have such ‘problems.’
The majority of OTC stocks would be lucky to have such issues. Hint: THESE ARE FUNN’s ISSUES
ON STAFFING
Start ups need to walk a fine line of scaling staff correctly or risk getting in to a terrible downward financial spiral. Many folks have to wear multiple hats (like common for a executive assistant to also be HR for hiring, or production person also does supply chain, Controller / Accounting to also handle employee benefits) on and on.
As the company grows the roles for each task get so big it requires a whole new resource.
Resources are expensive, recruiting, hiring, training, RETAINING.
Hire too soon, run out of money, don't have the business to support them
Hire too late, bigger messes to clean up, spend time on backwards facing vs forwards facing etc
Its a really tricky balance and why a lot of companies fail.
As time goes on, your company should hire positions like:
- Head of Human Resources
- Director of Supply Chain / Logistics
- CFO / more finance positions
- Global Facilities Management
- Quality Assurance / Customer Service
- Marketing / IR
- Mergers and Acquisitions
- General Counsel
- more work level members for each team
It is always a balancing act to ensure each position is set for a solid ROI and controlled. As the company scales and positions open, the CEO becomes more of a direction setter and less direct impact, as the tactical execution of the strategic direction rests of the shoulders of the TEAM.
Be wary of a company that hires too many top dogs too soon. Hiring the head of a department, just means that department is being built from scratch. It has a LONG way to go. Also be wary of a company with no actual staff, just contractors and / or consultants. Especially if promising production and future revenues but no clear path to get to them.
Invest with confidence: In the end, money and investing is very personal. We all have different ideas on how to go about making money. Far be it from me to criticize success. However, there is more to life than just money, so making it at the expense of others is not success in my book.
Remember the risk profile YOU created after doing your DD
As mentioned money is personal, so is risk tolerance. There is no point in creating some likert scale or graph of risk profiles together for penny stocks. They are all High risk. So you better know what that means. Only the individual can decide what risk level with the high risk area they can healthily invest in, and maintain the appropriate mindset around it. The idea here of course, that our DD tells us that a certain company is not as risky as others and the chances of success are much greater.
If you can put your company through the paces I've reviewed here, and still feel positive on it. You just might have the next MONSTER beverage on your hands. Invest with confidence, and sleep well at night regardless of how the day treated you. If you find yourself wondering about your future and how this investment is impacting the quality of your life in any significant way, might be time to reassess, divest or ideally keep you from getting in in the first place.
Remember: INVEST to where a company is going, TRADE daily action.
I hope you found value in reading my post. For me I take everything I have written and have applied it all to FUNN, over and over. FUNN still comes out on top, more than any other stock I have ever encountered in years on the OTC.
Im investing in FUNN today for the company of tomorrow.
Best of luck out there! Though if one does due diligence on FUNN, they realize luck has little to do with it!
$$$$ FUNN $$$$
