Public Venture Capital: Turning Micro-Caps Into Macro Wealth Builders
Mar. 4, 2014 11:41 AM ET | About: ADTM, Includes: CRTO, FUEL
Disclosure: I am long ADTM. (More...)
(Editors' Note: This article covers a micro-cap stock. Please be aware of the risks associated with these stocks.)
Returns from private equity and venture capital investments can be life-changing, but small investors are generally not invited to participate. And a rule of thumb on "Private Placement Memorandum" (PPM) opportunities in private companies is "if it's being offered to you, it's probably not a very good deal." Take it from an investor like me with "a lot of experience," which is a euphemism for "I've made a lot of bad investments."
After getting bitten by a few too many deals that went south, I reached my breaking point. There had to be a better way to play "early-stage" companies without having to be uber-wealthy and/or locked up with indefinite illiquidity.
A couple of years ago I stumbled upon an investment bank that was touting "public venture capital" opportunities -- PVC for short. The big benefit of PVC is that it allows "everyday investors" to gain access at the earliest, most profitable investing stage of companies creating technological breakthroughs. This kind of critical first-stage access -- when companies are trading at pennies, dimes or a couple of dollars -- can take a small nest egg and turn it into life-changing wealth. It is exactly the kind of access most venture capital funds parlay into hundreds of millions or even billions of dollars while small investors only can access after the eagle has soared. Real money is made by buying the future adult eagle when it's just a hatchling!
So these days, I look for micro-cap public companies meeting a certain criteria with total valuations in the millions to tens of millions of dollars that could turn into enterprises worth hundreds of millions (or more). Ultimately, with public venture capital, any investor, large or small, has this opportunity to buy common stock on the open market through their brokerage account and participate in what I've found to be some of the most exciting and lucrative investment opportunities available.
Here is the Public Venture Capital formula I have been using and am now a full on champion for:
1. Find a small, publicly-traded "micro-cap" or "nano-cap" company with potentially disruptive technology and experienced executive teams.
2. Determine the upside by comparing it to a "mature" company in a similar space that has a fully-recognized value in the public markets in the hundreds of millions, if not billions of dollars. My reasoning is that if a company in a similar industry or market sector has reached this level of success, then the micro-cap with a good management team and strong product has more than a fair shot at exponential growth. I like to look for companies that have a minimum upside of 3-5x the current market capitalization, with the potential for 10-20x returns (or more).
3. Confirm the technology has legs regarding near-term viability for creating a marketable product or service, and confirm that the company can scale to achieve tens to hundreds of millions of dollars in sales. This step involves analyzing the management team for past successes and operational chops.
4. Lastly, the valuation has to offer massive upside in terms of the stock being unknown and/or undervalued. Fortunately, this is not too difficult as most investors seem to follow and invest a few, already well-known stocks without digging deeper to find the future darlings. THIS is where the real money is made!
In this article, and in other future posts in my "Public Venture Capital" series, I'll be sharing micro-cap companies that I have personally selected as meeting all of the criteria above, and that I have chosen to invest in. Each of my picks has a hugely successful, fully-valued public company that shows the upside potential. First, I'll show the mature company from a similar industry and market segment that gives offers a look at the potential the early-stage company could reach if its management team succeeds. Then I detail the early-stage opportunity.
Please keep in mind that just as with investments in private, early-stage companies, investments in PVC is definitely a risky proposition. Risks include competitive risk, business execution risk, funding (or under-funding) risk, and more. So, when contemplating a "public venture capital" investment, please make sure you're aware of the risks and that you can afford to lose the money. And that's why I only allocate 10% of my portfolio for this riskier class of investments. But unlike a private venture capital investment, with PVC you can get liquidity almost any time you want! That said, micro-cap stocks are prone to higher levels of volatility and tend to have fewer shares traded per day. Due to the lack of liquidity, there is the potential for a small amount of volume to significantly impact the stock price. Timely trade execution is also a risk when investing in micro-cap and nano-cap stocks. They tend to be in weak financial positions, which can pose a going-concern risk, and are often in perpetual fund-raising mode, which means dilution. Losses from investing in micro-cap stocks can be substantially greater than in larger-sized stocks due to the risks outlined above.
With that risk disclaimer now behind us, I'm going to start in "Advertising Technology," or "ad-tech" for short. This space is red hot for good reason, particularly companies focused on "programmatic buying" or selling (also known as real-time bidding - "RTB") of digital advertising. See the February 18 Seeking Alpha post, Real-Time Bidding: Disruptive Ad Tech and Rocket Fuel IPO Blasts Off... How To Play The Ad-Tech Boom, which posted September 23, 2013. Dollars spent on old-school advertising formats including radio, newspaper and magazines, and even television advertising are either and radio are either decreasing or facing stagnant growth while digital advertising is growing at an incredibly strong clip.
RocketFuel (FUEL) - website: www.rocketfuel.com, which provides an artificial-intelligence based automated, decision-making platform for online advertising, exploded out of the gates when it went public last September, and has a market capitalization in the $2 Billion range. Meanwhile Criteo (CRTO ) - website: criteo.com, which IPOd last November, has a similar market cap with annual sales of north of $500 Million and steep 57% year-over-year revenue growth. Both FUEL and CRTO are at enormous scale - the early-stage investors and venture capitalists absolutely crushed it on these investments.
My way of playing this sector with a micro-cap investment is through Adaptive Medias, Inc. (OTCQB:ADTM) - website: www.adaptivem.com. Adaptive's competitive advantage is that it offers an end-to-end solution including video content management, ad serving, waterfall management, programmatic buying and selling and yield optimization for its customers. The Irvine, California-based company helps its partner websites, mobile applications, and video content owners achieve the highest ad revenue possible based on audience metrics and optimized ad rotations. Adaptive acquired Ember in December to help round out its technical suite with a real-time bidding platform. By combining RTB capabilities with the recently-announced partnership with OneScreen for video, Adaptive has a strong multi-channel offering across the key platforms of display ads, mobile, and video. The company has been profiled on Seeking Alpha several times in the past - on September 23, 2013, December 10, 2013 and December 18, 2013.
With ADTM trading around $0.10/share, its market cap is approximately $15 Million. The chart looks strong with the stock breaking out above its 20-day, 50-day and 200-day moving averages …
(click to enlarge)
Chart courtesy of stockcharts.com
The company's revenues grew almost 1400% from Q2 to Q3 last year (Q3 revenues were $373,737), and I believe the company could upwards of $10 Million in 2014 as revenues kick in. This is the kind of growth that makes valuations turn parabolic in a hurry. According to eMarketer, the annual market for mobile ads will be upwards of $29 Billion this year while the online video advertising markets are expected to more than triple by 2017 as video becomes the preeminent delivery channel for digital advertising, reaching over two billion people worldwide. Adaptive is in the epicenter of these burgeoning markets and is poised to gain market share, which should lead to a huge boost in its valuation. One more potential catalyst: Adaptive recently reached an agreement with Gemini Master Fund to retire all outside convertible debt and cancelled four million warrants.
So that's why I'm an investor in Adaptive Medias: there's a substantial upside opportunity and only a few pennies of downside risk, considering that much of the outside financing has come in at $.075/share.
The two most obvious risk factors for Adaptive Media are: 1) this is a highly-competitive industry, and the big players are well capitalized; and 2) the Company will need to raise additional money in order to get to scale, which means "dilution."
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