Wednesday, March 9, 2011

Investor Relations as a Marketing Tool

Any Pubco has a basic dilemma, and that is public awareness. The micro-cap or small cap universe is crowded with large pools of companies that are fairly non-differentiated. As any well distinguished company knows it is about differentiation or defining a USP (unique selling proposition). This USP allows a company to gain market share and drive top and bottom line results. Well, on the public image side it is no different, the winners in the small cap world do the best job of identifying an investor market place and penetrating that market successfully. This starts with their core story and then spreads out from there on an awareness platform. The key is in the communcation, not the noise!
Most IR campaigns are about loudness. Rarely are they focused on differentitation, the norm is to broadcast any story but make sure it is spread to a large non-defined audience and simply let it happen. This is similar to marketing and sales campaigns that are done with the shotgun approach. Simply devise a story and broadcast it to the largest audience possible (think in terms of the old direct mail campaigns). This has commonly been a failing approach and it wastes both time and money. It also wastes the communication level with the audience. I presently receive over 100 newsletter emails daily. Now, there are probably 10's of thousands, but I can only stand so much noise in a given 24hr period. I search through these newlsetters to research my industry and see how or if any are trying new innovative approaches. I am sad to report that it is the same old stuff everyday. New companies being pitched with the same old hype copy being produced to promote the next...............I'm sure you have read many of these reports. I find the disclosures fascinating (that is for a another future commentary).
A public company and an investor pool both deserve communication that leads with clear transparency and defines the specific reasons to invest in said company. This doesn't have to be long winded either, it can be done with simple paragraphs and it needs to diffentiate the company from all peers, it needs to identify the major market (sector) and why that market presents an opportunity (again full differentiation). The communication then simply needs to affirm why the company is well positioned to succeed in the overall marketplace. This simple story then needs to be connected to predefined audience who is interested in this type of story. Any other communciation is a waste of time and money. The bottom line for both PUBCO's and investors is that IR can be very simple and it can also be most effective when the core communication is clear and concise.

Sunday, February 27, 2011

The Concept of Perceived Value

The concept of perceived value is a psychological ploy that has been used in sales and marketing since possibly the beginning of time. This can be a healthy psychological trigger or it can be greatly manipulated. For the average consumer it is greatly manipulated.
With over 30 years of sales experience in several industries including Financial Services and Sales training I have learned the vast arsenal of psychological triggers used to get buying decisions. I must admit that the IR industry is the greatest manipulator of perceived value that I have ever witnessed. This manipulation is ingrained in the way the industry has trained public companies to compensate IR firms.
This manipulation can be very simply avoided, yet public companies commit the same mistake over and over without any recognition of the problem. CEO’s and CFO’s have repeatedly done the same thing and expected different results an act that Einstein proposed was the definition of insanity. One can only assume that this is an unconscious decision being made by the leadership of public companies.
To help define the problem let’s begin with the perceived value of a public company's greatest asset “its share.” One of the major reasons a company enters the public realm is to have greater access to capital. This is done through an intrinsic valuation of a company’s share price. It would follow that any company is driven to increase their value and thusly the value of their share. In this reality a share is of much greater perceived value then cash. We all know that the axiom of cash is king, and there is much truth to this, yet the greatest asset any public company has is the past, present and future value of its share. I have yet to see a company use its shares directly (indirectly done through capital raises) to finance its sales and marketing campaigns or other business execution strategies. Of course on the public side IR is simply a sales and marketing campaign focused on increasing awareness to get increased shareholder participation. It is simply a sales promotion to get buying decisions in the form of investment decisions. Now, shift to the perceived value of the IR services and how these are compensated.
IR firm X proposes to PUBCO a platform of services and creates a perceived value of $100,000 for this service. In the real world a service provider would have a cost basis built into the dollarization of its services. This is where the game is totally different in the IR world and the first level of critical mistake made consistently by CEO’s and CFO’s when compensating for IR services. The industry has uniquely driven compensation through shares and possibly a little cash. Mostly the IR firms have been share driven and will take free-trading shares and restricted shares in total compensation and have been able to greatly inflate the perceived value of their services. And unlike other service providers in the real (cash based) industries the IR provider has been basically printing money. Here is how it works:
IR firm X sells PUBCO on its service platform and PUBCO gleefully agrees to compensate IR X with paper (100K worth) and in their mind save cash. Little does PUBCO realize they have given up way too much in value vs. paying in cash.  So, now IR firm X has the paper value of $100K with ZERO cost basis involved and therefore has no incentive to increase the value of the paper. Look at this real slowly and watch the transaction in slow motion. Firm chooses a value and PUBCO responds with its most valuable asset in compensation allowing firm to dollarize at any time in the present or future. Of course firm is motivated to dollarize this transaction as quickly as possible; the so-called future value of the share is totally meaningless in this transaction. Of course the firm will pitch the future value and how their work is incentivized to grow the share value but that is simply smoke. The reality is the firm received $100K potential today with ZERO cost basis. They can dollarize anywhere between zero and $100K and have a phenomenal ROI. The next step for firm is to dump shares at the best time for their best interest. This has nothing whatsoever to do with the best interest of PUBCO and it never will as PUBCO volunteered to enter into a totally adversarial relationship. When the firm disappoints PUBCO with the perceived poor performance, PUBCO begins to search for another IR firm and then enters into the very same ineffective, inefficient business agreement and experiences another perceived poor performance. This goes on in a vicious cycle and the winner is always the IR firm. Best yet is the vast majority of IR firms have exclusivity pills in their agreements assuring that PUBCO cannot integrate their IR efforts and use the economy of scales in creating awareness platforms. This assures the IR firm there are no competitors with shares to dollarize against the IR firm. This is the foundation of this industry and it is well below the concepts of pump and dump. This is a form of 3 card Monte, where PUBCO’s are following a non-existent Queen.
The simple solution is using cash in all IR transactions. Of course when cash is unavailable there are much better solutions to dollarizing shares then simply giving them to IR firms in totally adversarial relationships. Next time we will look at the types of IR firms and the services provided. As an advocate I have developed non-IR solutions to IR for PUBCO’s. All PUBCO’s should be seeking an advocacy based relationship and run away from all adversarial relationships. The key is in knowing the difference.

Saturday, February 26, 2011

Advocate or Adversary, choice is always yours!

Investor relations, shareholder relations, public relations etc... all are commonly referred to as IR. There might be no greater cesspool of business than this particular industry. Now, I certainly do not want to pass judgement on those professionals who provide meaningful and well structured service to many public companies. My work is predominantly in the small cap, commonly referred to as micro-cap and most prevelantly known as penny stocks. The industry usually preys on companies that have market caps of 100M or less. Many times this consists of newer issuers, often times brand new S1 filings. The non-filing Pink Sheets alone have over 7500 public companies. Many other pubco's start out on the OTCBB and now OTCQB as fully filing companies. For now I just want to provide some simple and very obvious issues that face CEO's, CFO's and others concerned about creating proper IR representation and campaigns.

Typically IR firms are scarcity driven. This means they see all others in the industry as competition. There is no integration or strategic alliances as IR firms beleive they should be the end all and be all for their clients. This leads to an almost immediate conflict of interest. These providers build large bulky, and for the most part inefficient platforms to make their clients believe they can deliver a wide array of services. This usually includes press releases, media options, webcasts, blogs, social media, phone rooms, newsletters, paid for research, road shows, institutional and retail contacts, large email lists etc.... the list of services goes on to infinity. Now, consider the cost basis of delivering a platform this large and wieldly. Of course the expense is prohibitive so we all know that these services are not fully provided by a singular firm no matter how much they swear by it. The entire costs of these ineffective platforms are passed on to the client. This is simply business as usual in the industry and all the firms of any size and market share pitch this same story. The reality is that after 90 days max they have exhausted whatever depth they have in delivering service. The reason for this is they are not integrated and they do not share the market place with any of their perceived competitors which is every other IR firm in the universe.
The answer to this is so simple and yet totally ignored by the industry. I will introduce concepts in the coming days,