A funny thing happened to me on the way to approving an increase in a small family investment in a start-up technology company….. I read the audited financial statements.
To preface, we had just had a decent meeting with their investor relations guy, followed up several weeks later by an oh-so-exciting email detailing the awardings of new contracts and the ramping of revenues (there was a small request - an update, really - toward the end of this email regarding the wildly successful over-subscription of the latest round of funding; of course, there was still time for the reader to get in). Well, I got on my horse, placed a phone call to my contact just to verify, in voice, how absoposolutely wonderful everything was going. It was so verified and time drew near to gather the necessary assets to re-ante.
Excitement rang that fine morning as 10x in 1-2 years was a-winking. Only one final necessary to do: read the latest financials, tick that dreadfully uncreative box, and then we could let it rip. I received them later that day, proceeded to stash them in the I’ll-get-to-that-tomorrow pile and continued blissfully on with the afternoon’s work.
Tomorrow arrived; it was a travel day. The financials were the perfect read to cozy up with on my Southwest 90 minute hopper. Highlighter at the ready, 4 ounces of coffee on the way, I dove in innocently, expectantly and discovered…a going concern note, related party transactions favorable to everybody but shareholders, and blood, lots of blood, in the form of cash gushing through the accounts, ne’er to return.
Now, for those who do not know me nor know how I invest in publicly-traded companies, it is safe to describe my style as cautious and conservative; I demand integrity in management partners and require a proven record of a profitable enterprise with a reasonable expectation for continuance. I read K’s and Q’s everyday with these criteria in mind. So upon reading this particular annual report of a private company that had already gotten into the family’s coffers and was about to again, I was shocked at what had happened to myself, at what had been perpetrated before and had come very close to succeeding again. I ruminated on the issue and came up with what I call the promoter phenomenon.
Promoters are in the emotion trade. They sell hope and greed, they sell excitement, they sell that winning feeling. They use a good story as their conduit: it will be filled with huge market potentials; obvious consumer or commercial needs that are timely and newsworthy like national security today or b-2-b yesterday; there is hardly ever any competition and, if there is, they are light-years behind; a trade sale (it used to be an IPO) will be plain as day in probably 18-24 months; and you will, of course, need to get in soon or MISS OUT - the round will be ending next week so hurry, hurry, hurry. Once in, the good news simply will not cease; that is if you’re contracted at all. Months can easily turn into quarters with no update and, then, out of the blue, you will be notified how next year’s revenues are looking oh-so-mighty fine, that the company is expanding rapidly, the list of “partners” is exploding, and that lucky lucky you have the opportunity, the good fortune to participate in a rights offering - manna from heaven is raining down on you, rewarding you for your previous sagacity. There will be one small thing missing in these updates - facts, or more specifically, the facts behind the operation’s operation since your last day of good fortune (i.e. the day you signed the last check). Facts are silly, all they cause is questioning, concern, worry; they certainly do not produce that winning feeling. Facts, in fact, are for losers.
As I plowed through the facts behind FY ’06 for this particular ‘investment’, an alarming paradox made itself very apparent. If this were a publicly traded company, I might have spent 2 minutes (a generous estimate) reading about its operation before slam-dunking it in the never-bother-with-again file of both my mind and the trashcan. Yet, as a private company, with these silly, stubborn, loser facts not readily accessible, I (and my group, in my defense) had initially fallen prey to the dance of the promoter and had become excited to participate. I was willing to be illiquid in something I would never do if it were liquid. This is sheer lunacy, and we will pass on this current “opportunity.” As for the initial investment, it will sit and may even yield a ten bagger - we can hope. If it does not, and this is what I wholeheartedly expect, I will be very thankful for a somewhat cheapish lesson. Promoters sell hope, hope, and emotion - know as best you can what these feelings are worth to you.
To preface, we had just had a decent meeting with their investor relations guy, followed up several weeks later by an oh-so-exciting email detailing the awardings of new contracts and the ramping of revenues (there was a small request - an update, really - toward the end of this email regarding the wildly successful over-subscription of the latest round of funding; of course, there was still time for the reader to get in). Well, I got on my horse, placed a phone call to my contact just to verify, in voice, how absoposolutely wonderful everything was going. It was so verified and time drew near to gather the necessary assets to re-ante.
Excitement rang that fine morning as 10x in 1-2 years was a-winking. Only one final necessary to do: read the latest financials, tick that dreadfully uncreative box, and then we could let it rip. I received them later that day, proceeded to stash them in the I’ll-get-to-that-tomorrow pile and continued blissfully on with the afternoon’s work.
Tomorrow arrived; it was a travel day. The financials were the perfect read to cozy up with on my Southwest 90 minute hopper. Highlighter at the ready, 4 ounces of coffee on the way, I dove in innocently, expectantly and discovered…a going concern note, related party transactions favorable to everybody but shareholders, and blood, lots of blood, in the form of cash gushing through the accounts, ne’er to return.
Now, for those who do not know me nor know how I invest in publicly-traded companies, it is safe to describe my style as cautious and conservative; I demand integrity in management partners and require a proven record of a profitable enterprise with a reasonable expectation for continuance. I read K’s and Q’s everyday with these criteria in mind. So upon reading this particular annual report of a private company that had already gotten into the family’s coffers and was about to again, I was shocked at what had happened to myself, at what had been perpetrated before and had come very close to succeeding again. I ruminated on the issue and came up with what I call the promoter phenomenon.
Promoters are in the emotion trade. They sell hope and greed, they sell excitement, they sell that winning feeling. They use a good story as their conduit: it will be filled with huge market potentials; obvious consumer or commercial needs that are timely and newsworthy like national security today or b-2-b yesterday; there is hardly ever any competition and, if there is, they are light-years behind; a trade sale (it used to be an IPO) will be plain as day in probably 18-24 months; and you will, of course, need to get in soon or MISS OUT - the round will be ending next week so hurry, hurry, hurry. Once in, the good news simply will not cease; that is if you’re contracted at all. Months can easily turn into quarters with no update and, then, out of the blue, you will be notified how next year’s revenues are looking oh-so-mighty fine, that the company is expanding rapidly, the list of “partners” is exploding, and that lucky lucky you have the opportunity, the good fortune to participate in a rights offering - manna from heaven is raining down on you, rewarding you for your previous sagacity. There will be one small thing missing in these updates - facts, or more specifically, the facts behind the operation’s operation since your last day of good fortune (i.e. the day you signed the last check). Facts are silly, all they cause is questioning, concern, worry; they certainly do not produce that winning feeling. Facts, in fact, are for losers.
As I plowed through the facts behind FY ’06 for this particular ‘investment’, an alarming paradox made itself very apparent. If this were a publicly traded company, I might have spent 2 minutes (a generous estimate) reading about its operation before slam-dunking it in the never-bother-with-again file of both my mind and the trashcan. Yet, as a private company, with these silly, stubborn, loser facts not readily accessible, I (and my group, in my defense) had initially fallen prey to the dance of the promoter and had become excited to participate. I was willing to be illiquid in something I would never do if it were liquid. This is sheer lunacy, and we will pass on this current “opportunity.” As for the initial investment, it will sit and may even yield a ten bagger - we can hope. If it does not, and this is what I wholeheartedly expect, I will be very thankful for a somewhat cheapish lesson. Promoters sell hope, hope, and emotion - know as best you can what these feelings are worth to you.
