Adam Torres and Steve Kann discuss the microcap sector.
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Show Notes:
What’s next for the microcap sector? In this episode, Adam Torres and Steve Kann, Partner at Ocean Street Partners, explore the microcap sector and what investors should know.
About Ocean Street Partners
Ocean Street Partners leverages our 30+ years experience investing in and advising high-growth, differentiated, companies (both private and small cap public) to provide capital (often our own), proven strategies, complementary pieces (M&A, board members, customers), and trusted service providers. We navigate companies through to successful IPOs, uplists and other capital markets transactions.
Full Unedited Transcript
Hey, I’d like to welcome you to another episode of Mission Matters. My name is Adam Torres, and if you’d like to apply to be a guest on the show, just head on over to missionmatters. com and click on Be Our Guest to Apply. All right, so today my guest is Steve Kahn. He is a partner over at Ocean Street Partners.
Steve, welcome to the show. Thanks, Adam. Happy to be here. Man, Steve, I’m bummed. You went to the MicroCap conference, you got to meet the other co founder there, Chirag, and I wanted to go, I got sick, my audience is probably tired of hearing me cry about this already, but I don’t care, so, so how was the conference?
It was good. It was the first conference put on by this particular conference organizer who does other conferences all over the world and does a phenomenal job, and this was their first MicroCap conference, and they ran like a top. Oh, that’s right, this was Charlie’s Inaugural, right? That’s right.
Exactly. And it was great. They always do a fine job. Oh, so you’ve been to previous conferences , with Charlie and his team. Is that right? Oh, yeah. The founder of DealFlow Events Steve Drezner and I go back 20 years and almost got into business together 20 years ago, and I’ve been to almost all of their conferences on all topics.
Wow. That’s amazing. Yeah. we’re pretty new to the relationship. So this is actually our first conference that we’ve covered for them as a media partner. And they actually have another one coming up soon. Oh my gosh. I hope I don’t say this wrong. The activist investor or is it my saying that right?
That’s right. The activist investor conference. That’s right. Yeah, that’s awesome. So we’re just starting to get the information for that one and we’ll be covering that one as well which I’m excited about because I do have to say, even though we’re new to the, to the relationship as media sponsors and partners, but I’ll tell you that the people that we’ve had on the show and booked from the conference, it’s really a a top notch crowd in my opinion.
I mean, I’ve been to a lot of conferences. We cover conferences worldwide, but I was not surprised. Bye. But I was happy that each person we talked to each interview that we did, like it was, it was meaningful. And again, the quality of individuals that are there and the reason they go there for is, interesting in my opinion.
And they’re, and they’re on the level for yourself, Steve why do you normally attend the conferences or why’d you go to the micro cap conference this year, so to speak? Well, I went to theirs because they do such a good job with all the conferences there are a number of micro cap conferences out there and they all have their strengths and weaknesses.
But I knew they would do a really good job and they did very well run. Very good content. You know, very good crowd in terms of, as you point out, really quality people there. The people who attend are As important and more important than the company’s presenting, and on that score, they did a fantastic job.
And that’s why I go to meet new people in the space. I’ve been in the microcast space for 35 years, and I already knew about 150 people at that conference, but I’ve met about 50 more. Oh, that’s amazing. I mean, tell me 35 years and you’re still covering it. Talk to me about that. Come on. Old guy. Yeah, I got into the business in 1987.
So what is that 36 years? 37 years. Oh my gosh. Anyway I have in that time been a real specialist in that along with my partner. And we’ve been investment bankers primarily in that time. We’ve run. Three different fund strategies in that time. We’ve co founded multiple companies and either taken them public or merged them into public companies.
We have been advisors to a couple of hundred companies. We invest our own money in companies. I was an equity analyst in the microcap space, co founder and publisher of a, of a pretty highly regarded good performing newsletter. And that led to a book deal. I wrote a bestselling book on investing in microcaps.
So we, we come at this from every different angle you can and spend our entire careers in this space. What, what keeps you in the microcap space? I’m, I’m always interested when somebody finds a niche or something that is, that they, that they stick with, like what keeps you in the microcap space?
Obviously with your skillset, there’s a lot of different things you could cover. Yeah, the, we think and it’s been borne out that in the microcap space, because sort of by definition, there are smaller companies that have smaller market caps and are more thinly traded, less widely followed, not covered by analyst coverage, we always or regularly find it.
What we consider to be dramatically mispriced opportunities, you know, they don’t trade efficiently that leads to mispricing. And when there’s quality and mispricing, that’s where we want to go, get involved, be helpful and try to help realize a fully valued sort of get a fully valued deal in something that we think is otherwise priced cheap.
Yeah. And just to, just to juxtapose that I mean, this is a money crowd that listens to this show, so not, not to worry, but I do like to, I do like to juxtapose. So in comparison to like a Tesla or something else where everybody’s covering it, there’s like thousands of this and that. Like, yeah, I mean, whether it’s priced accurately or not, or whether the volume is dictating the price, I mean, that’s beyond this conversation, but in general.
There’s less information about some of these companies out there. So you have the opportunity to find more I’m not going to say deals, but more, you know attractively priced assets if you’re in, in, in the acquiring mode. Am I, am I off on that? No, you’re exactly right. In fact there’s a term I use in my book and I’m not pitching my book.
I’m just saying this. You can pitch your book. What’s the name of it? I love, I love pitching books, man. I’m a big fan of authors. Please name, name, drop that book for me, please. It’s called microcap magic. Why the biggest returns are in the stocks you’ve never heard of. And it gets to that. Yeah, it gets to that point.
You just brought up, which is sort of a name when companies are are narrowly held, poorly understood and illiquidly traded. They are sort of by definition. You know, the, the, the story isn’t, isn’t sort of perfectly understood. And I call that information arbitrage, right? I want to, I want to find companies that are trading thinly.
Nobody’s looking at them. When information is narrowly distributed and sell them when the story is widely understood, information is widely distributed and this, then the stock gets fully valued at that time. A company like Tesla, you point out there’s nothing. Anyone on the planet knows about Tesla that the guy next door doesn’t know.
Yeah. Other than Elon, and depending on where you live, right? Other than Elon, he can’t say, right? That’s illegal. Yeah, exactly. And so, you know, it’s just, if, what’s the, what’s the the odds that you’ve got the, you know, the angle on Tesla when there’s 40 analysts covering it, but you’ve got the right people.
Take on. Mm. And, and that’s you know, that’s, that’s, that’s why, you know, it trades sort of perfectly, and when I say perfectly, I mean there’s enough volume and interest and, and understanding of the story that all the various factors even out in its trading and in, in its valuation, which is Mm-Hmm. The risk is priced in.
The opportunities are priced in the, the interest rates are priced in the, the adoption of electric vehicles is everything’s already priced in. Yeah. Whereas. You get a micro cap name. That’s nobody covers. You’re not a single analyst covering them. They trade 100, 000 shares a day at you know, not even 10, 000 shares a day at a dollar.
Nobody’s watching. No matter how good that company is, it simply isn’t going to be fully priced or efficiently traded, efficiently priced until the story gets out there wider. Talk to me about the leadership side of things. I also find that the interesting part of microcap for me, Is that when you, for example, when you’re at the conference, I’m sure you met some CEOs, some companies there and otherwise, and it’s so like the access and the understanding and the ability to get to know the company and to have access and to see, you know, obviously the dream, right.
Is went and be public. The team of the CEO has to be, to get bigger. Or if they wouldn’t take their company public in the first place, assuming they founded it. Like talk about the access and like getting to know the CEOs and like what that’s like, and to see these companies go from, you know, small cap or micro cap to, you know, to, you know, one day being listed in NYC or otherwise, like talk to me about that.
I know you’ve seen a lot in the last 35. Yeah. I mean, you have to got to understand not only what the market opportunity is and what the solution in this particular company is bringing to address that market opportunity, but you have to know who’s the team that’s executing against that plan.
And the CEO obviously is the presumed leader, visionary, driving force behind that. And so, yeah, to be at a conference and be able to meet some of those guys is valuable to understand, you know, what makes this particular person tick you know, is, is there. Telling of the story from the horse’s mouth. Is that the same way you understood it?
And is there passion there? Is there fire there? Those are all important things. I can tell you that And you pointed it out. They wouldn’t be public unless they thought they could make it big But, you know, a lot of guys get talked into going public, right? Promoters. Yeah, promoters come to them and say, Hey, I can merge you into this deal and I can, Once you’re public, you can raise money really easily, And then you can, And it’s you know, Self serving to the promoter to get an interesting story.
Publicly traded because they’re the ones who end up sitting with a bunch of free trading shares, and they’re the ones who can sort of Be in a deal at zero cost basis and really Don’t care what the stock does over time because they can make money Off the promote they call it right and a lot of these ceos are completely ignorant to that And they often step in it, right?
And they have real difficulty navigating what it is to be a microcap public company. And you know, that’s where we sort of found our value proposition is, you know, we invest in and advise these companies. We put capital in, but we also more importantly help management navigate. who to deal with and not to deal with, you know, what kind of deal is a bad deal?
What kind of deal is potentially fatal to your future? What underwriters, what securities council, what auditors you should be using based on your stage, based on what your next step is and helping them sequence all that and and navigate that, keep them on the rails so that they can focus on running the company.
You know, we kind of take that that task that responsibility off their hands in those deals that we think are mispriced so we can get in as a good you know, valuation and that we can be additive to over some reasonable period of time. Talk to me about the team, like what you just mentioned, because you listed off quite a few and and I think it’s interesting because it’s, it’s complex.
Like, talk to me about the team and the importance. The team, the company team, the issuer team, the issuer team, the whole what you’re advising on. So whether it was the right accountant and the right issuer, like the whole team, that ecosystem to make sure that it’s done right. And that the CEO can actually focus on what you said, growing the company.
Exactly right. And almost every company we get introduced to, meet at a conference, chase down because we’ve seen them somewhere and we like what they’re doing and want to, you know, see if we can find a place for us to be helpful. They’re all deficient, right? When you’re Tesla, you got, you got all the resources you need.
You got all the people you need to get all the out at the external resources and service providers. You need when you’re a small company and you don’t know any of the players in the space again, you can often get led around by the nose by someone who maybe doesn’t have the company’s best interest at heart.
And so we’re often coming into a deal and saying, okay, that’s the wrong work. You’re spending too much for an auditor. You don’t have to have Ernst Young doing your audit because you don’t need that for where you are in your life cycle. And not to smash Ernst Young, they’re a phenomenal firm, but I don’t need to be spending 500 a year on my audit when I can spend, you know, 150 over here.
Or or attorneys, right? A lot of times these companies come with some legacy security, some legacy attorney that they were with before they were public, that you know, that was the CEO’s buddy from college or whatever the case may be. And it’s just not the level of. Capabilities and competency they now need as a public company to go forward.
It’s the same with investor relations. It’s the same with PR. It’s the same with, any number of things that sort of tell the story of the company to investor. Audience right? Whoever that is at the time, whether it’s more retail when they’re smaller or more institutional as they grow.
Yeah. Talk to me about the just the overall macro side of the micro cap market right now. What’s going on? It’s been really difficult last 18 months. It’s been getting more and more and more difficult over the decades that we’ve been in it. There have been a number of sort of mechanical changes to trading, you know, changes to how these kinds of small cap, micro cap names can be traded, bought, solicited.
Those have all put a damper on the price. Liquidity and accessibility to these investment opportunities for the average person. Regulatory things like sarve oxley and things like that, that have put additional burdens on these small companies that add to cost and add to risk, and add to you know, difficulty to navigate.
Mm-Hmm, . This has all gotten worse over the years and it’s become harder and harder and harder to be a microcap company, which. Again, it’s where we’re trying to step in and provide value to help navigate out of being an unknown small, you know, microcap company to being a better known widely traded, you know higher valued NASDAQ or NYSE company.
Yeah, that’s great. , and I think about the like just that whole ecosystem you’re talking about and like, if you’re going in there as a as a person that’s running, you know, their first public company or taking their company public and, and thinking about that, and then at the same time, managing what you just talked about, the macro side of what’s going on when you choose to go this route there’s a lot.
There’s a lot there and especially with the cost and everything else. So there’s, there’s a lot there. Where do you suggest that, you know, people that are thinking about going that route, where do you think, where do you suggest they start? You’re talking about companies thinking about going public. definitely have to have somebody on your team on your side of the ledger who’s either been through it before or, well, definitely been through it before, you know, a lot of times companies just rely on their attorneys which.
You know, can get you part of the way there, and they’ll certainly know all the regulatory landscape to help you navigate. But the actual market mechanics, the market side of the equation, the stock side, the investor side that you, you know, I just strongly advise you get somebody who’s who’s been. In at a long time, I can see around corners.
That’s the real issue is that you think when I say you, a CEO might think that, oh, I’m just going to do this thing here. And that’s, you know, it’s it’s a little solid thing I’m going to do. But what they don’t understand is that it’s, it’s, it’s informing or impacting whatever’s next. They’re maybe making the next round of financing harder.
Or they’re positioning themselves to not get market support of their, you know, their stock in the open market because of this one little thing they did that they thought was not a big deal. And there’s a million things like that. You know, there’s a lot of moving parts and you’ve got to get them right and you’ve got to sequence them right.
Now, now I know you didn’t come on the show to promote your book, but I like promoting micro micro cap magic. Why the biggest returns are in stocks. You’ve never heard of. What do you hope your readers get out of this book? Just an understanding, you know, there’s a lot of anecdotes in there which I’ve been told makes it very readable.
It’s like very accessible because it’s actual stories that have happened to me and people in my life in this business. And, you know, an example is, you know, when. You know, the guy next to you at work says, Oh, I heard this tip on X, Y, Z, you know, they’re gonna or whatever. And you’re like, Oh, wow, that’s a cheap stock.
And if that’s the rumor, then yeah, I’ll buy some. And my point in that, in the book is that, listen, By the time you’re hearing about it in your cubicle from the guy next to you, it’s over. Whatever it was is played, right? And there’s a lot of very nefarious things that can happen in this microcap.
World that you you need to understand as an investor. You need to understand really based principles of sort of fundamental analysis of of these small company stock. Just because they’re small and just because the stock is cheap doesn’t make. When I say cheap, low priced doesn’t make the investment cheap, right?
It all has to do with relative to the valuations, the larger peers are trading at the same exact metrics as the smaller peers, meaning that, you know, just because the stock’s 5 cents. Doesn’t make it cheap if there’s a billion shares outstanding, right? And these are some of the sort of basic things that a lot of sort of unsophisticated investors don’t understand, right?
Is that there’s there’s, there’s there’s again, a lot of moving parts, a lot of different ways you’d have to look at each opportunity. And I, I feel like I cover most of those in my book, but I’ll tell you, there’s a new edition coming out because even this far into my career. Every year I’m like, Oh, that needs to be a new chapter.
Oh, that’s great. When, when is the, I’m putting you on the hook for this one. When, when is it coming out? Come on. You don’t have to give me the month, but is it coming out this year? Yeah, I’ll get it. I’ll get it done this year. I’ll get it done this year. All right. Well well we’re waiting for it over here.
For everybody that’s listening to this, you can head on over to Amazon and you just type in micro cap magic comes up super easy or Stephen Kahn. So the full name spelled out on the author page there. So all works there. Well, Steve, Hey, I just want to say, appreciate you coming on the show today and sharing some of your expertise and what you do at ocean street partners.
If somebody’s listening to this and they want to continue the conversation or to connect or learn more, how do they do that? Sure. So if you’re an issuer, or you know an issuer or a company that is either public and is experiencing some of these difficulties of accessing money or getting eyeballs on their, on their story or getting the right team together to help advance the opportunity forward, you can reach out to me or, We lead investments into these companies that we get involved in and drive.
So if you’re a high net worth accredited investor and you want to look at our deal flow and come inside by side with us on some of these deals, you can reach me by email steve at ocean street partners. com. Fantastic. And so again, thank you, Steve. And to the audience as always, thank you for tuning in.
If this is your first time listening to this and you haven’t hit the subscribe button, this is your special invitation. Hit that subscribe button. Leave us a review if you’re feeling extra friendly. Sure does mean a lot to us over here. And we have plenty of upcoming guests that we do not want you to miss.
So definitely hit that subscribe. Steve, thanks so much again. I’m, I’m going to have to catch you at the next micro cab conference. Appreciate you, man. Sounds good, Adam. Thank you, man.
