Savvy investors in microcap stocks may gravitate to specific sectors, but the success stories are most often told by those who focus on six key metrics for evaluating a potential buy. Venture capital advisor Kai Sato, the founder of Kaizen Reserve, is also a strategic advisor to select early-stage companies, including publicly-traded microcaps. Here, he offers insights on how microcap CEOs can tell their story by sharing the information most important to prospective investors.
What is your company’s culture? Why is your company a great place to work? Describe what makes someone a cultural fit.
Provide at least one quote from an employee about your culture, including their full name and title.
“Until I came to IBM, I probably would have told you that culture was just one among several important elements in any organization’s makeup and success — along with vision, strategy, marketing, financials, and the like… I came to see, in my time at IBM, that culture isn’t just one aspect of the game, it is the game. In the end, an organization is nothing more than the collective capacity of its people to create value.” – Lou Gerstner Jr.
Who are your customers? Can you describe your target customer profile in great detail? What customer problem does your business solve? How painful is it for them?
“The most important single thing is to focus obsessively on the customer. Our goal is to be earth’s most customer-centric company.” “We’re not competitor obsessed, we’re customer obsessed. We start with what the customer needs and we work backwards.” – Jeff Bezos
What makes your product so special? Have you achieved product-market fit? Are the profit margins attractive enough to scale into a formidable company? Does it have any competitive advantages (e.g. superior technology, network effects, or brand)?
Explain the single leading differentiator of your product offering.
“You can always feel when product/market fit isn’t happening. The customers aren’t quite getting value out of the product, word of mouth isn’t spreading, usage isn’t growing that fast, press reviews are kind of ‘blah’, the sales cycle takes too long, and lots of deals never close. And you can always feel product/market fit when it’s happening. The customers are buying the product just as fast as you can make it — or usage is growing just as fast as you can add more servers. Money from customers is piling up in your company checking account. You’re hiring sales and customer support staff as fast as you can. Reporters are calling because they’ve heard about your hot new thing and they want to talk to you about it. You start getting entrepreneur of the year awards from Harvard Business School. Investment bankers are staking out your house.” – Marc Andreessen
What makes your market so attractive? How is your company’s positioning in the market? What tailwinds or vectors do you anticipate in your market as you look ahead?
Provide an estimate of your addressable market over the next 24 months.
“When a great team meets a lousy market, market wins. When a lousy team meets a great market, market wins. When a great team meets a great market, something special happens.” “If you address a market that really wants your product — if the dogs are eating the dog food — then you can screw up almost everything in the company and you will succeed. Conversely, if you’re really good at execution but the dogs don’t want to eat the dog food, you have no chance of winning.”- Andy Rachleff
What makes your leadership team so special? Is it rational? Has it consistently done what it’s said that it’s going to do? Has it ever owned up to a mistake that’s been made? Are you good stewards of capital? What makes your leadership team well-aligned with common shareholders?
Provide a detailed breakdown of your leadership team’s total compensation and also share an example of when it has defied the institutional imperative.
“I then thought that decent, intelligent and experienced managers would automatically make rational business decisions. But I learned over time that isn’t so. Instead, rationality frequently wilts when the institutional imperative comes into play.” – Warren Buffett
Who are the company’s major shareholders? How many shares outstanding are there, including any warrants, options, or similar equity instruments? How much of the company does the leadership team own? How much do the employees own?
Provide a detailed breakdown of your company’s capitalization table and show why new investors should be excited about becoming a part of it.
“Show me the incentives and I will show you the outcome.” – Charlie Munger
Kai Sato is the founder of Kaizen Reserve, Inc., a venture capital advisory firm for corporations and family offices, helping align their existing assets with synergistic startups. He’s also a strategic advisor to select early-stage companies, including publicly-traded microcaps. He’s the author of “Marketing Architecture: How to Attract Customers, Hires, and Investors for Any Company Under 50 Employees.” He has been a contributor to publications like Inc., Entrepreneur, IR Magazine, Family Capital and HuffPost; he has also spoken at an array of industry conferences, including SXSW and has been quoted by publications like the Associated Press and The Los Angeles Times. He is also the board chairman of the University of Southern California’s John H. Mitchell Business of Cinematic Arts Program. Follow Kai on LinkedIn www.linkedin.com/in/kaisato or X @KaiDaywalker.