WHITEFISH, MT / September 3, 2014 / Venture capitalists are experts at playing the odds. Without their early financial support, companies like Twitter Inc. (NYSE:TWTR) and Facebook Inc. (FB) might have never taken off. These investments paid off handsomely for early investors.
While the success stories make headlines, the National Venture Capital Association estimates that 25% to 30% of venture-backed businesses fail. The majority of the surviving businesses simply return the money and only a small fraction end up producing substantial returns. According to Shikhar Ghosh of Harvard Business School, three-quarters of venture capitalists fail to return investor capital.
Many investors don’t qualify to invest in venture capital funds, with most allocations going to trusts and other larger institutions, so they turn to the stock market to invest in more established companies. The challenge is that many of these companies are already trading at lofty multiples relative to the rest of the market and much of the "start-up discount" is lost.
Large tech companies may trade at lofty multiples, but there may be many bargains trading on the NASDAQ Small Cap or over-the-counter exchanges. While the OTC markets are known for being risky, there are many high-quality companies trading on the OTC, including some that trade at a discount. These companies might present investors with start-up-like upside opportunities.
For example, True Religion Inc. began as an over-the-counter stock trading in the pennies before TowerBrook Capital Partners eventually acquired it for $835 million after just nine years. Monster Beverage Inc. (MNST) is another great example of a stock that started out in the pennies and has since become a household name within the rapidly growing energy drink sector.
Micro-cap stocks are certainly more risky than established companies in any industry, but they may also be less risky than many start-up companies since fully reporting ones are required to make regular filings with the SEC or regulators. The increased transparency means that investors have more information available from which to make informed investment decisions than may be possible with start-up companies.
CrowdGather Inc. (CRWG), a social gaming and online community operator, provides a great case study. Prior to acquiring PLAOR, a social games company, in May 2014, the company specialized in operating online communities like Yuku.com that it aimed to monetize with a proprietary ad platform. After all, according to Zack’s Research, its forum users were 3.5x more likely to recommend a purchase and share new products.
The company’s acquisition of PLAOR marked its move into the high-growth social gaming space, where it plans to leverage its existing 90 million monthly page views and over 9 million monthly unique visitors to grow PLAOR’s user base. Management believes that it can create substantial additional revenue for every 25,000 players it can convert from its traffic.
The social casino gaming industry is expected to grow at a 16.1% compound annual growth rate (“CAGR”) to reach $17.4 billion by 2019. While these figures represent a fraction of the approximately $125 billion casino gaming industry, the proliferation of smartphones and liberalized gaming laws have provided numerous current and anticipated catalysts that could drive its market share significantly higher.
With a market capitalization of nearly $15 million, price-book ratio of 1.0x (vs. 5.3x industry wide), and a price-sales ratio of 4.3x (vs. 7.6x industry wide), CrowdGather’s stock is trading more cheaply than many of its established peers. Management appears confident in its ability to capitalize on its synergies and grow the company, as evidenced by open-market purchases of its stock in the past.
Investors looking for a balance between high-risk venture capital and low-risk tech giants may want to take a closer look at micro-cap stocks. While they usually carry a greater risk than blue chip stocks, they may offer greater potential that’s more along the lines of start-up companies. But unlike start-up companies, fully reporting micro-cap stocks may provide a higher level of transparency to help investor decision-making.
CrowdGather represents a great example of these dynamics:
- CrowdGather operates in a high-growth sector with a modest $15 million market capitalization relative to giants like Zynga Inc. (ZNGA) trading at a $2.7 billion market capitalization.
- CrowdGather trades near its $0.11 per share book value, which means that investors may have relatively low downside risk.
- CrowdGather insiders have been actively purchasing shares in the open market, including CEO Sanjay Sabnani’s recent 70,000 shares purchase made on August 21st, according to a Form 4 filing.
- CrowdGather is fully reporting with the SEC with over seven years of operating history and 5,000+ shareholders, unlike most start-ups.
For more information about CrowdGather Inc., see the following resources:
For more info on Crowdgather Click Here:
Disclaimer: Except for the historical information presented herein, matters discussed in this release contain forward-looking statements that are subject to certain risks and uncertainties that could cause actual results to differ materially from any future results, performance or achievements expressed or implied by such statements. Emerging Growth LLC is not registered with any financial or securities regulatory authority, and does not provide nor claims to provide investment advice or recommendations to readers of this release. Emerging Growth LLC may from time to time have a position in the securities mentioned herein and may increase or decrease such positions without notice. For making specific investment decisions, readers should seek their own advice. Emerging Growth LLC may be compensated for its services in the form of cash-based compensation or equity securities in the companies it writes about, or a combination of the two. For full disclosure please visit: http://secfilings.com/Disclaimer.aspx
Source: Emerging Growth