In the investment world, most great investors had mentors. Not surprisingly, many companies too require good mentors.

Warren Buffett had Benjamin Graham. Stanley Druckenmiller had George Soros.

For some, these experts are there from the beginning, guiding management through growth and around challenges. For most, however, expertise materializes along the growth journey—if they are lucky. It’s often the difference between success and failure, as we have seen time and time again.

Take famous investors like Warren Buffett. He got his start by identifying undervalued microcaps, taking a position, and then strategically advising them on the path to success. As his wealth grew and he left microcaps behind, he continued to apply this same approach: search for a mispriced company, become an investor, and, most importantly, an active advisor of the company.

Buffett is just one of many who have used this approach. In fact, it’s a strategy employed by most highly successful investors as they know what makes a good investment and how to steer a company in that direction.

Assuming a microcap has the criteria we look for—year-over-year revenue growth per share, at least two quarters of profitability, a good market fit—attracting these types of investors should always be a top priority.

Capital Market Sponsors

These experts provide many important roles, and in the microcap world one of the most crucial is the knowledge to navigate the markets. We often refer to them as capital market sponsors, as they provide the guidance many companies don’t even realize they need.

You heard that right: most small companies don’t know what they are missing, as the type of expertise needed to avoid financial pitfalls is gained through years of industry experience, and the individuals with this type of experience are limited.

For many companies, a lack of proper guidance means making the same mistakes repeatedly and, all too often, having underwhelming financing terms because the smaller a company is, the less leverage they have to gain an advantage.

There are many good reasons to want capital market sponsors on your side, including:

• Expertise – just like good management comes from years of experience, so do good investors. They have been part of the few companies that achieve true success, having experienced the many pitfalls along the way. They know how to navigate markets as they have done it multiple times, with skin in the game.
• Access to capital – capital market sponsors are, by definition, not lacking for money due to their success, and because of this they are able to provide avenues to seek capital that many small companies don’t have access to.
• Market liquidity – in the same way that these investors can open better access to capital, they can also provide much-needed liquidity, paving the way for larger investors to get on board and helping lower-quality investors get out.
• Credibility – Who would attract more attention, the retail investor down the street or Mark Cuban? While it’s an extreme example for a Canadian microcap, the point stands. If you can attract a top investor, attention will soon follow.

Examples of Success

A historical example is Warren Buffett’s partnership with Katharine Graham at The Washington Post. When Buffett joined the board and became a significant shareholder, his guidance played a crucial role in stabilizing the company and enhancing its financial standing during challenging times. His involvement not only boosted investor confidence but also helped transform the newspaper into a highly profitable enterprise, ultimately increasing its value significantly.

Likewise, Peter Thiel’s early investment in Facebook, along with his strategic input, was instrumental in shaping its growth trajectory. As one of Facebook’s first outside investors, Thiel provided both capital and advice that helped the company scale quickly and navigate the complexities of becoming a public company.

Smaller companies can look to these examples as a blueprint for leveraging the right investors. While the scale may differ, the principles remain the same: having knowledgeable and committed shareholders can accelerate growth and elevate market perception.

How to find them

Knowing if a company has a capital market sponsor can be as simple as digging into the share structure. If you see a sizable position (e.g., ~10%) allocated to a well-known, successful investor, chances are they are playing a key advisory role and you have a reason to be optimistic.

Of course, this assumes deep knowledge of the microcap space, including who the successful investors are in the first place. Most retail investors do not get anywhere close to this level of knowledge, nor do many management teams. To add to this, the Warren Buffetts of the world are not in this space, so instant name recognition is relegated to a small handful of people.

And while companies can hire directors with good experience, it’s not the same as attracting an expert with skin in the game. To repeat, these experts are not hired—they are attracted as a shareholder. They are immediately invested in the success of your business and will have a shareholder mindset from the start.

The catch?

The catch to having the right expertise onboard is that it could come at a cost. This could be a favorable placement for a key investor, at a discount. Placing a key investor with an illiquid stock can also present challenges, as can the simple fact that these investors will give management advice that may be hard to swallow.

But what’s more valuable, top dollar for a financing now or a slight discount for a key shareholder who can help attract other quality shareholders and guide you to better growth prospects and ultimately higher valuations down the road? It’s a question that is often only answered in hindsight, but thankfully there are many examples.

Quality Shareholders = Quality Company

It all comes down to having quality shareholders.

In addition to meeting the investment criteria we follow, a company with a strong and committed shareholder base has a better chance of providing stellar returns.

These good shareholders are the people who come from a strong financial position and are less likely to sell for a quick profit. They are knowledgeable about how the market works and, by taking a vested interest, they will ensure a company avoids common mistakes. They absolutely invest in mispriced stocks, and they don’t buy junk, meaning their very presence is usually a bullish sign.

We aspire to be part of this community of sought-after investors, and we encourage you to follow us as we look for great value in the market, connecting with great companies and like-minded investors.