So, people are telling you that your company has a liquidity problem and giving you a variety of different reasons for it. What contributes to it? Small float? Misunderstood story? Lack of growth? Lack of awareness? Little to no retail?
Each of these can contribute to a lack of liquidity. The belief that simply addressing one of these causes, will solve your liquidity challenge is false. In reality, there are no quick fixes. Improving liquidity requires a multi-pronged strategic plan. Fundamentally, the more compelling and believable your growth prospects, and the more people that know about them, the more liquidity you will have.
If a Company found a cure for cancer there would certainly be demand for its shares, even if it had a small float. Finding a cure represents a massive market opportunity and would certainly generate interest among investors. This is what we refer to as the ‘Myth of Liquidity’. There are several compelling examples that show that solid, well understood companies will be purchased by investors regardless of poor liquidity. Often, we find that investors who cited lack of liquidity as a reason for not buying a stock are just using that as an excuse to mask some other underlying reason for not buying the stock. As a third party, when we act on behalf of these companies via an independent perception audit, results yield answers such as - I don’t understand their growth strategy; they have a weak competitive position; management lacks credibility, etc. Lack of liquidity if often an excuse for another underlying reason that they don’t feel comfortable telling you directly.
Steps to solving your liquidity problem may include:
-Simplify your story. If investors don’t understand it, they won’t invest in it;
-Describe where your company will be in one to three year segments. Provide investors with milestones so they can gauge progress against objectives and assess management’s track record;
-Stick to your guns – don’t try and tell investors what you think they want to hear, you’ll only end up as the flavour of the month and you want a long-term solution;
-Make an effort to communicate with all segments of the investment community – analysts, investment bankers, institutional sales people, fund managers, investment advisors, and retail investors – each has something to contribute to the liquidity equation;
-Perform a perception audit using a third party – get to the root of the issues;
-Be consistent and proactive in your outreach in both good times and bad; and
-Most importantly, be patient. Liquidity does not improve overnight, it takes time to build a following.