Tricks of the trade
There are a number of ways to lose money in equity investing. We have seen and committed most of them, and, in our more youthful versions of ourselves, have been tricked into them. Over the years we have started building a list of top red flags to look for, which we think serve as leading indicators of trouble ahead.
We are not saying that all companies and all sell-side houses commit these practices (we look for ones that don't), but we see it regularly enough to wonder. Certainly, if the incentive is high enough to sell overpriced equity to unsuspecting investors (particularly in a bull market), then you can be assured it will occur.
The majority of the below normally applies more to unlisted investments, but there is some crossover into the listed space as well.
1) Valuation is not disclosed
Often presented as "we are raising $10-20m" but silent on what pre and post money valuation the raise is being conducted at. Sometimes there is a legitimate reason for this like, the company is soft sounding, and the raise price has not been finalised. However, we often see that it is to steer the potential investor to focus on the story and people rather than the price of entry. The price of entry is one of the most important facts (if not the most important) when conducting due diligence on a company.
2) Hockey stick growth forecasts
A cliche, but we often see companies present a 4–5 year forecast period which contains exponential growth in revenue and earnings. Something that in our experience is frequently talked about but much less often achieved. It's good to see confidence in the business, however, it often detracts from credibility when this confidence is put so bluntly there on a page.
* We like growth companies and are supportive of founder ambition, however in this case we are perplexed with $1m revenue in 2023 going to $111m in 2027, an uplift of c.100x. Easy to say, hard to execute.
3) Name changes
A rebrand or name change often occurs without much accountability to why. Too often it's because companies have toasted shareholders capital and need to raise money at lower prices. In our view, it's too easy for a company to simply rebrand, change their ASX code, and the memory is wiped. It makes it a little more difficult for investors to easily due diligence the management and the company.
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Tom is a co-founder of VP Capital and brings over 10 years’ experience in the investment banking sector from Goldman Sachs, UBS and ANZ, where he worked on over A$10bn of transactions. Tom is currently a Portfolio Manager of VP Capital Fund I.
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Tom is a co-founder of VP Capital and brings over 10 years’ experience in the investment banking sector from Goldman Sachs, UBS and ANZ, where he worked on over A$10bn of transactions. Tom is currently a Portfolio Manager of VP Capital Fund I.
Tom is a co-founder of VP Capital and brings over 10 years’ experience in the investment banking sector from Goldman Sachs, UBS and ANZ, where he worked on over A$10bn of transactions. Tom is currently a Portfolio Manager of VP Capital Fund I.
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