daVinci Capital Group Blog

daVinci Capital Group’s unique investment strategy is based upon a disciplined process to build significant shareholder value in carefully selected companies in a sector largely ignored by the institutional investment community: public microCap companies (with market values less than $200 million). While many investors shy away from these microCap companies, we see opportunity to create value.

We know that there are thousands of public companies that fall into this size range and thousands of venture-backed private companies that could be good strategic acquisition candidates for our public companies.

But what are we looking for in these “oceans” of candidates? Here are some factors:

1. Technology/Special Business Models. We are only looking for companies that participate in businesses with technology as an important component, even better if the investment candidate approaches the market with a novel business system concept.
2. Markets. There must be potential for growth within the market segments we look at and larger, stronger, companies must not dominate these markets. Growth factors for the business may include: technology changes, regulatory changes, demographics and other discontinuities. Availability of good strategic public or private acquisition candidates is a plus to the situation.
3. Valuations. We are interested in companies whose valuation metrics are at somewhat of a discount to larger companies in similar businesses.
4. Ability to Benefit by Additional Expertise. Many microCap companies do not have the management bandwidth to implement significant growth plans – daVinci can bring additional resources to bear.
5. Challenged at Present, but Capable of Change and Growth. Our investment candidates do not have to be perfect companies, and rarely would be so – but they must have the perceived ability to make positive changes and have problems that can be effectively addressed. For example, a attractive candidate may have good products but limited distribution channels, or established distribution channels but too narrow a product line or lagging competitiveness because of a missed a product cycle or a critical shift in technology. It’s also possible that a candidate may not have a competitive cost structure for any number of reasons including lack of economies of scale – this particular point may be remedied by strategic acquisitions.
6. Ability to Partner for Growth. We are ready to supply capital and ideas, but we can only do so if we are comfortable that management, the Board and us see the same forward direction. We will not invest in situations of conflicting views, and we will not take “Activist” stances to impose our positions.

We believe our ability to partner with a microCap company with our capital and other resources can create significant increases in share valuation and liquidity – benefiting all shareholders substantially.

There are thousands of microCap public companies with enterprise values less than $200M that are undervalued and largely ignored by the investment community, particularly by institutional investors. There are a variety of reasons for this. First, is their small size alone, which makes institutional investing difficult due to a lack of liquidity and ability of institutions to build meaningful ownership positions. Lack of information is also a problem as few recognized analysts cover small companies.

However, many microCap companies are good businesses with good prospects despite a lack of broader scale investment attention. Often their valuation ratios are trapped well below larger companies in similar business sectors. They are unable to demonstrate to investors an ability to grow revenues and profits at double digit rates because they often lack the sufficient depth of management and often specialized know how, experience and capital to achieve these results.

All of these factors translate to an investment opportunity, and this is daVinci’s niche.

Very simply stated, daVinci seeks undervalued companies that have the prospects for growth, but may lack resources to achieve dramatic growth. daVinci provide capital and assists our portfolio companies in obtaining other missing ingredients to succeed with a growth plan.

Our ideal investment candidate certainly has the capacity and desire for growth and understands that changes will be required for growth – this is a prerequisite. Other factors do not have to be 100% perfect, but may include good products, technologies and market positions, and good prospects for growth via business combinations with other companies.

We call these candidates “platform companies” because they represent solid foundations for both organic and external growth.

Our platform companies may be in any number of technology business sectors. But, sectors we particular like are the medical device, semiconductor and software industries which are populated with a large number of small public and private companies and not dominated by a mid- or large- Cap company who may have already consolidated the market area.

Our preferred potential platform company candidate will have a good basic business, but with valuation ratios (e.g., enterprise value to free cash flow) significantly below larger comparable companies and sufficient stock float without concentrated ownership. Its business model may be challenged, but is not fatally flawed, and deficiencies can be attributed to addressable issues.

A good investment candidate should be strong in at least two of the following areas: 1) product line management, 2) customer base, 3) channels of distribution, 4) technology differentiation with Intellectual Property (IP) protection, 5) opportunity to become a dominant player, 6) balance sheet, or 7) gross/profit margin opportunity. Most importantly the executive team and/or the Board of Directors must be willing to adopt a growth plan and understand the changes that may come with it. Their commitment must be, like ours, to increase value for shareholders. Once we decide to complete an investment, we are dedicated to assist in every way we can to help a portfolio company achieve the objectives of the growth plan.