My Experience Investing in a Start-Up Company, Part 3

(This is the third part in a series which starts here.)

So in the early 2000’s, having sold some of my shares of Virtra Systems and created a “free position” where I had already taken out all of the money I had put into the company and a nice profit lagnaippe, I decided to let the rest of the position ride.  I figured I’d wait for the company to move into the multi-dollar per share range, at which point my position would be life changing.

The company had changed its business model from making custom virtual experience systems to making firearm training simulator for law enforcement and military training.  The company would film scenarios and then provide scenarios projected on multiple screens so police and soldiers could practice use of judgement in high stress situations.  Some of the neat innovations included systems that would surround the trainees so threats could come from behind, the ability for trainees to use their own weapons with realistic recoil provided by CO2 cartridges, and the development of a ThreatFire belt that gave the trainee a painful zap if he were shot.

Each time that the company would sell a system, the stock would jump up in price but then sink back down over the following weeks.  It also seemed like there was a lot of custom work involved where most of the money earned from the sale of the system was used to shoot new scenes, put hardware together, and other expensive tasks.  Administrative and sales expenses were also high, resulting in a loss each year.

The company was going through cash quickly.  I wished that they had a business segment such as entertainment centers that would generate regular cash to feed the development of new products, but that was not the business model.  At some point they had gone to venture capitalists who now had a large loan to the company.  Each year the auditor who reviewed the report made the statement that there was a strong chace the company would not survive another year.

Because the share price was so low and because it would reduce filing costs, the company gave up their listing on the NASDAQ and went to the “pink sheets” where individuals would hype companies in an effort to sell out quickly, taking advantage of the ability to move share prices with just a little money for these microcap companies.  The share price sank and sank.  It started sitting around 5 cents per share and rarely moved, even when new orders were announced.  At one point it sank further, falling as low as less than a penny a share.  I bought more shares as it sank, figuring I could reinvest some of my gains from before.

The shares recovered a bit as they started selling a few more systems, moving into the 5 to 8 cents per share range.  Seeing the shares hover below 5 cents for a while, I considered buying more shares.  Then suddenly back in late summer the shares jumped on news that the company had their best quarter ever, earning more than a penny per share.  They went from having negative shareholder equity to positive.  The shares moved up to the 13-15 cent range, nearly tripling my position in a few days.

At this point they have stayed in the 13 cents per share range for several weeks.  Given the 1 cent per share earnings, that is a very reasonable P/E ratio of 13.  They are starting to have police force and military customers from around the world.  Their product line is impressive and they are starting to get some bigger customers.  Perhaps their time has finally come.  But then again, I’ve been here before.

I am now completing my 21st year since buying into Ferris Productions in Bob’s apartment.  That’s long enough for a baby born at the time to now be a drinking adult.  And that brings up a final lesson learned:

Investing in a start-up is a very long-term investment.

The venture capitalists you see on Shark Tank are buying into a company after it has already made a name for itself and is growing.  They are also paying hundreds of thousands of dollars.  If you are a small individual investor, you won’t have that kind of money to put at risk.  You’ll therefore need to buy in much sooner when the price is cheap.  You need to be able to wait a long time to realize a profit, if ever.

It is not serious investing  as advised by other posts in this blog – it is a lottery ticket.  Kind of like the Irish Sweepstakes, which was really more of a way to give hope and let people who had little dream.  It is fine to use a little of your money for such dreams.  For the rest, buy established company stocks and mutual funds.

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Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

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