What Is Public Venture Capital? A Guide to Early-Stage Public Companies

Most people hear the words venture capital and think private startups, Silicon Valley, angel investors and VC funds.

There is another version of that world that gets far less attention, and it happens in the public markets.

This is the world I grew up around and, eventually, the world I went to work in myself. I’ve spent more than 20 years in and around early-stage public companies as an executive, director, strategic advisor, capital raiser and investor. I’ve seen companies work, companies fail, companies reinvent themselves and companies go from almost nothing to something the market suddenly cares very much about.

When people ask what I do and I say public venture capital, I can usually tell from the look back that I need to explain it.

The easiest way I know how is this: a small public company may have a ticker symbol, but underneath the ticker it can still be a venture.

There may be an entrepreneur trying to build a mine, commercialize a technology, acquire an asset, develop a new product or prove a business model. It may be pre-revenue. It may need years of additional capital. It may still be trying to answer the most basic question any venture has to answer: does this actually work?

The company just happens to be public.

Venture capital isn’t only private

Take two entrepreneurs building similar companies. One stays private, raises from friends and family, angels and eventually venture funds. The other starts privately too, but at some point enters the public markets and begins raising capital as a public company.

The journeys can be surprisingly similar. Both need good people. Both need a worthwhile project. Both need capital. Both need to hit milestones. Both need investors willing to take risk today because they believe the venture could be worth substantially more tomorrow.

The difference is the structure around the ownership and the capital. That difference creates an entire ecosystem.

On the private side, ownership is generally concentrated among founders, employees, angels and funds, and liquidity may not arrive until a sale, later financing or eventual public offering. On the public side, the company is already operating inside a market where its shares can trade, its valuation is being continuously expressed by buyers and sellers, and it can return to the market for additional capital as the venture develops.

That liquidity is one of the reasons I’ve personally gravitated toward the public side. It doesn’t remove risk. Far from it. But it changes the nature of the risk and gives investors options they often don’t have in a private company.

A public company can still be very early

I think people sometimes assume that public means mature. That’s obviously true for a lot of the companies we know. But the junior markets are a different animal.

A small exploration company on the TSX Venture Exchange can be public before it knows whether the property it is drilling will ever become a mine. An emerging technology company can be public while it is still working toward meaningful commercial adoption. A life-sciences company can be public while major parts of its thesis remain to be proven.

You aren’t necessarily looking at a miniature version of a mature public company. You may be looking at a startup with a public capital structure.

And once you see it that way, a lot of the market starts making more sense.

What I’m actually looking at

Over the years I’ve found myself coming back to the same basic things when I look at an early-stage public company: the people, the project, the structure and the capital.

Who is actually building this thing? What have they done before? Can they execute? Can they finance? Do I trust them?

What does the company actually own or intend to build? Why does it matter? What has to happen for that asset or business to become substantially more valuable?

Then there is the structure, which I think is one of the most underappreciated parts of small-cap investing. How many shares are out? Who owns them? What did earlier investors pay? What options and warrants exist? What debt exists? How much dilution could be coming?

And finally, capital. How much money is in the treasury? What does the next meaningful milestone cost? How long does the current money last? Can management raise the next round, and on what terms?

A great project inside a terrible structure can still be a terrible investment. A great story with no money can stall. A pile of cash with the wrong people can disappear remarkably quickly. I want the pieces working together.

Financing is part of the business

For many junior companies, financing isn’t an occasional event. It is part of the business model while the venture is being developed.

A company raises money, uses it to reach a milestone, hopefully creates more value, then raises again from a stronger position. At least, that’s the idea.

Sometimes it works beautifully. Sometimes the milestone disappoints, the market changes, capital dries up or the next financing comes at a lower valuation and creates significant dilution.

This is why I don’t automatically think dilution is bad. I want to know what the dilution buys.

If a company issues shares and the money accomplishes very little, that’s a problem. If those shares finance a discovery, a transformative acquisition, commercial adoption or another milestone that materially changes the value of the venture, the financing may have created far more value than the dilution cost.

The question I’m asking is: what is being created with every new dollar and every new share?

Catalysts matter because they change the probability

Small public companies often move around milestones. Drill results. A permit. A commercial contract. Clinical data. A financing. An acquisition. A new management team. A product launch.

Traders understandably care because those events can move the stock. I care about something underneath that too.

Does the catalyst change what the company may be worth, or change the probability that the company can become what management says it can become?

A press release is not automatically progress. Activity is not automatically value creation. I want to know what changed.

Where penny stocks fit into this

I wrote a book originally called The Penny Stocks Bible, later reworked as Navigating Penny Stocks. The title has always been a little awkward for me because “penny stocks” carries a lot of baggage.

There are absolutely bad actors in this business. There are also legitimate entrepreneurs, geologists, engineers, executives, investors, lawyers and financiers doing serious work on difficult, speculative ventures. The risk is real because the ventures themselves are risky.

So I increasingly think about penny stocks, microcaps and small caps as one part of the broader public venture-capital universe rather than the definition of it.

The ticker and share price are the visible layer. The venture underneath is what interests me.

Investing in the company and trading the stock are different games

I can like a company and dislike the trade. I can dislike a company fundamentally and still recognize a short-term trading setup. A fantastic venture can be overpriced. A mediocre venture can have momentum.

When I’m looking at public venture capital, I’m asking what the company could become, what has to go right, what can go wrong and whether the structure gives me an attractive way to participate.

When I’m trading, I’m asking what the security is doing now: where the support is, where resistance is, whether momentum is building, where I enter, where I exit and where I’m wrong.

If you want the trading side, start with How I Think About Trading. If you’re building the company and trying to finance it, start with How to Raise Capital for Your Business.

This series sits between them. It is about understanding the venture itself and the public ecosystem around it.

A marketplace for possibility

This is probably the reason I’ve stayed fascinated by this world for so long.

Public venture capital brings entrepreneurs, ideas, assets and money together while the outcome is still uncertain.

Some companies fail. A lot of them struggle. Some survive for years without really going anywhere. And every so often, the pieces line up and a small company becomes something much larger than it was when almost nobody was paying attention.

I like looking at something early and asking what is hidden in here. What could this become? What would have to happen? What is missing? Who needs to be involved? What capital is required? What would unlock the next level?

That is public venture capital to me. It is capital being deployed against possibility.

From here, I’m going deeper into the individual pieces: public versus private venture capital, penny stocks and small-cap companies, how I evaluate a small public company, how these companies finance themselves, and the mechanics of RTOs, share structures, management teams and catalysts.

This article reflects my experience and opinions and is for informational and educational purposes only. It is not investment, financial, legal, accounting, tax or securities advice, or a recommendation to buy or sell any security. Early-stage public companies can be highly speculative and volatile. Do your own research and get qualified professional advice where appropriate.