Lowest bidder

Why not to Cater to the interests of the Lowest bidder?

A common pitfall of investing, is to believe that the largest investor percentage-wise should have the loudest voice when it comes to decisions and direction in a nascent endeavor.Let’s analyze a hypothetical timeline of events which may mirror real life scenarios closely. Maybe some you have seen this scenario or parts of it play out with your own eyes.

Let’s start with an endeavor showing promise and traction. A long term investment which many will be part of for many reasons. A high risk - high payoff endeavor maybe, let’s say that at this point the share price is 50$.

Investor A is the largest investor percentage-wise in that given enterprise when compared to other investors maybe 20% total. Other investors have a lower amount of stock percentage-wise but in total the rest of investors keep a larger amount of stock when compared to investor A. In some cases, investor A doesn’t hold even remotely close the amount to be the majority but since it is the largest investing entity, it’s more often than not, been paid more attention than the rest of investors. Mainly the reason is that investor A is feared in case he sells his share, others fear the price would take a hit if investor A were to sell. The fear would be to have investor A sell and drop the price to 20$

More often than not, investor A starts to participate more and to take a protagonist role in the decision making of the enterprise. Often backed by smaller investors, participants or other active roles within the enterprise, C-suite, execs, etc.

However, by addressing the concerns and wishes of only and exclusively investor A and its clique (and many times, not even a clique is present) the rest of investors and shareholders, lose interest, lose respect, lose a positive view of the endeavor as the direction mainly favors investor A.

Investor A often uses the endeavor to further its own projects, to extract value therein and also to give its clique of supporters a position within the endeavor as they would guard the interests of investor A over the rest. This undoubtedly disenfranchises other investors. First, investor B will drop the endeavor and sell off get a return of investment. Then, seeing this pattern continue we have investor C drop the endeavor in favor or a return or just to break even. The C-suite catering to the interests of investor A exclusively has now caused the sell of investor B and C.At this point the share price could be 20$ thus already having the feared scenario without even having investor A sell his stock.

By losing investor B and C, investor A often doubles down on his own plan and strategy. Losing strategies often include an excess of marketing, senseless expenditures without closing any new businesses, catering to unreliable partners or most commonly having a high burn while losing current and old business partners not to mention the smallest investors. Now investor A potentially controls the C-suite and if the endeavor is large enough the PR, BD and investments.

Investor A, may even see the endeavor as a personal piggy bank which can be extracted in case of need. If other enterprises handled by investor A are having a hard time, investor A can see the endeavor in question as an easy way to increase the viability of the struggling enterprise of his.
By looking at this, investor D can also predict the direction the endeavor is taking and will start to also sell, maybe even to cut loses. Bear in mind that we are witnessing a lose in confidence of convinced investors, the ones that once thought this stock would be a medium-long term investment. But considering the viability that they see, they might prefer to cut the loses. The largest the return the easiest it is for investors to just cash out and never look back. At this point the share price could be 12$ thus already having a worst case scenario even having investor A sell his stock.
By losing all the “smaller investors”, investor A now holds the majority but it has also become the largest holder of an asset that has become illiquid, potentially being unable to sell all his share at once due to lack of liquidity.

Investor A and his plants might start selling secretly while publicly proclaiming that they have an incredible plan, promising future and other justifications hence sucking as much liquidity as possible as exit liquidity.In this final stretch, investor A will dump all the shares possible while possibly looking for new strategic partners to continue his own endeavors. Hence being at this point the lowest bidder of the endeavor. At this point the share price could be 1 or 2$ thus leaving the promising endeavor in a worse-than-worse-case-scenario thanks to a lack of structure and to the fact that catering to the lowest bidder is more often than not a losing strategy..