The importance of trading cannot be underestimated as it relates to the formation of capital for early-stage enterprises. "There's no doubt individual investors have an appetite for investing in early-stage companies," says Klein. But problems arise because individual investors, unlike large institutions and venture capitalists, need to be able to sell their shares from time to time. They need the liquidity that trading provides.
While the Nasdaq stock market and the American Stock Exchange (Amex) have both made well-intentioned overtures to provide trading liquidity for what amounts to public venture capital for early-stage companies, it's difficult to say they've met with success. Amex's Emerging Company Marketplace was quietly closed down. The lower tiers of the Nasdaq stock market, such as the Pink Sheets or the Bulletin Board, though available to very tiny companies, often introduce a new set of challenges that ultimately prove disruptive to the process of building the business (see "Raising Money," June 1996 ).
"We were approached by several securities firms that wanted to make a market in our stock when the deal was done," says Klein, "but many small companies' [stock] either languishes in the market or the price whipsaws--both of which distract management, make it difficult to raise additional capital, or both."