The next step involves determining the rate of cash consumption, the presence of offbalance-sheet liabilities, the quality of management and the workability of the business plan. Some investors prefer to take a more active role in realizing a company s balance-sheet value. Robert Chapman, of El Segundo, California-based Chapman Capital, has spent years investing in distressed situations. By the time you get to it, management has sucked it dry. Preview Systems is just the worst example I ve seen so far.
Chapman warns further that corporate governance in the busted Net arena is often an illusion.
Many of these companies are still effectively startups and are now staffed and backed by their venture capitalists. There are typically no outside directors. Or, maybe the venture capitalists are unconcerned with oversight because they ve got future deals in mind. Other value players take a broader approach, owing to the illiquidity and unpredictability of these penny-stock investments. John Rolfe, of Argand Capital in New York, has earned solid returns by investing about 10 per cent of his firm s capital in just eight to 10 names.