That's right, to escape small cap hell you need to have a market cap over $2 billion.

What Does It Feel Like To Be In Small Cap Hell?

Lonely. Nobody cares about your little venture. To the team that endured blood, sweat, toil and tears to get to $50 million in revenues, and then go through all the SEC gyrations to become a public company, that is tough to accept. Here is what you can do.

1. Hire a strong investors relations team and send out lots of press releases, be accessible to the press, go on road shows and speak at conferences for investors. Your IR team can take care of the mechanics, but this is also a big time-suck for the CEO and CFO. (And you cannot say, "Sorry we missed our numbers we were too busy schmoozing folks like you.") The result is a lot of work and you have to do it - but the payoff is small. Every other small cap is doing the same thing.
2. Buy back your own shares. That tells even the most dimwitted investor that you think the stock is undervalued, and as you run the company you probably know. This is fine if you personally are vastly wealthy or you have massive amounts of cash laying idle on the company balance sheet. In other words it is not an option for most companies

Social Media IR Rides To The Rescue?

Agoracom is a modern IR firm. They use online methods to tell your story. That may not sound like a big deal, but IR is a pretty conservative business, so just using a few tools like Twitter intelligently is a big step forward.

Agoracom's pitch is that they can "tell your story". For a while there will be an opportunity to use modern methods while your competitors are stuck with their buggy whips. But that advantage will erode really fast. So this is where the new Finance 2.0 sites like Seeking Alpha, Stocktwits, Kaching and Covestor may have the key.

I decided to test this on the 14 publicly traded SaaS companies.

Finance 2.0 For Small Cap: It is Too Early To Tell

Select a classic small cap stock in the SaaS Index. For example: RightNow Technologies (RNOW). At time of writing, they have a market cap of $525 million. It is a cool company that is growing fast and delivering good results for customers. So how much coverage do they get on these new sites? In my test I looked at RNOW for the period Jan. 1 to March 1.

StockTwits: There were nine tweets about RNOW, and many of them mentioned RNOW among a list of other stocks. Some are not very helpful, such as: "Does anyone know the future of $rnow ?"

SeekingAlpha: This has two posts that were specific to RNOW and they seemed high quality. That is better than nine tweets that don't say much.

Covestor: This is interesting to play around in. You can see the last 10 trades done by Covestor members in RNOW. But you cannot drill from that to any rationale into RNOW. The system is set up to do that, but there is just nothing there yet.

Kaching: This gave good news aggregation on RNOW. It looked better than YahooFinance (still the starting point for lots of investors) but seemed to lack depth. Nor did it have any fundamental new information.

So, from the limited perspective of one small cap, these sites are at this time not the answer.

What about "ye olde stock forum" on Yahoo Finance? Their message board for RNOW for the same period of time has 28 posts, not including the threaded replies. That puts them way ahead of the newcomers.What about quality you ask? What is the use of a lot of noise from anonymous posters pushing the stocks they own (or panning the ones they short)? That seems to be the problem with all these sources.

Wanted: Patient, Long-Term Investors

Found: Momentum-chasing day traders.

You want investors who will buy into the quality of your technology, understand your value proposition, like the market you are in and think you are doing a reasonable job managing the business. In other words, you want Warren Buffett.

That is not what these new sites are delivering. They do not seem to be the key to escape from small cap hell.

Let Your Story Surface

The evolution seems to be:

1.0 Tell Your Story. This is standard investor relations. The updated version of IR is to be present where investors hang out, which today means online. But it is still the old broadcast model.

2.0 Let The Crowd Tell Your Story. This is classic social media - and it suffers from classic social media problems. You might trust a user-generated review on Yelp before going to a diner, but you are likely to be a bit more nervous before investing your kid's college fund in a company.

What we need is something that reverses the flow, that lets investors discover you, that lets your story surface. This is where XBRL may help. (For a basic intro to XBRL read our earlier coverage.)

The Current XBRL Disconnect For Small Cap Is Temporary

XBRL was not any help when I was compiling the data for the 14 companies in the SaaS Index for the Saas Insights Report (a paid report for investors available from CapitalMarkets.com. Disclosure: The guest author wrote this report). The reason is simple. Only one out of 14 reported to the SEC in XBRL format. That company is Salesforce.com (CRM). The reason for that is also simple: The SEC currently mandates that companies with a market cap higher than $ billion report using XBRL. That is what creates the disconnect:

1. XBRL will enable the good investments from small cap companies to surface, but,

2. Only big cap companies report using XBRL (and they have no trouble reaching investors).

The good news is that disconnect is temporary. The second wave of new XBRL filers in 2010 is estimated to include 1,500 - 2,000 reporting companies, and the final wave in 2011 is for about 10,000 additional companies.

Imagine the Information Discovery Tools

When I go to my local wine store, the owner asks me what I want and we have fun with my standard reply that I want something "incredibly delicious and ridiculously cheap". Investors want the same. Warren Buffett got to be one of the richest men in the world by finding a few of those.

When all companies file in XBRL (and some geeks have created some neat tools to help sip more effectively from that firehose), ordinary investors will be able to create really powerful filters to find those "incredibly valuable and ridiculously cheap" companies.

They won't find them among the big cap companies. They will find them among the thousands of small cap, micro cap (and yes, even nano cap) companies. When the value surfaces, they can reach out to IR who can them tell their story.

Of course, when all this pans out, the opportunity to find the bargains will disappear. That is the price of an efficient market.

But the value to all the companies trapped in small cap hell will be immense. They can focus on building value knowing that the value they create will surface.

And that will have a great impact on the innovation economy.

Photo credit: Chris Whiteside

Companies have traditionally filed on paper, in ASCII, or in HTML: all essentially lifeless formats for conducting any meaningful comparison or analysis. With XBRL, every line item is given a tag that identifies it and its role in the financial statement. Imagine that a line item -- say, "Net Income" -- is tagged like a migrating goose (which frequently happens, I'm told). That goose is part of a flight of geese, which may change their course mid-flight, fly over national borders, have babies, and even join another flight. But thanks to the vital information on the goose's tag, we never lose the original information, and we are even able to see it in the context of other information.

Financial accounts are the same. Figures get re-purposed all over the place, which leads to input errors, or worse. It's easy to cover up information or fail to notice business risks when the analysis is relegated to a footnote somewhere, and you're reading the annual report like a "Choose Your Own Adventure" book.

When financial data is tagged, it's begging to get mashed up. Take a look at this comparison of executive pay, this dynamic charting, and the SEC's own repository and viewer. Software exists that can be first used upstream with the creation of management accounts and go all the way through to taxonomy design, document tagging, and viewing. One would be able to call up income statements of two or more companies in different sectors and different countries and compare line items in seconds.

But to see XBRL simply as a means of marking up financial statements at the end of a financial reporting period is to miss the rest of the iceberg. If financial items are automatically tagged upon their creation using a system like SAP, the rich analysis can be filtered through the enterprise and to suppliers. Triggers and reports can be generated on the fly. Knowledge workers will be manipulating XBRL without knowing it by its accurate, albeit consonant-heavy, name.

XBRL, by its nature, has largely escaped the wave of Enterprise 2.0 functionality. But the openness of the data, its ability to be mashed up and displayed in previously unthought-of ways, will impress itself upon a public disillusioned with poor financial management -- management that has itself partly relied on poor data. It's time for some developer rock stars to step in and make those spreadsheets sing.

More about XBRL

Often described as being simply complex, XBRL should be approached from a technological, as well as an accounting, perspective. XBRL is simply a flavor of XML. Financial line items, totals, text, and metadata are XML elements that are mapped to a predefined schema (called a "taxonomy" in XBRL). In all cases, these taxonomies are the financial rules of accounting for that jurisdiction. Throw in XPath, XLink, and more, and you have a mature language for tagging and submitting your financials.

An introductory resource to begin with is Wikipedia, which links to the various regulatory bodies, IT initiatives, and current issues. The "XBRL in Plain English" video is specific to executive summaries.

This was a guest post by Derek Abdinor, a divisional director at motiv - the Investor and Branding agency of Ince, a large communications concern from South Africa.