The legendary investment-banker and founder of Paulson Investment Co. in Portland, Ore., talks with the Opportunist’s Managing Editor Leslie Stone about his 40-year career, his motto for success and why he’s optimistic about the U.S. economy.
Paulson Investment Company, Inc. is a full-service brokerage firm engaged in the purchase and sales of securities from and to the public and for its own account and in investment banking activities. As a wholly owned subsidiary of Paulson Capital Corp., it has been a publicly traded company since 1971, and trades on the Nasdaq Capital Market under the symbol PLCC.
Since 1978, Paulson Investment Co. has built a strong and unique reputation as a leading investment banker specializing in small and emerging growth companies with capital needs of $5 million to $50 million. The company has served as a manager or lead underwriter for over 160 offerings, raising over $1 billion for clients.
Opportunist: Chet, please tell us your background.
Chet: I went to Portland State but my bachelor’s degree in Economics is from the University of Oregon, so I’m an Oregon Duck. [Laughs] I got my M.B.A. at the University of Portland. I also spent a few years as a high-speed radio operator in the U.S. Army. I was stationed in Germany, which was an awfully nice place to be in peacetime Europe.
Opportunist: When did you start Paulson Investment Co?
Chet: I started Paulson Trading Co. in 1970. We raised money just to be a market maker and buying and selling over-the-counter stocks. In the mid-1970s there was a phenomenon in the oil patch and mining patch in Denver where a penny stock market was quite noticeable and a lot of transactions went down even though they were just penny deals. We raised money for good companies and not so good companies. As things developed I thought it would probably be better to focus on small or more traditional businesses that could use help. If we developed the expertise on public offerings we might be able to develop a business out of it and help a lot of young entrepreneurs develop their business. It turns out I was right about that.
Opportunist: When was your first initial public offering?
Chet: Our first IPO was in 1976 or 1977. It went slow at first. We would do few a year for a while until the early 1980s. When Reagan came in the market just took off. It was 1982 or 1983—I forget the exact year—and that was the start of a 20-something-year bull market. We did some small deals and some larger deals.
Opportunist: What are some of the most notable companies you have funded?
Chet: In the early 1980s we did a $12 million offering for a company out of North Carolina called Cree, Inc. It was one of the best performing stocks at the time—they went to a market cap of over $8 billion. They do silicon carbide, and they are still around and doing well.
About six years ago we did a company called Taser. It’s a state-of-the-art stun gun, which is used to help law enforcement. As an alternative to lethal firearms, we think we’ve saved a lot of lives by financing that business and, you know, most anyone would rather be Tasered than [shot by a] .38. [Laughs] It was just a huge success and still is. At first I turned down Taser, but then my analyst went to visit them and convinced me to take part.
We also worked with Pre-Paid Legal Services, which was a huge success.
Opportunist: What qualities do you look for in the companies you work with?
Chet: We are not industry specific. I started doing investment banking in the 1970s on the hypothesis that we would be generalists rather than concentrate in one area. That was a good decision. We look for opportunities and for individuals and management that can convince us that they have an opportunity.
Opportunist: Why do you prefer small cap companies?
Chet: First of all they’re probably going to grow faster than any other segment of the market. Yes, there is often a higher mortality but if you find the right ones you’re going to have a much more successful investment. As far as a business strategy, I wanted to develop a niche where we wouldn’t be competing with larger investment banks. For example, if a company is qualified to work with Goldman Sachs I’ll never get the call. [Laughs] We segmented to only compete with bigger firms in private deals as opposed to public, and it worked. We developed a business. If we decided we were going to go after big deals like Goldman we would have been long since gone.
Opportunist: What were some of your experiences with the National Investment Banker’s Association (NIBA)?
Chet: I was chairman of NIBA two or three times over the years and I would take part in that organizations. My youngest son is one of the co-chairmen of NIBA at the moment. One of our other employees has been past chairman. We have devoted a lot of time to that organization, doing a lot of networking and with people doing deals and looking for deals.
Opportunist: We understand you are known as a proponent of socially responsible investing.
Chet: Yes. We are interested in the environment and keeping this world a nice place to live. Lord knows, it needs help. We believe that helping so-called green companies is a very good thing to do from a social standpoint and from a business standpoint because those are businesses that are going to solve our environmental problems. So we will always take a special look at something that has an element of green in it. Giving to them is a good place to put money to work.
Opportunist: What are some “green” companies you’ve worked with?
Chet: We did a successful public offering for Ascent Solar about four years ago. The solar business has been very difficult because of the fact that it’s hard to get competitive on a cost basis. Unfortunately, solar companies find it difficult to produce energy as competitively as other methods like coal. Long-term it’s a matter of technology proving its metal. We did a successful deal for S&W Seed Company, a California producer of the natural sweetener Stevia. It is quite popular and a nice company.
Converted Organics Inc. is another green company whose technology is pretty terrific. They do organic fertilizer, vertical farming and industrial wastewater treatment.
Opportunist: What are some highlights of your career?
Chet: The moment with Taser was definitely one. We were effective on their IPO, but there is a story that goes along with that.
Opportunist: Please tell us more.
Chet: There was a co-manager from New York whom the SEC put out of business on that very day. We thought, Oh no, we’re going to get killed on this stock. The market was kind of lousy and we thought they’d have a field day. Probably 99% of investment bankers under the same circumstances would have felt the same way. When they asked me if I was going to do the deal I had an opportunity to make one of the biggest mistakes I could make. We didn’t know at the time that they would become a huge success, but I knew the principals of the company and had a hunch that if they would continue to tell their story it would be a success. We were right about that. Here was a company that would virtually go up in smoke if we hadn’t done the deal. We were certainly rewarded over the long term.
Another highlight would be early on when we put together the Financial News Network. That was always an inspiration and a thrill to see. We did a lot of promoting of our business on the tube and we got an enormous number of leads. I was one of the of the three guys who dreamed it up and we did a public offering for them and introduced them to Dr. Earl Brian who was their chairman of the board. FNN was by and large the model for CNBC. They were different entities but that model has been quite successful. Some news anchors who worked for FNN, such as Bill Griffith and Ron Insana, are with CNBC today. CNBC is known all around the world, so I am very proud of the thought and the idea because it’s the thought and the idea that we tried to do.
Opportunist: Do you have a formula for success?
Chet: Be sure you’re doing what you should be doing and that is helping to represent investors to achieve good results. Keep in mind, if you’re the CEO of a business that your mission is to fulfill the dreams of the people in the company and the shareholders. Good old hard work and being true to your work is crucial. The most important thing in business, though, is a strong reputation so make yours one of truth and honesty and support other people whenever you can. I know that’s corny stuff but I believe that opening doors and extending little courtesies defines who we are. I’m impressed when a stranger lifts an old lady’s luggage off the carousel in baggage claim.
Opportunist: Tell us about a day in the life of Chet Paulson.
Chet: I get up probably two or three times in the middle of the night to see the markets opening up across Europe and Asia. When our market opens I start taking calls around 6 o’clock in the morning. I normally cut out an hour or two after the close and go play tennis or take a break. Is used to play quite a bit of tennis, but I’m kind of running out of gas on that but I still like to play. I used to like to ski too. Then we will have our meetings. There is a lot of travel involved, especially when we are on the road shows telling investors about securities and this and that. I talk to a lot of people and I go a lot of places. It used to be more exciting than it is now. [Laughs]
Opportunist: How do you feel about America right now?
Chet: I believe in esprit de corps, and I think the United States has better days to come and that anybody who sells the country short is making a big mistake. The single most important thing [to improve America] would be for the President to quit. I think he’s an absolute disaster and that he has created an antagonistic feeling among businessmen. The guy is just President for another one or five years, though, so in the scope of things it’s not a long time although at the moment it feels like an awfully long time. I think cooler heads will persevere and we will be back in a very major way.
Opportunist: What are your thoughts about the current state of the European Union?
Chet: My first reaction is why should we be upset and why should we be suffering for what Europe is doing? I guess there are reasons. I think it is way overdone by the news media. The EU has had problems forever and, you know, I guess I kind of resent being tied in so much with them and having them affect our market and our business the way they do. My feeling is that it’s overstated.
Opportunist: Do you believe the U.S. economy will rebound?
Chet: Yes. The early 1970s were awful. My oldest son who works with me says all we did back then was sell orders on mutual funds. Nobody was buying anything. But I don’t think it was as bad as this. There was the 1987 crash but it was short and sweet and it didn’t keep coming back every other week like this has. It seems the last few years have been awful but better times are coming. If our government would get their act together and get some employment there are investments to be made. Little companies out there are dying for support and capital. My guess is the market has got a long way to go over the next five years, and it’s a really good idea to just hang on.
Leslie Stone is an award-winning writer/editor with more than two decades of experience covering business, finance and lifestyle issues for newspapers, magazines and online publications. Originally from Virginia, she currently resides in the Orlando area.