Most entrepreneurs still adhere to do's and don'ts. But those who rebel are feeling good about being bad.
Company:
Rick's Cabaret International(RICK Quote - Cramer on RICK - Stock Picks)
Rule It Broke: Don't take an adult-entertainment company public.
Why It Likes Being Bad: Projected sales of $54 million for 2008.
After my tour of adult nightclub Rick's Cabaret, three things stuck in my head: the cordial woman working the coat check, the sumptuous live lobster tank and the intriguing interior design that included metal curtains and glass walls.
The dancing entertainers, a staple at the club, seemed like just another part of business as usual.
It Taints You
Kirby Cochran, head of Castle Arch Capital, invests in almost every industry except those commonly referred to as the "sin" industries: gambling, adult entertainment and tobacco.
His decision was an ethical one that he made at the beginning of his career: He wants to be able to tell his children how he makes his money.
"All the business people I associate with have the same basic principles," says Cochran.
Cochran knows he could have made a lot of money investing in sin companies. He's been approached by two highly profitable gambling casinos, among others, and turned them down.
He doesn't see big banks embracing the adult-entertainment industry anytime soon. "The main banks don't want the potential harassment," he explains.
Investment banks also risk alienating shareholders who might not approve of sin investments, says Peter Siris, managing director of Guerrilla Capital Management.
Individual investor concerns about gentlemen's clubs are the same as they were for casinos years back, explains Siris: What happens with the cash? Is the mob involved? What happens to revenues when the economy slows?
Public Vice
Colleagues laughed at Rick's Cabaret CEO Eric Langan, 39, when he took the company public in 1997.
VCG(VCGH Quote - Cramer on VCGH - Stock Picks) is the only other company in the industry to take that step.
When David Mau, an analyst for Montgomery Street Research, LLC, makes calls to potential investors for Rick's, roughly seven out of 10 still turn him down.
"Years ago it was nine out of 10," he says.
But despite major investor reservations, Rick's Cabaret, which now owns 15 adult nightclubs countrywide, reported sales of $5 million for December 2007 -- a 99% increase over the previous year. It expects sales of approximately $54 million for 2008.
With numbers like these, Langan's doing something to get through to investors.
Open-Door Policy
"When we went public, we weren't looked at as a serious business," says Langan, who began by raising money from friends and insiders at the company.
After the company revamped and opened its first club in New York City, Langan saw his opportunity to woo Wall Street and combat stereotyped images of backdoor money handling.
Rather than talk up his business at conferences, he invited hedge fund managers in for dinner at the club's five-star steakhouse.
The upscale look of the revamped club, its transparency due to
SEC scrutiny and its financial statistics caused investors to begin looking beyond what the industry peddles.
Langan's continuing strategy is to get his business plan in front of as many people as possible by presenting at conferences and hosting parties at the club for investment professionals.
Bit by bit, his plan is working. "At small-cap conferences, most people have heard of us," says Langan.
Investors like that Rick's creates an immediate cash-flow machine by taking over the revenue and client base of an existing club.
As a public company, Rick's also has the liquidity a similar privately owned club doesn't have, and privately owned operators increasingly see Rick's as a good exit strategy.
Annika Mengisen
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