Founders of potential investees take substantial risks going to the market, sharing information and looking for investors. Oftentimes, they’re required to send intricate details of their proprietary processes, historic financials and industry forecasts to advisers, bankers, private equiteers and even competitors.

It’s no wonder then, that some founders can be extremely precious about confidentiality. Not only due to competitive threat, but also due to the potential damage of critical relations.

Concerns around confidentiality arise when private equiteers ask founders for customer, supplier and employee contact details. Most of the DD until this stage relates to pieces of paper and historic financials. But, once you have unbridled access to stakeholders, it becomes the real deal. Sure we all sign confidentiality agreements beforehand, but these agreements are little consolation to founders with ruined businesses and without the cash flow to fight a case in court.

(This post actually spawned from an email I received in response to my post regarding market analysis. In that post, I said the best market analysis is done by contacting stakeholders rather than just relying on Google. The reader whom emailed me commented that it’s not so easy to get such access to stakeholders, hence, this post.)

As with most conundrums, there’s a relatively simple solution that entails staging the analysis:

1. In the early stages, contact industry associations, research providers, colleges and then competitors. Be a little careful with competitors; don’t mention the potential investee’s name, try not to mention you’re a private equiteer, and be quite vague regarding the purpose of your call. Also, now’s a good time to advise the potential investee that you will need customer and supplier details soon, so they prepare themselves early to entrust you with that info.
2. The next stage involves retaining anonymity, but reducing the search grid to competitors, customers/suppliers of competitors and maybe even customers/suppliers of the potential investee (if the founders have given approval). The idea of these anonymous calls is to make contact, advise you’re researching the industry and ask broad-based questions about all players in the industry. If they volunteer information on your potential investee, you may feel adventurous and decide to follow their lead with a few brief (and seemingly off-the-cuff) questions.
3. Once the founders agree to you directly contacting customers/suppliers/etc, ensure the questioning guidelines are clear and ensure you make the most of your time with these stakeholders. Keep the founders updated along the way to give them comfort that you’re not ruining their business while they wait in suspense for the outcome. You may also like to make clear the entire plan with them first, even the anonymous calls to associations and competitors.

Market analysis can be tricky because you need to access the people that matter to get the best and most unique information. But, your relationship with the potential investee is also important to the process, so it pays to balance their paranoia with your thirst for information carefully. There’s always a way to work around ultra-paranoid founders, so be willing to give a little.