Startups Should Avoid Dropping Trou

Note: This is Part I in the Startup Advantages series.

Startups have few advantages. One of the most significant is the ability to keep your cards close to your vest. A major disadvantage of a public Big Dumb Company (BDC), as well as one that works closely with governmental agencies, is the degree to which they Dropping Trouare forced to publicly disclose otherwise confidential information.

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“Dropping trou,” short for “dropping your trousers,” is the process of exposing your company’s confidential information, usually at the request of a BDC. When engaging in a dialog with a BDC, they routinely make gratuitous requests for information. They may request your financial statements, ostensibly to assess your financial wherewithal. However, the actual use of such data is often so they can file it away, only to retrieve it in the event they need to cover their derriere. Every time you provide confidential information to a BDC, you risk the data finding its way into the hands of a competitor.

Confidential information tends to grow legs and you cannot afford to take a chance that your financial information will slip into enemy hands. Sensitive data, especially in electronic form, can make its way around the Internet in seconds. The more sensitive the data and potentially damaging to your company, the more likely it will end up in the hands of someone who can use it against you.

Requests For Proposal (RFPs) are notorious sources of data leakage. Although the BDC initiating the RFP usually indicates that all submissions will be kept confidential, it is appalling how often such information is shared with the winners of the RFP. As noted in RIP RFPs, entrepreneurs should generally avoid RFPs because they cannot afford to expend the time and resources required to participate in such regimented and lengthy sales processes. Data leakage to potential competitors is another great reason to run hard and fast in the opposite direction whenever you are asked to complete an RFP.

As such, simply refuse any and all requests for confidential information (especially financial data) from prospective customers, partners, suppliers, etc. Once you provide confidential information to ONE such entity, it is a slippery slope. Thus, by never giving it out, you can honestly say, “Look, it’s not personal. We simply do not disclose that information outside of our organization.” BDCs’ employees generally appreciate arbitrary and bureaucratic rules, so this approach is often an effective means of dealing with such inappropriate requests.

Dealing With The Real Objections

In the event you are unable to deflect requests for confidential information, seek to understand the real objective behind the information request. In nearly all cases, you will be able to address the other party’s underlying concerns without serving up your confidential crown jewels.

For instance, if the other party is concerned about your financial viability, the most important component is not the amount of cash you have in the bank. On the contrary, the question the BDC should ask is, “Does your startup have a sustainable business that will afford you access to additional capitalization and ultimately self-sustaining profitability?”

Chances are the BDC guy on the other end of the conversation has never run a business and the probability that he will realize what he really needs to know is slight. Thus, you may have to deferentially educate him as you assuage his objections.

You can validate your startup’s long-term prospects by introducing the BDC to satisfied customers, Board members, your core team and one or more of your investors (assuming they are willing to speak positively about your business). Third party validation regarding your personal credibility and the viability of your adVenture’s business model are worth more than the figures on your balance sheet.

Explain your business model to the BDC and provide tangible proof regarding your ability to execute your business plan. A BDC does not need to know how much money you have in the bank to be satisfied that you are running a viable business with a bright future. As noted in Competitive Sleuthing, some partners routinely share information about the companies with whom they are working. 

Go To The Meeting – But Do Not Take The Materials

When I was an operational executive, I limited access to the information contained in my PowerPoint presentations. You can effectively do so by utilizing an online meeting product, such as GoToMeeting or LogMeIn. These solutions allow you to share data, without it leaving your building in electronic form. If the other party asks you to send them your slides, find out why they need them. If it is to inform others in their organization, set up a subsequent meeting in which you present the slides and lead the discussion. No one can tell your story better than you. Retain the role of storyteller and you will avoid your story being diluted by someone at the BDC who cannot do it justice.

If you are speaking to prospective investors, you have to be even more careful. Most sophisticated investors (with good reason) will not sign a non-disclosure agreement (NDA), which can put your sensitive data at risk. Without NDA protection, you should assume it will be shared with any company in the Venture firm’s portfolio. Whenever you share proprietary information, take reasonable steps to minimize the ease with which such data can be distributed – such as posting PDFs in a secure data room.

Corporate Beyotch

Another positive outcome of holding your cards close to your vest is that you will engender respect from the other party. Most big companies are used to getting whatever they want from a small company, even when their informational requests are out of line. Be the one company that tells them “No.” It may shock them at first, but if you handle the communication in a professional manner and explain why you are refusing to provide the requested information, you will ensure that the ongoing tenor of your relationship is one based on ‘equality’ and not one in which you are the big company’s startup ”beyotch.”

Shocking HP

Several years ago, I was pitching a software license to a middle-level executive at HP, within their Printer Group. It was clear that he was a corporate zero and was simply sleepwalking through the process. At the end of the call, he requested that we, “send him the slides and a proposal.”

I shocked him (and my salesperson who was also on the call) by telling the HP zombie, “No, we are not going to send you the slides and we are not going to pull together a proposal that is just going to be filed away. If you are ready to move forward, then we are prepared to apply one-hundred percent of our resources to make you successful. However, if you just want something to throw in a file so you can later document that you spoke with us, we are not interested.”

After a long pause, the HP guy came out of his corporate coma and acknowledged the validity of my comments. He agreed that simply sending over a proposal was not the most impactful next step. We continued our dialog over the next several months and we eventually closed a significant, multi-year deal with HP.

There are so many disadvantages to being a small company that you must use your private status to your advantage any time you can. One way to do so is to keep your pants firmly in place and respectfully, firmly and frequently say, “No.”

Note: This is Part I in the Startup Advantages series.

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John Greathouse is a Partner at Rincon Venture Partners, a venture capital firm investing in early stage, web-based businesses. Previously, John co-founded RevUpNet, a performance-based online marketing agency sold to Coull. During the prior twenty years, he held senior executive positions with several successful startups, spearheading transactions that generated more than $350 million of shareholder value, including an IPO and a multi-hundred-million-dollar acquisition.

John is a CPA and holds an M.B.A. from the Wharton School. He is a member of the University of California at Santa Barbara's Faculty where he teaches several entrepreneurial courses.

Note: All of my advice in this blog is that of a layman. I am not a lawyer and I never played one on TV. You should always assess the veracity of any third-party advice that might have far-reaching implications (be it legal, accounting, personnel, tax or otherwise) with your trusted professional of choice.

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