Revealing the hidden layers

At the initial point of interest between investors and private company founders, information beings to flow progressing from investment presentations, a data room to due diligence exercises. Investors need to navigate through layers of information beyond those presented at surface level and unravel the layers to discover what lies beneath.

Only a full crystal clear picture can reveal the true potential, or threat, that lies behind an investment opportunity.

Presented below are a few takeaways and tactics on revealing key hidden data as a deal maker and representative of private investors. These tactics should not consume time or huge efforts like a full audit conducted by professional third parties in a due diligence exercise. I simply run a few tests and if a clear deviation appears at first instant, it's a sign there may be more hidden underneath. Then, it's worth taking a deeper dive to find out more.

Reasons behind unrevealed data

There is a wide range of agenda and people backing unrevealed data.

• Deliberate and planned schemes by management with or without the knowledge of business founders
• Companies presenting data may simply have no experience in presenting information requested by investors, therefore leaving key information without noticing
• Companies tend to reveal data they believe is most important, in their own perception, and not necessarily what investors request.
• Threat from competition; investors who have investments in similar industries may try to gain access to key company information to transfer to their own companies
• Protection of key intellectual property or trade secrets, and especially in a jurisdiction that does not protect such rights. It is worthy to note that investors should have access to key information to make sure such intellectual property exists and not turn into opportunities with purely major promised 'secrets'. Many fraudulent cases tricked investors by creating barriers to such information

Impact of revealing full data

New key information can be influenced the direction and shape of investment decisions

• Altering investment terms on a term sheet, including valuation (upwards or downwards), ownership share, etc
• Revealing undisclosed liabilities or hidden risks
• Revealing strategic resources or assets that can enhance investment potential
• Bringing entire investment decision to a halt for a particular investor or a group of investors, leaving a negative impression on the company

Tip: Avoid distractions

People have different ways of creating distractions to stir attention away from key information.

• Tons of hand written documents. Sorting the documents might seem like a boring an exhausting exercise but reveals lots of clues with the first few steps. After all, the purpose of tons of data might be to create a physical barrier to access data and notice data trends
• On the other hand, there are the fancy reports with nice charts that present results and trends. The trick here is to dig behind the underlying data and try to deduce trends, then compare both findings
• Specific people have a way of keeping others busy with pre-set meetings, documents, and other full agenda
• Stamped reports by well known third parties (auditors, lawyers, etc). Many companies hide behind such reports before an investigation reveals data manipulation, so, it's worth taking an independent and closer look beyond stamped reports

Tip: Have a conversation with the quiet people in the room

People who like to speak a lot and share lots of information give easy access to information, yet the quiet people are a source of vast and sensitive information. This type may be open to share information upon approaching them, or they maybe reluctant to share information for a variety of reasons. Apart from technical knowledge, a set of deep people skills are required to extract information from such important profiles.

Tip: The minor details lead to the big picture

Minor details are always overlooked and can be detected from any signs:

• Small numbers in the financial statements
• Mood of the office boy / girl
• An unusual one time transaction
• Employees hired or fired

Minor clues could lead to something valuable in the big picture.

Cross border barriers

Foreign investors are often exploited by companies and third parties who seize to take advantage of language, culture and knowledge barriers. Each jurisdiction has its own set of both explicit and implicit rules, and trusted specialized teams are key to revealing key data to safeguard and enhance investment performance. A few areas to cover:

• Cultural rules / etiquette - especially with regards to norms, traditions, employee rights, etc
• Legal terms and background checks - rules differ from one jurisdiction to the other; one term can have two extremely different directions and underlying impact from one jurisdiction to the next. Doing full background checks can also be conducted in different ways between jurisdictions
• Taxes - Many hidden tax laws can be overseen and fireback at future investments
• Accounting & Auditing standards. A major area for manipulation of data, covering key accounts such as revenues, costs, cash flows, etc. People can get very artistic in how they can cover key information within acceptable standards

A key part of discovering an investment opportunity is unravelling what lies beneath the surface.

It is advisable for deal makers and investments teams to ensure a review of company information as early as possible, especially during investment origination and the first few meetings with the business founder and management. Based on past experience, early clues will rise to present themselves.

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