Investor confidentiality agreements aren't as valuable as you think

Investor confidentiality agreements aren't as valuable as you think

Don't waste valuable time drafting dozens of confidentiality agreements with prospective investors to keep your margins, revenue and key accounts a secret. Investors are unlikely to steal your idea for themselves. But even if they do, it's your brand that earns you the big bucks—not just the business plan.

One the most common concerns I hear from consumer products entrepreneurs considering fundraising on CircleUp is the release of confidential information relating to their businesses. Candidly, I see this fear most often in less experienced entrepreneurs and it tends to be aggravated by board members that don’t have backgrounds in consumer products.

(Let me first note that CircleUp gives companies the ability to decide who sees their private information—we have a private deal room that is only accessible when the individual company grants approval to a specific investor.) 

Companies often worry that if competitors (or customers, suppliers, etc.) see their revenue, gross margin and customers, it will make it materially harder to be successful. Their natural reaction to releasing their private information to others is one of horror. But is this concern justified?

Brand strength vs. "secret sauce"

First, it is critical to differentiate between consumer product businesses and those in other industries—for example, tech. With tech, a company’s most valuable asset is its intellectual property. Think computer hardware, the Google algorithm, medical devices, etc. The dissemination of that type of information may prove harmful.

This phenomenon is not as applicable to consumer product businesses whose success and growth correlate more strongly to the strength of the brand. I’ve written often that a consumer company's strongest asset is its brand—and that is trademarked. Is Grey Goose vodka’s taste that different from SKYY, Stoli, Absolut, Ciroc and the thousands of other premium vodkas out there? Grey Goose’s passionate consumers swear by it, but it seems as if every vodka claims some taste test awards in its marketing.

That’s the point: Grey Goose has built a name—a brand—that renders irrelevant some secret sauce (however true it may be that the sauce is what built the brand initially). The panache of the Grey Goose in hand is as important to its customers as the taste itself. This is not to say that taste or product excellence is irrelevant in consumer products, but there is more that separates one successful consumer products company from another.

Customers are visible

Having this in mind, does it really matter if your competitors know who your top customer is? Most competitors can guess already by checking the product locator on your website. They can see your end cap at Target or your register display at Whole Foods Market.

Price wars only for the big guys

If competitors know your gross margin can they engage in a price war to put you out of business? The only competitors with the wherewithal to engage in a price war are the big ones—and the big ones aren't really looking. An executive at a $10 billion food company told me that his company didn’t subscribe to SPINS because they don’t think about the next $20 million brand that is 1/500th of their size.

While you would not want a competitor to know your new product pipeline or your proprietary contract manufacturer, you would rarely need to reveal that information in an investor presentation to individual investors. Remember, a potential investor doesn’t want you to reveal something that could damage the business because that would hurt them economically if they do invest.

Secrets don't sell

All of the above is meant not to advocate for releasing all of your information to the entire world. It's meant to keep you from focusing so much on confidentiality. I’ve seen companies waste months trying to get investors to sign detailed Confidentiality Agreements. That’s months the companies will never get back—and for what? Were they really worried the investor was going to start a competing baby food company, find the same suppliers, use the same recipes, and start from scratch only to overtake the original brand? If that’s part of the fear, the baby food brand is probably doomed for failure anyway.

Entrepreneurs have plenty to worry about when raising capital, but for consumer brands confidentiality should be very low on that list. It is much more important to attract the right investors for your company than to spend months with your head in the sand. 

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