Why it is important for startups and investors to Know Your Clients (KYC)
When we hear the term “due diligence” the first thing that comes to mind is the painful process that an investor goes through before deploying money into a startup. What many people don’t know is that this process may (and most probably should) be applied to most of the stakeholders around your company. At Hillfarrance, we think that reputation is a make or break asset for startups, founders and investors. So it’s necessary that you know your stakeholders to make sure that you won’t discover (or worst, that someone else will) that your new investor, client or employee is infringing laws, regulations or your company values that you have proudly printed in the walls of your office.
One might ask: “why it is important? If someone wants to do business with my company, been a client or investor, in the same or better terms than everyone else, I’m game!”. Well, if you get unlucky that your technology will be used to destroy modern democracy or your investor happens to be behind shady weapons deals or genocide, you have a problem, a gigantic one. Reputation is an intangible asset that is hard to access, but for the average company, it influentiantes 70% to 80% of its market value according to HBS scholar Robert Eccles (https://hbr.org/2007/02/reputation-and-its-risks).
So what needs to be measured and whom should a startup or fund be measuring?
- Identity – a company should make sure that they are talking to the right people, so double-checking identity is crucial for risk mitigation. Procedures for identity verification include documents, non-documentary methods (these may include comparing the information provided by the customer with consumer reporting agencies, public databases, among other due diligence measures), or a combination of both.
- Relationships – in the case of companies and high profile individuals is important to understand their ownership and main associations. Usually, this is solvable with a wee bit of elbow grease searching online on different databases, and most of them will be easy to find through google. If you feel that there might be any association with terrorism or criminal activity it is important to check local government databases (and for some startups that have investors and client in multiple regions, is key to cross-check the relationship between those locations).
- Values – the values of a company or individual is what creates grounding. Moving from that may create cognitive dissonance within stakeholders, leading to distrust. Some companies, like Patagonia and Amazon, will not accept deals or even will entertain ideas that are far from their values. Even if it looks like a nice and interesting deal, Amazon won’t accept moving from frugality, Patagonia won’t use toxic materials and move from their very environmentally friendly approach.
These efforts will have a price-tag on it, and as startups are cash strapped this needs to be taking into account and included on your Customer Acquisition Cost (CAC) or Cost of Doing Business. Overlooking these costs might push you and your team to avoid KYC efforts in every transaction and increase your overall reputation risk of default ratio.
It is hard to say “NO” to clients and investors that are offering good business, but this is strategic to have your organization safe from implosion. Wear your values with pride and check-in with them on every decision you make.
Guest Author: Alexandre Veiga. Click here to connect.