By Laurence J. Stybel

You have been approached about a job with a privately-held company. Is this a great opportunity, or the assignment from hell?

Naturally, you'd never take the job without performing due diligence. The problem is that it is often difficult to find good information about private companies. One has to rely on such "soft" data as "reputation." When information can make the difference between a terrible mistake and a sound decision, consider using the Scuttlebutt technique.

In our business, we coach executives who are considering seats on boards of directors. A board-level executive needs to know, "Is this company worth my time, attention and credibility?"

We have found that the Scuttlebutt technique is a powerful way to quickly gather reliable information about a company that -- for all intents and purposes -- makes no significant information about itself public. Scuttlebutt can reveal tremendous opportunities and it can reveal profound pitfalls. With a little bending and shaping, you can use Scuttlebutt to dig up the truth about a private company no matter what level job you're considering.

Scuttlebutt
Networking is a well-known strategy for finding opportunities before they become generally known in the marketplace. Investment manager Philip A. Fisher describes a networking technique he calls Scuttlebutt. Scuttlebutt is a combination of old-fashioned networking and a social science tool called a sociogram. A sociogram is a chart of social contacts that describes how those contacts interact with one another.

Says Fisher in his book, Common Stocks and Uncommon Profits: "Most people love to talk about their competitors. Go to key managers in five different companies in an industry and ask each of them questions about the other four. You will emerge with a detailed and accurate picture of all five companies!"

Competitors of your target company are only one source of informed opinion. Other sources include vendors, customers, professors, trade association executives, former target company employees, and so on.

When a social scientist maps the connections among a set of companies and their opinions of one another the result is a sociogram. When we add Fisher's networking component the informal one-on-one discussions yield useful Scuttlebutt. For our purposes, Scuttlebutt can serve as a good basis for deciding whether to accept an offer to serve on a company's board -- or in almost any other position.

Embedding the Target Company
Instead of asking respondents directly about your target company, you might say to them, "I am considering a private investment in a company like Company A, Company B, Target Company, and Company C. I know you work for Company D, and I wanted to know if I could ask you some questions about these four organizations?"

Asking direct questions about the target company might seem like the natural approach to take. But, keep in mind that such direct questions can put respondents in the uncomfortable position of having to make absolute judgments. Your sources of information might be uncomfortable about this because it poses an ethical problem: people don't like to make absolute judgments about individual companies they may not know very well. The result is that most respondents will make noncommittal statements like, "Target Company is a fine company." You may interpret that blandness as a ringing endorsement!

On the other hand, the technique we advocate allows respondents to make a relative evaluation of the target company against several of its competitors. By "embedding" your target company among others, you may get more valid information because you're freeing the respondent from having to make an absolute judgment, and you also provide a context in which to understand his judgments.

Fisher used Scuttlebutt as a method of evaluating companies to make investment decisions. We think his approach is equally valid if you are contemplating a sweat equity investment.

Confidentiality
Scuttlebutt requires that respondents trust you to keep their identities confidential. Confidentiality should go beyond promising not to name your sources. As a matter of business ethics, you should not reveal information if divulging that information might allow a listener to figure out the source.

Scuttlebutt Questions to Ask
We have adapted questions from Fisher's classic investment guide, Common Stocks and Uncommon Profits to use when evaluating job opportunities at the board level. Most of these questions can be applied to evaluate a company when considering almost any kind of job.

1. Do these companies have products with market potential to increase sales for at least several years? Your target company may be harvesting profits currently, but it may lack long term potential. This question can help you discern the company's prospects (and yours).

2. How effective is R&D in relation to its size in each company? Looking at the financial ratio between total R&D expenditure and total sales is a popular but crude way of thinking about R&D commitment. Such ratios can be misleading. When evaluating a company's R&D efforts, it is just as valid to inquire about market research as technology research. So, find out how the company investigates (and develops) its market.

3. Can you describe the sales organizations of these companies? Information about the sales operation is seldom discussed in financial reports of public companies. Fortunately, this information is easily obtained using Scuttlebutt. Of all aspects of a company's activity, the most well-known to sources outside the company will be the sales organization.

4. How would you compare these companies' profit margins? Sales are of value only when they lead to profits. You want to find out what the target company is doing to maintain or improve profit margins. Scuttlebutt can give you a glimpse into a company's profit future.

5. How would you describe the way these companies treat employees? Within an industry, it is generally known that there are "decent" companies. It is also generally known that there are companies that "burn up and discard" people. Senior management is often blind to its own reputation, but others will see it clearly.

6. How would you compare depth of management? A small company can do extremely well under an able autocrat. What would happen if that key person were no longer available?

7. How would you compare these companies' cost analysis and accounting controls? It is not difficult to churn out reams of accounting information. The tough questions are, how valid and useful is this information, and how effectively does management act on it? The Scuttlebutt method is helpful here in revealing significant problems that won't necessarily appear on the balance sheets.

8. How would you compare the integrity of management? Without breaking laws, there are ways in which senior managers can benefit themselves at the expense of customers, employees, and stockholders. Such managers are generally known within their professional communities. The only real protection against being abused by such managers is to avoid getting involved with them.

Drawing Conclusions from Scuttlebutt
It can be very difficult to obtain the information you need about a privately-held company. Scuttlebutt gives you access to the professional assessments and opinions of people who know a company. It's not perfect information. However, by cross-referencing the answers you get to the questions we have outlined, you can form a picture of your target company. Scuttlebutt helps you combine your judgment with that of industry insiders to draw reasonable conclusions.

Start-Up Companies: A Special Case
We use these questions to help executives determine whether they ought to join the board of an existing company. As you can see, the same questions can be used to make informed judgments about jobs at many levels.

The one area where it can be especially difficult to gather useful information is start-up companies. Because a start-up has little or no history behind it, there is likewise little basis on which anyone -- even industry insiders -- can form judgments. In this case we find that it helps to turn the focus of an inquiry on the integrity and business savvy of the founders of the company.

When evaluating a company, getting all the hard data you can is a good thing. But getting Scuttlebutt on a company by talking to smart, knowledgeable people is even better.

Please tell us what you think of this article.

For more on this topic, please see Can A Start-Up Launch Your Career?

Laurence J. Stybel is the co-founder of boardoptions.com. Boardoptions.com helps companies build educated, competent boards and helps senior executives position themselves to be effective contributors at the board level. Larry is a former member of the Board of Directors of the New England Chapter of the National Association of Corporate Directors. He serves on the board of a venture capital firm and two technology companies. Larry's partner, Maryanne Peabody, has designed an educational program for new board members for NACD. She is on the Board of Directors of the New England Chapter of The NACD and serves on the boards of two other organizations. Larry and Maryanne can be contacted at (617) 371-2990.

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