Always Reference your Investors
Photo by alexey turenkov on Unsplash
During the past few months I’ve been asked by several founders I know what to do with a difficult investor. The circumstances are varied and for obvious reasons I won’t disclose specifics, but they range the full gamut of the problem shareholder:
overburdensome reporting requests
unconstructive pressure following a company wind down (“you lost my money?!”)
withholding / refusing cash transfer during deal closing
forcing a founder exit from the board / company
While some of these are clearly more serious than others, none are welcome and all could have been significantly mitigated. As I worked through the details of each situation I was surprised to see a consistent theme emerge; little to no investor due diligence was done. It’s commonly said that taking investment is like a marriage and it’s common for a reason. Once someone is on your cap table it’s basically impossible to remove them. While I am no stranger to the time demands placed on a founding team, investor referencing is simply not something that can be skipped. Reference check 100% of your investors, from your venture lead to your smallest angel. Strong belief, strongly held.
To put things in perspective, I’ll perform a minimum of “direct” two to three personal references per founder (provided by the team) and as many “indirect” references as I can find (via my network without the founder’s knowledge) for any investment that I’m seriously considering. This is in addition to any customer references I might perform, always with founder permission of course. In the last deal I led, I spoke / exchanged with over 20 people connected to the founder team.
This level of due diligence, in my opinion, is warranted because of the professional duty I owe to minority shareholders as a lead and the fiduciary duty I owe to my LPs. Every investor (VC, angel, etc.) will have their own position with referencing and many won’t go to the length that I described, but remember that any experienced investor will have a portfolio of dozens of startups, so the relative risk / importance of any one company, and by extension founder, is limited. A founder, by comparison, as only one company so even a small investor presents a significant opportunity for friction / distraction / value destruction.
Each of the issues I mentioned earlier could have been predicted through basic referencing. Past action is a very strong indicator of future behavior and while I do believe that people can change, I don’t think any founder should pay for that development. Equally if you aren’t able to find shared contacts or secondary connections, that’s a red flag. Investing is built on information trading and there is a natural incentive to be highly networked. An investor’s network is your surface area of assessment so anyone with a limited footprint is most likely inexperienced.
If you’ve never done an independent reference here are a few quick tips from what I’ve found to work:
Default to written feedback. Calls require synchronous communication, which introduces scheduling friction that can really slow things down. I find that a quick email is usually enough to get a sense of go / no-go sentiment.
Always provide a verbal option: My bullet above stands but some people may, understandably, prefer to avoid a paper trail - particularly for bad feedback. Make it clear in the initial request that you’re open to a quick phone call.
If it’s not a “Hell Yes!” it’s a “Hell No”: The conventional wisdom of hiring holds true with references as well. In my experience, really great people garner extremely positive, almost visceral feedback. If you detect any hesitation or calculated language there’s probably some history there that you don’t want to deal with.
I don’t mean to paint with a broad brush for investors or may the claim “I’m one of the good guys.”. Most investors I know are honest and committed to the idea of backing high potential startups early and often. But investors are people and people have styles / quirks / gaps / weaknessess. You owe it to yourself (as CEO), your cofounders and your employees to make sure the people you take money from are the ones you want by your side for the long haul.