How founders might check VC references
Investigating your potential investors is different than referencing a potential recruit — yet people tend to treat it the same way. Error!
When our venture fund speaks with founders, we often encourage them — even in our first meeting — to start doing their references on us and others. Yes, founders can use public lists like Founder’s Choice (which VCs who founders prefer) or the Midas List (which shows some of the VCs with the strongest financial returns). It’s an important enough choice — a marriage with no divorce — that founders, understandably, want to be sure their prospective investors are great.
Do these VC people live up to their promises? When it starts raining, do they wash away? What’s it really like after the infatuation passes?
Referencing a VC, who (if they invest) you might work with for a decade or more, is an entirely different mentality than normal references.
Founders might want to treat these as the most important reference checks they will ever conduct.
Lately, I’ve seen one too many cases where a founder calls one or two friends, says “I heard good things!” and then assumes that’s enough of an endorsement to invite another person to own a piece of their business — forever.
Founders normally reference a VC in the same way they would a potential hire: Ask a handful of people you know, see who they tell you to contact, and then ask how they were, compare and contrast the answers, listen for red flags, and decide.
A better way: Recognize that the VC-founder relationship is different than the talent-manager relationship. Why?
- You can fire a hire — your VC is with you forever. It’s a (shotgun, often) wedding from which there is no divorce. A mismatch comes at high cost.
- A VC often has “red button” powers — contractual rights that can cause enormous damage if misused, like blocking a sale or a financing. Your leverage, when they consider pressing that red button, is their reputation — so you need to explore that reputation.
- VC actions play out over a much longer period of time — someone who has worked with an engineer for a year probably knows their work well, while a VC-company relationship plays out over a decade.
So, how should you founders act differently?
In addition to the usual sort of reference questions…
Ask more about the worst cases. Did the VC use those “game over” powers responsibly? Or threaten the founder with mutually assured destruction? Chase rumors; unearth as much gossip as you can find.
Seek out many more references. Three references on a VC might not be enough… ask each reference about the worst case they have heard about for the VC, about other founders who may have different perspectives. Even getting quick one-line responses from many more founders is valuable.
Ask founders who departed a startup, they may feel more comfortable opening up. LinkedIn research is your friend. It takes time to research the right people to contact.
Accept the “front door” references the VC offers, but focus on backdoors. Most founders are happy to answer a quick reference. How fast a founder responds — that’s data, too. Our general approach is to avoid even introducing references — we want to avoid tainting them by putting the founder on notice. (Though we will happily suggest which of our portfolio companies have a similar business model, problem, or other aspect to yours.)
Start early. If you wait to reference until there’s an offer or term sheet, you’re out of time. Besides, you might already be mentally committed (after spending hours convincing this VC). If you hit a reference along the way that gives you pause, you can save your time (what’s more valuable than a founder’s time?) by disqualifying that VC lead, just like in any enterprise sale process. This is another reason why your best path to meet a VC is often the founder in which they have invested — you get a reference plus an intro in one shot.
First impressions of a VC are an awful guide. Some of my best relationships with founders started out with them thinking I was a jerk! (I was — sorry.) Thank goodness for references. (We use “founder NPS” of us as the top performance metric for our fund, even more than the paper value of our portfolio.)
Our fund focuses on the future of work, so understanding business relationships is especially important to us as a model of how to make work better in the future. Hold VCs like us accountable! Reference us like you’re collecting every coin in Super Mario Bros.
