Just as investors fire a long list of questions at startup teams (do they ever stop asking questions), founders can and should do the same with doting investors.
VCs have the benefit of being able to invest in numerous teams and themes, and thus diversify their capital such that failures don’t make or break their entire portfolio (side note: I’m starting a campaign to ban the word “portfolio” who’s in). Founders, on the other hand, are concentrating much of their personal capital into one asset: their startup. They can have much more to lose (but also more to gain).
Then why oh why don’t founding teams do more diligence on investors?You are about to get on a bus with a crew you better enjoy because it’s a long ride. Oh, and news flash: the road can (and will) get rather bumpy.
Founders may have checked off everything on their investor diligence list (meetings, phone calls, prior personal and firm investments, industry expertise, fit with team and firm, blog, Twitter feed, LinkedIn resume, etc.) but if they miss doing the reference check, they may end up with less than advertised. I am focusing here directly on the partner of a firm not the firm’s reputation, as the partner with whom you will be working is more important than the firm.
Founders will learn more about the information that comes out of a reference’s mouth than anything else about that investor. Not all the information will be glowing (especially the ones that fail), and sometimes people have differences of opinion, but on the whole a founding team will know what they’re getting after these calls are completed. The goal is to get an idea of how the investor delivered on his or her promises throughout all life stages of a startup.
Teams should first try to connect with as many investor references as possible before going to the investor. Scour an investor’s investments and connections to find people who know and have worked with him or her. Many times (hopefully) a startup will know many of these people, and if not, this may speak more to a founder’s lack of network than the investor’s.
Note: it is important to spend as much time doing the background check work before you go directly to the investor. When we at Promus Ventures go through the process of reference checks on founding teams, we have already talked to numerous people they have worked with in the past before we ask for additional personal references.
If I were a founder, and only after I could see myself giving this investor filling a coveted spot on my cap table (don’t waste their time or other’s if you’re not serious about them), I would ask this potential investor for the following reference checks:
1. Founder of company where investor participated and outcome was complete failure.
2. Founder of company where investor participated and outcome was complete success.
And if this investor is going to take a board seat, then I’d also add:
3. Founder of company where investor participated on the board (probably led the round as well so can understand that process as well).
An example: we recently finished the process of leading a round with a fantastic team that reference-checked us up and down. One of the co-founders knew three founders we had backed. The team talked several times with a vc (maybe more than one) that we had invested with on numerous occasions. I’m sure they talked to other folks that knew us as well. After these conversations, they then approached us and asked for three morereferences from founders in exactly each of the aforementioned situations.
Overkill? Nope — thoroughness. The team took their time to make all these calls because they understood the importance of the decision.
Final note: founders should recognize an investor is cashing in some of his chips by asking another busy founder to take time out of his or her schedule to talk. A team should find a way to be helpful to this person in some way rather than just getting on the phone and asking questions.
So don’t be afraid to ask a potential investor for references, regardless of who they are. Last thing you want is an investor that promised the world but delivered a goose egg. If a potential investor balks or grimaces at this ask, well, that will be an important tell in itself.that promised the world but delivered a goose egg. If a potential investor balks or grimaces at this ask, well, that will be an important tell in itself.
No I don’t think we’re in a bubble.
Yes I think we’re living in good times.
I believe every startup should dream big, be tenacious, iterate always, and change the world. But whether in plenty or in want, RIGHT NOW every startup on planet earth should take their entire core team to the mirror and ask themselves these questions:
· Is our burn rate sustainable?
· Rinse and repeat — is our burn rate sustainable?
· How much money do we really need to solve this problem?
· When exactly do we believe we will achieve customer revenue and profitability?
· If the world falls apart tomorrow, what is the probability our valuation is ahead of itself?
· What would it look like if our next round was a down round?
· If we all had to cut our salaries by 50%, how many people would leave?
· How passionate and intense is our entire team about our core thesis?
· Would our team commit to five years of doing nothing but working on this startup together?
· How have we sacrificed as a team to get here? What else may we have to sacrifice?
· Are we proud of what we’re working on? Does it change the world for the better?
· Why exactly are we here? What drives each of us?
· What mistakes have we made? Find 10 more. What have we learned from these?
· Where does each of us need to be better? How are we better as a team than apart?
· How did our funding round change us? How has not getting enough funding change us?
· Are we leading the company well? Where can we do better?
· How original is our core value proposition?
· What are the strengths in our product? Cut down to top 3.
· What are the flaws in our product? Find 5 more.
· Are we impartially looking at the data about our product?
· What are the current Top KPIs we look at each day? Does entire team know these daily?
· What did we launch too slowly? What did we launch too quickly?
· How often do people say our product won’t succeed? How do we respond to this?
· Is our product risky enough?
· What do our top customers honestly think about us?
· How would we describe what our ideal customer looks like? Is this realistic?
· Do I find myself using the product because I want to or because it’s my job?
· How much time do we actually spend with our customers?
· How do we listen to our customers? Do they freely share their feedback? How can we enable this better?
· How hard is it for someone to copy our idea?
· What do our competitors do really well?
· What can we learn from our competition?
· Do we have a list of people waiting to work at our startup? Why or why not?
· Who in the past have we hired that is not a fit? How did we handle this situation?
· How many people do we interview before we hire someone?
· When was last time we hired someone who was not looking for a job?
· Is the culture we are fostering an attractive one to the outside?
· How strong is our customer/hiring/investor network?
· When was the last time we met with a new investor?
· How often do we listen to advice from other older/wiser mentors?
· How often do people say we won’t succeed? How do we respond to this?
· Are we doing a lot with a little? Even if we raised a large round?
Don’t let the busyness of building your business permanently descend your plane from 30K feet. Be honest with yourself and each other and great fruit will bear itself on the tree.
Confidential info is serious business.
I recently sat on a plane coming back from SFO and was forced to listen (for three hours plus) to a vc and startup founder in back of me loudly wax poetic about a wide range of opinions about other vcs and startups. These people should have known better, and knowing some of these companies and investors, some of their info was just wrong.
You know a lot about a startup or investor about how much comes out of their mouth. The above example is on the extreme side of cluelessness, but there are various other forms I see all the time. When you hear things like “just between you and me” or “confidentially” from people you just met, suffice to say you’re not the only one with which they’re shared this information.
Generally people share more than they should out of insecurity. They are trying to impress the other person and sharing “in-the-know” information somehow will earn their respect. Most times this instead backfires as the other side quickly judges that this person can’t be trusted.
Many years ago when I worked in M&A, you could lose your job on the spot if you let out information that was deemed confidential. I was constantly asking myself what exactly I could share with investors about companies that we were representing. I am thankful for the Managing Directors above me who continually put the fear in us about the importance of confidential information.
Nothing rocket science here, but startups shouldn’t:
1) bad mouth their competition or say things they know privately about these companies or product, even if true
2) share information about other startups or founders that has nothing to do with anything
3) talk about their customers openly and their plans (unless you want to lose them quickly)
1) talk about metrics or customers of startups in which they’ve invested or seen in other startups’ decks
2) share pitch decks without getting permission from the startup
3) throw around valuations of startups, however “overvalued” they may believe they are
The world has never been flatter — information travels at the speed of light in ways you never thought possible. Just because you know something doesn’t mean you should tell even one person about it. You never know who is sitting within earshot of you.