Investor Reference Checks

In the past few weeks, I’ve witnessed startup investors being incredibly value-add and also seriously destructive. It always surprises me who ends up in which camp – my gut feeling is often wrong. There also seems to be little correlation between an investor’s value-add and seniority, background, or their fund’s ‘tier’.

The same can be said for the founders I work with. Trying to gauge the value-add of an investor feels nearly impossible during the fundraising ‘sales’ process (on both sides), and a founder backing out post termsheet because of a negative investor reference is nearly unheard of.

Something Kevin Kelly mentioned about reference checks (1) struck a nerve with me recently – that people are “reluctant to say anything negative” (which we all know) and to “elevate good behavior 10x more than punishing bad behavior”.

Kevin’s suggestion is to write a quick note asking to “get back to me if you highly recommend this <applicant> as super-great”

My first thought was that founders should write a similar “let me know if this investor has been highly valuable” email to a potential investor’s portfolio companies (2). That works fine on an individual basis, but the information is lost to the broader ecosystem.

Idea: send an email/message on the yearly anniversary of every investment round to every founder in the world, asking if each investor is incredibly value-add.

Then I thought, why not bake this idea into one of the many investor feedback sites that have launched recently? Or better yet, launch a new platform that simply asks “Is this investor incredibly value-add?”

No 1-10 ratings. No ‘Quite friendly’ or ‘They showed up late’ feedback. No investor rebuttal. Just the plain truth if an investor is incredibly value-add or not. Then display a ranked list of what investor has the highest number of founders who believe they’re incredible. Now that’s something I’d like to see.

(1) Bits of Advice I Wish I Had Known
(1b) Freakanomics Podcast

DUBNER: Here’s one that resonated with me in part because it’s very practical and in part because it has happened to me. You write, “When checking references for a job applicant, employers may be reluctant or prohibited from saying anything negative. So instead,” you write, “Leave or send a message that says, ‘Get back to me if you highly recommend this applicant as super-great.’ And if they don’t reply, take that as a negative.” Does that actually work? Do you know people who’ve had success with that method?

KELLY: Yes, I have used that method. There is a kind of a weird cultural moment right now where there actually are companies that cannot comment on previous employees and stuff. There’s a bias to saying anything negative for various reasons. But I have used this model of leaving a message on an answering machine earlier and now with an email saying, “Only reply if this person is super-great,” and sometimes I have not heard back anything. That’s a sign. And other times I’ve heard back, “Yes, you’re lucky to have this person.”

(2) Dear founder, I am considering taking an investment from <NAME>. Could you get back to me with a simple ‘Yes’ IF they have been incredibly value-add and you highly recommend them? If they are truly amazing and I’d be lucky to have their support, then I’d appreciate hearing from you.

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