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.

About Andy Shannon

Hi, I'm Andy and this is my blog, hope you enjoy. Feel free to get in touch anytime via Twitter or Linkedin