How Do You Reference Check a VC?

Posted on Feb 8, 2010 | 32 comments


claptonThis is part of my ongoing series on Raising Venture Capital.

I often tell people that raising money is worse than getting married.  I have to be careful in how that sounds because I love my wife and am happily married.  But the truth is that in marriage if you’re unhappy you can at least get divorced (in most countries).  Not so in venture capital.  You’re tied at the hip to your VC.

So my first advice is not to rush in the fund raising process.  Get to know VCs over a long period of time so that when you’re ready to get engaged you feel you know their character.  As in real life – those that rush into marriage often find out what their partner is really like after the fact.  I wrote a post linked as follows about how to build relationships with VCs over time.

But what about once you have a term sheet?  How do you then reference check your VC to be sure that you’ve chosen a good firm and partner?  First, I would say that most entrepreneurs do almost no reference checks or at least do them very informally.  Don’t let that be you.  Most VC’s will happily supply you with a list of CEO contacts of the people who will speak to you about working with them.  Don’t be afraid to (politely and respectfully) ask for this.  In fact, they will think better of you because you’re demonstrating that you’re the kind of thorough person that they wanted to invest money into in the first place.

Don’t stop there.  This list is the equivalent of the reference list that you’d give your VC (or any other potential employer if you’re interviewing for a job).  What I mean is that this is the “friendly” list.  The one where they HAD BETTER say good things about you because if they don’t then you’re really messed up for not suggesting the right people and calling them in advance to control the process and make sure that they say good things.  Good recruiters never stop at the official list and neither do VCs.

For some reason most entrepreneurs do.  Don’t let that be you.  I always tell entrepreneurs, “in good times of course everybody loves their VC.  They made great introductions, they helped you get financed, the put in more money themselves, they helped you strategically and they helped you with your exit.  It’s an effen love fest.”

BUT (and there’s alway a but …) what were they like when the chips were down?  When the world was ending?  After Sept 11th?  After Sept 08?  After some random date

when you missed your targets, when your co-founder quit, when the competition chose your competitor or when the other investors around the table lost confidence?  Don’t take my advice, take Eric Clapton’s.  Nobody Knows You When You’re Down and Out.  If you’re so inclined click on that link and launch this video while you’re reading the rest of this post.  I love this song.   I’ll highlight the key lyrics:

nobody knows you
When you're down and out.
In your pocket, not one penny,
And as for friends, you don't have any.
When you finally get back up on your feet again,
Everybody wants to be your old long-lost friend.
Said it's mighty strange, without a doubt,
Nobody knows you when you're down and out.

Make sure to call the companies in that VCs portfolio that didn’t succeed.  Feel free to ask the VC after they give you the official list for a list of 3 CEO’s where the company stumbled.  Do a web search to find companies that they didn’t give you.  Ask the CEO’s about the VC when the chips were down.  Do research and find some CEO’s who were fired by the VC.  That would be instructive.  I’ve met some that actually say positive things about the VCs.  I’ve heard others that say the opposite.  You’ll have to sort though how much is sour grapes versus reality but … wouldn’t you rather have all data points?

My story briefly.  My chips were down in late 2000 / early 2001.  I had 5 investors at the time.  That “nobody knew me” was being polite.  Nobody wanted anything to do with Internet companies.  Hard to believe but true.  Except GRP Partners.  They said that they back entrepreneurs who show promise even when the chips are down.  It might sound self serving since I now work here – but there’s a reason I now am a partner here.  They got me through the tough years by rolling up their sleeves.  They did the same with places like UGO Networks (bought by Hearst), Kyriba (investors were hard to find in 2002 and now raising a major round of capital and growing at a fast clip) and countless others.

I’m not saying they’ve backed every company, every time.  Nor that any VC should.  I’m also not saying GRP is perfect or the only VC who rolls up its sleeves when times are tough.  What I’m really saying is, any VC would have had their share of having to deal with companies when the chips are down.  Find those companies and find out the truth.  Better now than when you have kids.

One small hack – go to LinkedIn and do a search for the company name.  You’d be surprised how many ex-founders and ex-CEO’s you can find this way.

Happy reference checking.

  • http://giangbiscan.com Giang Biscan

    Great post, Mark, it is an excellent point about doing homework. Thank you.

    Chris Dixon few days ago wrote about a VC that backed out of a term sheet – and how he would advise those in his circles to avoid them. So I assume VCs would be a very good source for reference as well. How open do you think VC are to entrepreneurs asking for advices about other firms?

  • http://giangbiscan.com Giang Biscan

    Great post, Mark, it is an excellent point about doing homework. Thank you.

    Chris Dixon few days ago wrote about a VC that backed out of a term sheet – and how he would advise those in his circles to avoid them. So I assume VCs would be a very good source for reference as well. How open do you think VC are to entrepreneurs asking for advices about other firms?

  • http://www.JamesSiminoff.com Siminoff

    It is so hard to do this. Many people are scared to talk poorly about their VC's. As you know I was more then f*d by a group of VC's but even with that I only tell people when I am with them in person. I have chosen not to publish the info. And those VC's would have checked out…

    Sadly I think that TheFunded.com had the right idea but because it is anonymous I do not put much weight in the positives/negatives of any VC.

    On this one my opinion is that it is part of the risk of your venture. While I think talking to the companies that did not work out is probably the best way to get a read, it is not a guarantee.

  • http://www.zelkovavc.com/ Jay Levy

    One thing tha is important to us is how is the team outside of the 'office' we try to go out with most our teams prior to investing to have dinner/drinks to see how they are in non business settings, i think this is also very important for the founder to see the personalities of the vc's outside of the office.

    Also I think its important to do your diligence before you get a term sheet; its never a good situation when a team has to say no to a vc that has given them a term sheet.

  • http://bothsidesofthetable.com msuster

    Giang,

    I think it's important to understand why a VC pulled a term sheet and the frequency. There are times where it is valid. Most term sheets are subject to due diligence and things DO come out during due diligence. That said, it should be made clear when a term sheet is signed what the expectations are with regards to due diligence and if you find a VC that backed out of a term sheet it's worth understanding the circumstances (from both sides of the table).

  • http://bothsidesofthetable.com msuster

    Thanks, Jamie. Yes, it's true that it can be tough to get the true story out of somebody when they fear that what they say might get out. The same is true in reference checking where people often don't like to talk disparagingly about other people. It's your job to pose questions that get information out of people. Also, I would say that the system often does work. While you didn't publish your views online you are able to get across your bad experiences to other entrepreneurs and investors who ask you. I certainly confirmed information when we spoke!

  • http://bothsidesofthetable.com msuster

    Great point, Jay! We like to do the same, too. We try to get out in a social setting to make sure there is good chemistry between the team and our partners. It definitely works both ways.

  • http://asable.com/ Giang Biscan

    Great post, Mark, it is an excellent point about doing homework. Thank you.

    Chris Dixon few days ago wrote about a VC that backed out of a term sheet – and how he would advise those in his circles to avoid them. So I assume VCs would be a very good source for reference as well. How open do you think VC are to entrepreneurs asking for advices about other firms?

  • Mike R

    One of the most powerful tools we've found for reference checking people is the Internet Archive Wayback Machine. Many times a firm or a business is very proud of something that they later try to hide. This tool kept us out of at least one sketchy deal. Within an hour we had a better picture of his business activities than I bet he could have ever imagined.

  • http://www.JamesSiminoff.com Siminoff

    It is so hard to do this. Many people are scared to talk poorly about their VC's. As you know I was more then f*d by a group of VC's but even with that I only tell people when I am with them in person. I have chosen not to publish the info. And those VC's would have checked out…

    Sadly I think that TheFunded.com had the right idea but because it is anonymous I do not put much weight in the positives/negatives of any VC.

    On this one my opinion is that it is part of the risk of your venture. While I think talking to the companies that did not work out is probably the best way to get a read, it is not a guarantee.

  • http://www.zelkovavc.com/ Jay Levy

    One thing tha is important to us is how is the team outside of the 'office' we try to go out with most our teams prior to investing to have dinner/drinks to see how they are in non business settings, i think this is also very important for the founder to see the personalities of the vc's outside of the office.

    Also I think its important to do your diligence before you get a term sheet; its never a good situation when a team has to say no to a vc that has given them a term sheet.

  • http://bothsidesofthetable.com msuster

    Giang,

    I think it's important to understand why a VC pulled a term sheet and the frequency. There are times where it is valid. Most term sheets are subject to due diligence and things DO come out during due diligence. That said, it should be made clear when a term sheet is signed what the expectations are with regards to due diligence and if you find a VC that backed out of a term sheet it's worth understanding the circumstances (from both sides of the table).

  • http://bothsidesofthetable.com msuster

    Thanks, Jamie. Yes, it's true that it can be tough to get the true story out of somebody when they fear that what they say might get out. The same is true in reference checking where people often don't like to talk disparagingly about other people. It's your job to pose questions that get information out of people. Also, I would say that the system often does work. While you didn't publish your views online you are able to get across your bad experiences to other entrepreneurs and investors who ask you. I certainly confirmed information when we spoke!

  • http://bothsidesofthetable.com msuster

    Great point, Jay! We like to do the same, too. We try to get out in a social setting to make sure there is good chemistry between the team and our partners. It definitely works both ways.

  • Mike R

    One of the most powerful tools we've found for reference checking people is the Internet Archive Wayback Machine. Many times a firm or a business is very proud of something that they later try to hide. This tool kept us out of at least one sketchy deal. Within an hour we had a better picture of his business activities than I bet he could have ever imagined.

  • Jeanine Jacobson

    Great advice for founders! One place where quick decisions may have Disastrous and very long implications. Also taught in the Founder Institute _How to select your VC.

  • http://bothsidesofthetable.com msuster

    What a great idea. Thanks for sharing.

  • nathanbeckord

    Mark, good stuff.

    “Upside assessments” seem straightforward– how many intros did he/she make, how good was her advice, etc.

    “Downside assessments” seem much harder to do…e.g. how to sift through and discern when a VC was being an ass, vs. trying to protect or perhaps salvage an investment (after all, a VC's ultimately responsibility is to their LPs, not to the entrepreneur).

    In the one or two times I've been involved in this, I've found that it's really hard to– like you say– sort through the sour grapes vs. reality. Any additional tips? Or is the solution just a numbers game– having enough date points? thanks Nathan Beckord

  • kevinJs

    I'd be curious to hear what others think are the specific, important things to look for during reference checks…How the VC scored when it came to Mentoring, introductions, advice, access to exit options, etc. Thoughts???

    Mark, do you ever have founders approach you that want to do a deal with your firm only for the non-monetary help mentioned above? What's your position on a traditional VC's involvement here? Is this something best left to the ycombinator type firms?

  • http://bothsidesofthetable.com msuster

    Nathan, just like with employee references the important thing is hearing both sides of the story. You can ask the entrepreneur about their experiences. If they're negative ask for specific examples. Once you've heard then you need to assess your own views on their validity. I would VERY carefully ask the VC about that company. What experiences they had, why the company didn't succeed, what their interactions with the CEO were, etc.

    You'll never get the “true” story. There is no truth. But between the various pieces of input you'll draw some conclusions. And if you decide to go ahead you do so with your eyes wide open.

  • http://bothsidesofthetable.com msuster

    I think the primary reason you go to a VC is obviously the money. But I really believe that a good VC will help in all the areas you mention – much more so than YCombinator. YCombinator and the equivalents are wonderful programs for the first phase of your company. But companies go through many difficult phases and you need VCs there at each phase. We deal with issues like:
    - recruiting
    - founder disputes
    - raising debt to fund working capital or receivables
    - whether to merge / acquire companies
    - raising a larger round of VC
    - selling your company
    - access to senior industry leaders

    and much more. A good VC will reference well in all of these categories. You just want to talk with other CEOs and assess how useful the individual was in these categories. How prepared were they for board meetings? How useful were they at board meetings? How available were they for help when it was needed? etc.

    Good luck.

  • http://abstract-factory.com/ BerislavLopac

    There is one important difference between VC funding and marriage: with the former you need to double-check all the clauses when entering, and with the latter when exiting. I'm currently going through a difficult divorce, and once it's over I'm pretty sure I'll be able to handle any VC. :)

  • Jeanine Jacobson

    Great advice for founders! One place where quick decisions may have Disastrous and very long implications. Also taught in the Founder Institute _How to select your VC.

  • http://bothsidesofthetable.com msuster

    What a great idea. Thanks for sharing.

  • nathanbeckord

    Mark, good stuff.

    “Upside assessments” seem straightforward– how many intros did he/she make, how good was her advice, etc.

    “Downside assessments” seem much harder to do…e.g. how to sift through and discern when a VC was being an ass, vs. trying to protect or perhaps salvage an investment (after all, a VC's ultimately responsibility is to their LPs, not to the entrepreneur).

    In the one or two times I've been involved in this, I've found that it's really hard to– like you say– sort through the sour grapes vs. reality. Any additional tips? Or is the solution just a numbers game– having enough date points? thanks Nathan Beckord

  • kevinJs

    I'd be curious to hear what others think are the specific, important things to look for during reference checks…How the VC scored when it came to Mentoring, introductions, advice, access to exit options, etc. Thoughts???

    Mark, do you ever have founders approach you that want to do a deal with your firm only for the non-monetary help mentioned above? What's your position on a traditional VC's involvement here? Is this something best left to the ycombinator type firms?

  • http://bothsidesofthetable.com msuster

    Nathan, just like with employee references the important thing is hearing both sides of the story. You can ask the entrepreneur about their experiences. If they're negative ask for specific examples. Once you've heard then you need to assess your own views on their validity. I would VERY carefully ask the VC about that company. What experiences they had, why the company didn't succeed, what their interactions with the CEO were, etc.

    You'll never get the “true” story. There is no truth. But between the various pieces of input you'll draw some conclusions. And if you decide to go ahead you do so with your eyes wide open.

  • http://bothsidesofthetable.com msuster

    I think the primary reason you go to a VC is obviously the money. But I really believe that a good VC will help in all the areas you mention – much more so than YCombinator. YCombinator and the equivalents are wonderful programs for the first phase of your company. But companies go through many difficult phases and you need VCs there at each phase. We deal with issues like:
    - recruiting
    - founder disputes
    - raising debt to fund working capital or receivables
    - whether to merge / acquire companies
    - raising a larger round of VC
    - selling your company
    - access to senior industry leaders

    and much more. A good VC will reference well in all of these categories. You just want to talk with other CEOs and assess how useful the individual was in these categories. How prepared were they for board meetings? How useful were they at board meetings? How available were they for help when it was needed? etc.

    Good luck.

  • http://berislavlopac.tumblr.com BerislavLopac

    There is one important difference between VC funding and marriage: with the former you need to double-check all the clauses when entering, and with the latter when exiting. I'm currently going through a difficult divorce, and once it's over I'm pretty sure I'll be able to handle any VC. :)

  • http://giangbiscan.com Giang Biscan

    Thank you, Mark.

  • http://asable.com/ Giang Biscan

    Thank you, Mark.

  • http://asable.com/ Giang Biscan

    Thank you, Mark.

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