This 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.