How to Conduct References on Your Investors

When we are ready to make an investment proposal, we request a list of references. We also speak with off list contacts and ask permission to do so if those discussions could compromise the business. 

Any responsible investor about to enter a long term relationship with a team will follow that protocol. They need to learn as much about that team as possible within a relatively short time frame.

Entrepreneurs who are entering the relationship should conduct the same diligence from their end. However, it is far less common for them to do so. Below are some steps I’d recommend to make sure you’re signing up with the right investor. If they are unwilling to reciprocate references, you have to question whether they’re the right partner. 

1) When to Ask: Investors should not request references until they are very serious about making an investment, and entrepreneurs should similarly wait until discussions are at or nearing term sheet phase to do the same. Neither side should expect their contacts to conduct multiple reference calls with parties that are not serious about moving forward. 

2) Who to Ask For: Look at an investor’s portfolio and send a list of companies you would like to speak that are tangential to your business. Be sure that the fund representatives leading the investment are involved with those companies. You should reference the lead investor as well as the overall fund. Ask for references that have been successful exits and failures. Everyone shows their true colors when times are tough.

3) Go Off List: Investors like to speak with references that are not provided directly by the management team, making them truly neutral. Entrepreneurs should do the same when possible. These personal references can be conducted earlier in the process to make sure it’s worth continuing the discussions.

4) Make the References Worthwhile: Target references that can be helpful to your business as a partner or customer. If you’re working with a fund based on their portfolio, be sure that you can leverage it.