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Reference calls are a standard part of a VC diligence process, and often one of the less stressful fundraising moments in a founder’s eyes. However, they are often the first time in the process that the management team is completely removed, and thus don’t have the opportunity to course-correct in the midst of the action.
VCs are more focused on patterns of negative feedback emerging, rather than one-off comments.
Fundraising, especially early in the life of your company, has unique time constraints. It’s rare to enter into such long (and difficult to unravel) commitments, and even rarer to do so after only a few weeks or months of a relationship. These calls are an attempt by the VC to learn about you, your market, and your business from people who have more context and a longer history of interaction than we do.
You should expect these to occur late in the process – sometimes post-term sheet. This makes logical sense (references are mainly to validate, rather than educate) and also shows a respect for your references’ time. At most, your references should be speaking to a few extremely serious firms – not arranging calls for all the investors on your Obvious and Possible fit lists.
Step one: Build your list
There are three buckets of references you’ll need to consider:
“Friendly” personal references
These are people who can attest to your work ethic, character, and leadership potential. Aim for a mix of different roles – peers, managers, and direct reports. If you’ve founded past companies, you’ll want to include your co-founders. It’s an added bonus if they’re independently impressive. These references are indicative of the company you keep, and if you can show that you’ve worked with world-class people (and left a positive impression on them), it lends credibility to your ability to recruit top-tier talent.
Although these are personal references, keep them in a professional context. Your best friend or sister-in-law might know the most about you, but including them won’t reflect well on your judgement.
These should be your most enthusiastic customers – you want your biggest champions, and those that won’t interpret a VC’s intrusive questions as a negative signal on your company’s performance and prospects for success. The person who owns the relationship is much more important than seniority or prestige.
The purpose of these calls are to parse out the buying process, your company’s value and ROI, gaps in the platform, and your ability to deliver on promises.
Connecting your VC with a less engaged, but more senior customer contact risks creating the impression that ROI is vague or they’re not in love with your product, simply because that person has less familiarity with the daily use case.
These are the informal references you can expect VCs to contact, but won’t actually provide. Consider who you would logically reach out to if you were in their shoes. Have you worked with their portfolio companies in a customer or partner context? Did you work with one of their portfolio executives at a former company? Do they have advisors or portfolio contacts who you know independently? Have you been funded by other VCs, either during this company or a past venture? Expect them to compare LinkedIn and AngelList networks as well. Note that these references won’t all be as formal as the first two groups, but the insights gleamed will be arguably more important.
Step two: Prepare your references
Like I mentioned above, this is one of the few moments in the fundraising process where you aren’t kept in the loop and have less control over how statements are interpreted by VCs. Don’t write off your ability to craft a narrative around your references though! It’s important to spend time thinking through the message you want your references to get across, and preparing your references to deliver on that wish.
Coach your references to be extremely complimentary. There’s a big difference between honesty and pessimism, and VCs will be digging for a balanced judgement.
First, don’t assume your references know the drill – this is meaningfully different from standard job reference questions, in both type of question and tone. Your customers may have never given a reference call before. VCs will ask probing questions, they might focus extensively on negative aspects of the business or management team, and/or they might challenge the opportunity. Make sure your customer references don’t read into this (or the fact that you’re fundraising and nearing the end of your runway) as a negative reflection on your company.
Frame this as educating the VC on the industry versus a key decision point in making a decision. This is one data point among many, and your customers/personal references shouldn’t feel uncomfortable about being liable for the investment.
Second, coach your references to be extremely complimentary. There’s a big difference between honesty and pessimism, and VCs will be digging for a balanced judgement of the founder and company’s strengths and weaknesses. However, your references should be your biggest champions. If they don’t love you or your product, that’s a red flag! We expect more balanced insights to come from your off-list references – if your on-list references are hesitant to sing your praise, we’ll worry customers don’t genuinely love your product.
Ultimately, your best references will be those who’ve been kept updated well in advance on your progress. You want your references to speak to your progression over time, not cram for the call.
Step three: Stay engaged and get ahead of issues
Once you’ve introduced VCs to your references, they’ll typically try to schedule all the calls within the span of a week maximum. Make sure you know when these calls are taking place, and check in with your references to find out how they’ve gone, what conversation topics came up, and anything potentially concerning that you might want to address. If you feel a reference has misrepresented your history or skillset, try to get subsequent references to address those concerns as your rebuttal may come across overly defensive.
VCs are more focused on patterns of negative feedback emerging, rather than one-off comments. You should anticipate what weaknesses might surface, and hopefully you’ve proactively addressed them not only to ease the VCs concern, but also within your business. Don’t be defensive, but do focus on demonstrating how weaknesses can be mitigated. Have you learned a valuable lesson from a past mistake? Did you consciously change your behaviour or your approach to a business problem? Have you backfilled a missing skillset? VCs aren’t looking for the perfect investment, but rather a founder who’s humble enough to acknowledge their shortfalls, but paranoid enough to make sure they don’t remain unaddressed for long.
Finally, don’t get thrown off by criminal and financial background checks. It’s part of our fiduciary duty as VCs, and isn’t indicative of any malaise.
My only addition to the topic of references is to point out that VCs may expand their list of references beyond the founder and founding team. This is especially the case if there is key role in the business currently filled by an employee. Most typically, these are the head of sales and CTO roles. A potential VC may very well request references, same as the above, for these individuals. You should of course clear these reference requests with your employees first, but follow the same process Sarah outlined above in preparing them.
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