The Importance of Blind References

Taking money from the wrong people is almost as bad as hiring the wrong people. Both can be fatal to any Company.

Taking your time to research the people you accept onto your cap table gives you three valuable advantages:

1. You can avoid people that could significantly harm your Company and your reputation as an entrepreneur.
2. Armed with intelligence, you can construct your fundraising round by prioritizing the most value-added investors who want to invest in your Company.
3. Learning about how others perceive people you haven’t yet worked with before, will help you get the most out of these potentially very valuable relationships.

Done even somewhat right, it also expands your network and done excellently, it even might result in getting more investor intros!

Here’s my simple how-to guide to blind referencing.

1. Most investors keep an up-to-date list of every investment they’ve made that is publicly announced on Crunchbase and or AngelList. I find it easier to update my AngelList than Crunchbase. Crunchbase is better as it allows you to see the actual round that an investor has invested in.
2. Get to know an investors’ portfolio. This says more about them than any thought leadership piece or tweet or conference talk will ever say. It’s important that you follow the breadcrumbs that are available to you. Research and/or follow the founders in an investors’ portfolio on social media and try to identify the founders you think are most like you.
3. Almost founder’s email is first name at domain name (why there is so much startup spam). Write in the subject line: Reference Request: Investor Name. In the body of the email, make clear whether the investor has offered to invest or whether you’re in discussions as this allows a busy founder to prioritize a reply. While some might disagree here, I really believe a lack of reply is itself a reply (more on this in a minute). Indicate in the email a very quick intro about your business and the round you are raising.
4. As in any request that you are making of another person, prioritize around their availabilities to speak, not yours. This should take 15 minutes or less.

Here are helpful questions and why they matter:

1. When did Tom invest? Why it matters: All relationships take time to build and so relatively recent investments will almost always have less ability to offer insight into the working relationship.
2. Relative to your other investors in that round, how valuable has Tom been? Why it matters: Beyond the obvious insight of knowing where a prospective investor sits on the “leader board”, the answer here can also help calibrate the feedback especially if someone is dismissive of all of most of their investors.
3. Is there anything specifically that Tom has helped you with? Is there anything you had asked him to do that he couldn’t do? Why it matters: Each investor has different value-add. Ideally, you have a diverse group of investors with different “super powers” and some that you might not even think to ask or yet understand it’s value.
4. How often do you communicate with Tom and how responsive is he? Why this matters: If a founder is not communicative, an investors ability to provide value is significantly constrained.
5. What should I know about Tom and how we works that I might not know to ask? Why this matters: Different investors have different strengths and weaknesses.
6. Did Tom ask to follow-on and did you let him? Why or why not?

I believe that with references, three is the minimum viable intelligence and that an entrepreneur should do far more depending on the size of the check and/or whether this investor is joining the board.

If you really want to gain valuable insights, do 6 specifically cohorted references. Three companies doing really well and three that aren’t. How do you really know whose doing well and who isn’t? LinkedIn employee count is a better indicator than anything else that’s publicly available. A Company that hasn’t raised money in more than 18 months is often another signal of a company that has committed itself to the venture path although it bears saying that only in our industry does diluting the team’s ownership get taken as a sign of success!

I really believe that by scoring each prospective investor based on the collective input of their blind references will lead you to be able to maximize your company’s chance of having truly helpful investors that can help accelerate your inevitable success.

One of the challenges that comes to you when more investors want to invest in your company than you have room for is deciding who you’re going to accept into your round and how much each investor can invest. If you’re deciding who to allow to invest in your next round of financing from your existing investors, asking yourself these same questions about your own investors is a valuable thought-exercise.

While there are a great many number of valuable investors that I try to work with as often as possible, there are also so many non value-add investors and worse yet, a fair number of truly bad investors. You will never regret doing this type of work I’m outlining here.

I strongly believe that pro-rata rights should not be contractual in early-stage investments (anything prior to Series B). Contractual pro-rata rights create incredible problems for founders who run successful fundraising processes. Fundraising / Investor Relations is often one of the most stressful and mentally taxing aspects of a CEO’s job. After successfully signing a term sheet in any fundraising process post the very early stage, the next thing the CEO has to contend with is the “blood bath” that comes with existing investors doing everything they can to invest more into the Company.

The final piece of advice with blind references is to follow-up with those CEOs that were gracious in replying to your cold email and trusting you with their feedback and if you’re so inclined, offer to buy them lunch. You might make some of your strongest professional friendships this way. Good luck!