Counter-diligence

Eric Wiesen

I’m enjoying this series of posts, inspired by Matt Blumberg’s list from a few days ago, so here’s the next of Matt’s characteristics of great investors. This one is specific, pre-investment suggestion Matt makes about how to do due diligence on an investor.

Great investors invite you to do diligence on them by giving you a list of every CEO they’ve ever worked with and asking you to pick the ones you want to talk to.

I don’t disagree with Matt that this is a worthwhile thing to ask for and something a potential investor should be willing to provide, at least as you get quite close to a signed term sheet. From my perspective, if a company came in and pitched and immediately demanded a contact sheet for every CEO I’d ever worked with, I’d say no. But if I was planning on investing in the company and was getting close to proposing terms, I think it’s quite reasonable for someone on whose board I’ll sit to ask about others who have worked with me, and not just a cherry-picked subset of those I know will say good things.

A couple of additional points here.

1. Talk to at least one CEO who was replaced, if you can get in contact with one.  Every venture firm has CEOs who are replaced and most well-networked founders know several who have been as well. There are longer posts to be written on this topic, as the notion of founding CEOs being replaced is nuanced, complex, and can be for a variety of reasons. For purposes of this post, if you want to do full diligence on an investor and what your expectations should be for that investor, talking to someone who was replaced may be helpful.
2. In addition to CEOs the investor has backed, talk to a couple that the investor hasn’t backed. You can ask for a list of a few CEOs whose companies the investor chose not to fund (I keep a short list of this type of reference handy for potential investments looking for this type of conversation), or if you want to be a little more signal to noise ratio, talk to people around your space and see who might have pitched this particular investor. Chances are if an investor is seriously interested in your company, that investor saw pitches from a variety of your competitors or those in adjacent spaces as well.

Hearing the experience of those who may have pitched this investor, but in whose companies s/he chose not to invest is a potentially valuable source of data. As both Stuart and I are fond of saying – if a guy is nice to you, but nasty to the waiter, he’s not a nice guy. Similarly, if you find that an investor is on his best behavior to you but learn that he was dismissive or rude to others in whose businesses he was less interested, that tells you something about this investor.

Lastly, I want to make a point that also emerged in the comments to Matt’s post. Being open to this type of diligence request is only indirectly related to being a “great investor”, as great investors are measured by their returns, not by how well they are liked. It’s important when evaluating investors to think about how they are also being judged.

That being said, this type of openness builds a long-term reputation among the entrepreneurial community as someone who believes in respect and takes each interaction with a founder or CEO seriously. I think it’s a worthwhile exercise, and likely tells you something valuable about an investor with whom you’re about to spend a lot of intense, challenging time.