We all know that one of the most difficult things to do is to judge the honesty and integrity of a startup founder.
If you choose to back someone who’s either a crook or who’s incompetent, you’re going to end up in deep trouble. The problem is that you’re not going to realise this until it’s too late, because everyone wears rose coloured glasses during the 6-month honeymoon period after funding has been raised.
This is one of the reasons why investors will perform so many reference checks as part of their due diligence process, in order to judge which founder to back. You don’t want to be taken in by a glib, smooth talking imposter.
Check The Box Exercise
Typically, most reference checks are done as a standard “check the box” exercise. The entrepreneur provides a list of people who will vouch for him, who are either professors, or his earlier bosses. Because these are people he has selected, usually they will have good things to say about the founder. This is why the reference check usually just becomes a perfunctory task which is delegated to a junior analyst, and doesn’t provide much useful information.
This is why it’s so important to do what I call anti-reference checks.
You need to ask him for names of people who will not say complimentary things about him. This could be a boss whom he used to work for whom he didn’t get along well with; or a senior who fired him from his job; or a customer whom he failed to sell to. These are the people you should actually be talking to, because they are much more likely to give you the unvarnished truth.
Triangulate – To Get A 360 Degree View
One tip. If anyone has anything negative to say about him, please give this a disproportionate amount of importance. Typically, most people are very reluctant to say anything unflattering about anyone else, and their comments are quite likely to be very guarded, because they want to be politically correct. You can always ask the founder to provide an explanation for any criticism you unearth.
Unless you triangulate, you’re not going to be able to get a 360 degree view, and you may get carried away by some of the positive things which the people he selected have to say about him. They are likely to be biased, which is why they fail to provide any useful information about his weaknesses.