Do Diligence on Us

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Coach Dale talking to his players

“Think of him as chewing gum. By the end of the game, I want you to know what flavor he is.”
– Coach Norman Dale (Gene Hackman), Hoosiers

Entrepreneurs don’t do enough diligence on their investors.

As venture investors, we do a lot of diligence on you. We call references, both on and off your reference sheet. In our partnership discussion, we talk about your strengths and weaknesses, your character, your ability to grow the business, your idiosyncrasies, whether you will want to sell too early, your willingness to take feedback, and everything else under the sun. We are making a bet on you just as much as (or more than) we are betting on your idea.

As an entrepreneur, you should conduct an equivalent amount of diligence on your investors, but few entrepreneurs do. My experience has been that most entrepreneurs base their decision on one factor well above all others: price. Choosing an investor based on price is like picking a wife based on looks. It seems like a good idea for the first six months until you hit a bump in the road and figure out you optimized for the wrong factor. I am not saying price isn’t important; it’s just not all-important.

Choosing an investor based on price is like picking a wife based on looks. It seems like a good idea for the first six months until you hit a bump in the road and figure out you optimized for the wrong factor.

The obvious caveat is that often entrepreneurs don’t have a choice in choosing their investor partners. Assuming the choice is there, below are seven tips/questions to help you think about your diligence.

1. Call references.

If you are deciding whether to accept an investor’s money, you can ask for intros to the CEOs that the investor works with most closely. Good investors often volunteer this information. Even better, find references you trust. Talking with someone who will give you the straight scoop is much more valuable than asking questions of someone you don’t know and who is likely more beholden to the investor. Check out LinkedIn and Facebook for mutual contacts.

2. Ask the tough questions.

Don’t do perfunctory reference calls. Ask if that CEO would take the investor’s money again. Ask about strengths and weaknesses. Ask about how that investor reacts when times are tough. Ask if the CEO calls that investor when he or she is dealing with an important issue.

3. What did you learn through the negotiating process?

Your best indication of how you will interact with your investor during a more stressful time is the negotiation you just had. Maybe you didn’t get all the terms you wanted, but was the investor honest and up front? Did you feel good about the process? Was he or she responsive?

4. Think about the next round of funding.

If you are still an early-stage company, make sure you are setting yourself up for success down the road. What is the investor’s role in the firm? Is he or she respected among other investors outside that firm? Is there additional capital reserved for your company and how much?

5. What’s the track record?

By track record, I mean more than past successful investments. How has the investor responded in the tough situations that inevitably crop up in startups? Does this investor hop off boards the first sign of trouble? Does the investor attend board meetings in-person or phone it in?

6. Do you like him/her?

You may be spending 10 or more years with this person. Divorcing your spouse is easier than getting rid of a large investor, so don’t jump in willy-nilly. Do you respect this person? Would you enjoy talking to him or her over a beer? Try it out before the investment is closed.

7. Do you trust him/her?

Trust is the most important element of a successful relationship between entrepreneur and investor. Listen to your gut based on what you’ve heard and experienced. Prioritize trust over a couple pennies on valuation.

  • Jerome Gentolia


    FYI! Check out this blog on Google Chrome. The image overlaps with the text. Some text on your side bar overlaps with each other as well. I have to copy and paste your text on the document to read it. Love the article by the way!

    • Christopher Fryer

      Jerome, I help administer the site. I’m on Google Chrome and can’t replicate the problem. Can you send a screenshot to me at

      • Rand Fishkin

        Christopher – here’s an upload of the problem – I’m seeing a few overlapping text blocks:

      • Jerome Gentolia

        I assume Rand showed you a screen shot already? Or do you still need me to send you a screen shot?

  • Dan Shapiro

    Great article, Greg. I suggest one thing more: ask the investor directly about the sensitive details of their fund: how big is the fund, how much is still available, how far in to the fund life are they, how much do they typically reserve for follow-on investments. If it’s a seed round, ask what percentage of seed investments they participate in the series A, and what percentage they lead.

    Entrepreneurs are sometimes worried about looking pushy or alienating the prospective investor, but asking hard questions like this in a constructive, positive way makes you look like a better investment, not a worse one. And investors do tend to prefer entrepreneurs who are choosy, not desperate.

    • Greg Gottesman

      Good point, Dan!

  • Scott Porad

    I would enjoy an entire post on #2. What are the tough questions that an entrepreneur should be asking? And, what are the right and wrong answers?

    • Javier Sandoval

      Dan Shapiro ^ explains the tough questions. Those questions will prevent you from wasting time with a “walking dead” VC.

    • Javier Sandoval

      I would add however to ask the VC to connect you with a startup they backed that flopped or struggled. It’s important to know how a VC behaves in tough times. They’ll respect that you’re professional about who you work with.

  • Rand Fishkin

    One of the things that surprised me most in the VC process I ran in 2011 and 2012 was how, when a VC offered to have me chat with some of their CEOs, they’d often damn with faint praise, or even give some critical feedback. I loved that the loyalty was to other entrepreneurs rather than their investor – and it made the praise Brad (Feld) was given by the folks he’d funded additional weight.

    This is good advice Greg!

    • Mark MacLeod

      It only speaks to most VCs egos that they would offer up sub par references not really knowing what the entrepreneur thinks.

      I always encourage entrepreneurs to call any and all of the CEOs I have backed. Not every company has turned out as planned. But that’s to be expected. But I do hope I am building long term relationships with every founder. be real for the long term and you won’t get crap references.

  • ALBsharah

    One of the most concise posts on the topic I’ve seen, nice work. I think it’s hard for most entrepreneurs to say “no” when it comes to the wrong investor… $$$ are shiny and hard to ignore.

    It’s important that while it may be more work up front to find the right investors (when they just want to close the deal and get to work), it’ll pay dividends in time and stress down the road…

    Nice bumping into you at the GeekWire gig the other night!