One of the often overlooked but critically important aspects of raising a venture round is to make sure that you have GREAT references. Customer references are of course very important, too, but this post is about personal references. This is a good topic to ponder because the way that VC firms will check your references should be the same way YOU are checking references with everyone you work with, or you may be in for an unpleasent suprise.
A single bad reference for a key member of the founding team IS going to be a dealbreaker.
VC firms do LOTS of reference checking and unlike most company fact-checking references, they aren't going to be happy with an HR department reference or by peers. If you look at your resume objectively, it should be immediately obvious who they want to see the references from. It is usually going to be a CEO, board members, or a VP at a larger company that you worked for at your last 1 or 2 positions (or whatever the big successful company you were at that gave you the crazy idea you could start a company yourself).
Here are my top tips for how to not blow your VC deal over personal references:
1. Check Your Own References
Do not give a reference that you don't know is going to be a good one. Having a frank conversation when you are warming the reference up to know that the VC may be calling them is a good honest approach to this to try and root out what might be. Find a real, but friendly investor, like an angel who may already have invested or that you know well enough to ask this as a favor, to call the references up and do a reference check on you.
2. Be Honest Before the Reference Checking
Make sure there are no misconceptions the VC could possibly have about what your prior positions, responsiblities, or results have been that may be contradicted during the due diligence.
3. Expect Back-Door References
VCs always want to find the people that you DON"T give as references to talk to, to find out the real story on you. If you have any skeletons in your closet, be honest with yourself about who they are, what they might say, and come up with a strategy to try and mend those bridges or have a strategy so that when the investors knock on that persons door it will not be a dealbreaker.
4. Know Your Key People
Even if you personally think bringing someone onto a team would be great, look at it from an investor viewpoint. If they are bringing baggage along with them of a bad break-up in the past, expect VC are going to find out about it and it will affect you. One way to deal with this if the person is a founder is to minimize their role in the organization so that the investors won't know to care about them (eg take them out of the management team), but the key here is that you need to consider not just someone's resume but how they manage their relationships with former employers.
4.1 Don't Hire People Who Have Been Fired
There is a certain characteristic of employees who get terminated in the workplace. And I'm not talking about getting laid off because of downsizing or reorgs or m&a, but real either personality or performance driven good old fashioned firings. Often because you have a personal relationship with someone you just overlook it and honestly take their side - their boss was an idiot, etc., but you won't get that same level of trust from investors. The corollary to this is that anyone who can't see that handwriting on the wall and get out in a softer exit from a company may not be ready for a management role. Of course there are exceptions here and great people get fired all the time, but you are probably trying to rationalize that YOUR guy is one of those 1% and be realistic and realize there is an issue here.
5. Cultivate Your References
If you are working in a company now, your boss, whether it be a CEO, a VC firm on your board, or whoever, is critical to the future of your next start-up. Keep that in mind and it may change your decision-making process when it comes to making tough choices. Building long-term sustained relationships after the employment ends is an important consideration.
You get the idea. THINK about references, it is one of those things it can take years to build up a solid set of and not long to ruin.