Who Are The Most Valuable References To Investors?
Hi, I'm Kieran. I personally reviewed thousands of startup applications for funding at On Deck and Wefunder. One crucial part of an application review is reference checks. Most first-time founders don't realize how important these are to investors. Your references can make or break an investment. This is because investors shape their opinion of your startup in large part based on the opinion of others. Investors follow other investors they respect to make decisions in a phenomenon called herd dynamics.
Here is how I'd stack rank references from most valuable to least valuable based on who they are:
1. Tier-1 Investors
The opinion of credible investors is the most important reference consideration of investors. Tier-1 investors have a track record of being right when picking startups to invest in. Also, not only do investors have skin in the game with money, but more importantly, they stake their reputation every time they invest in a founder.
Examples of credible investors include:
- VC Partners from tier-1 funds such as Keith Rabois at Founders Fund, Jess Lee at Sequoia Capital, or Andrew Chen from a16z.
- Notable angel investors such as Elad Gil, Scott Belsky, or Balaji Srinivasan
2. Co-Investors (or another investor at their VC firm)
The next most valuable reference consideration for investors is that of investors they co-invest with or on their team. While they may not be tier-1 investors, they respect the investor's judgment enough to recommend deals to them, invest alongside them in startups, or work with them.
3. Venture-Backed Founders
The following highest signal reference to investors is the recommendation from a venture-backed founder. While they are not professional investors, venture-backed founders have an upper leg on the rest of the people below them on my list because they can pattern-match for qualities that may be leading indicators of success for the startup based on themselves. Additionally, venture-backed founders know what VCs demand from a founder and can endorse people with ambitions large enough to meet these expectations.
If the venture-backed founder makes a personal investment and acts as an angel investor in the round, the reference is even more powerful.
Examples of venture-backed founders include:
- Parker Conrad of Rippling, Mathilde Collin of Front, and Melanie Perkins of Canva.
4. Portfolio Founders
After venture-backed founders, the opinion of portfolio founders is the next most essential reference investors consider. An investor's view of a portfolio founder changes over time based on the startup's performance. Therefore, an endorsement of a startup from a portfolio founder performing well can greatly influence an investor.
5. Successful Bootstrapped Founders
Successful bootstrapped founders are the next most valuable reference for startups. Like venture-backed founders, successful bootstrapped founders can pattern match for qualities based on themselves, just without the experience of raising VC.
Examples of successful bootstrapped founders include:
- Craig Newmark of Craigslist, Sara Blakely of Spanx, and Erik Allebest of Chest. You can read about their bootstrapping stories here.
6. Founders You Worked For
At this point in the list, the references decrease in value exponentially for investors. A founder you worked for may or may not be a significant reference check for an investor. Unlike others higher on this list, the investor may not view the founder you worked for as successful or credible, and they don't have a prior relationship with them.
7. Managers
While a manager can speak to a founder's performance in their last role, it's unlikely they possess the judgment to understand whether or not the person will likely succeed as a startup founder. For example, a previous manager may not understand startups or VC.
There are some exceptions, but a previous manager at the most recent company is often more valuable than a manager from the first company they worked at. This is because they worked with you most recently – performance, drive, growth, and skills changes over time.
8. Teammates
Teammates are ok references. They may lack the qualities and visibility, similar to a manager, to provide a high signal reference to an investor. If you use a teammate, try to pick a teammate that worked with you directly for an extensive amount of time rather than a teammate in a different department who can't speak to the quality of your work.
9. Friends
Friends want to see you succeed and will say good things about you if they are your friend. If this is your best option, try to pick a friend who qualifies as something higher on my list, such as a previous founder or investor, even if they have yet to work directly with you.
10. Family Members
Yes, some first-time founders think a family member is an appropriate reference for an investor because they don't know better and have yet to read this blog post. Find somebody else higher on this list :)
In my opinion, investors should consider the views of others but ultimately should trust their gut and rely on their due diligence. References should confirm your thoughts or help move the needle for investors on the fence rather than something that completely flips their decision from a strong no to a yes.
