Be Honest on VC Reference Calls

A friend of mine running a very successful company found himself conflicted over an upcoming reference call.  It was from a top college endowment that was taking a look at the next fund of a widely known VC who had backed him.

The truth of the matter is that their experience with this VC hadn't lived up to the hype.  The VC firm was growing quickly, having raised two funds in just a few years, each quite larger than the previous one.  At first, they seemed engaged, but they really didn't come through on the "rolling up their sleeves" approach that was promised during the fundraising.  

In fact, the main partner became increasingly difficult to reach, and a junior person started interacting with the company more and more.  Less than a year in, both had disappeared from board participation entirely, letting the other VC firm in the deal take the reigns.

The last thing this entrepreneur needed was to make waves.  Reference calls to potential limited partners seemingly have no upside to founders.  These investors are never going to fund them directly, and it probably helps in some way for the LPs in the funds who backed you to keep pouring money into those funds--regardless of how little the VC might have been helpful.  You don't want to see your main VCs go out of business while you're still running your company.

There is a downside, however.  It's not for you, but for the next founder down the line who winds up with them.  Many founders realize the hard way that reputations of many "top" VCs are little more than smoke and mirrors.  When I talk to founders about the VCs they really love--the ones who are working hardest for them--the first ones who come to mind are never the most widely known investors.  I don't know what's going on at a lot of the brand name funds, but it seems like a lot of VCs are kicking back and letting their past successes carry their effort--or perhaps they never were that helpful in the first place and just happened to be great at picking companies.  

Either way, when Limited Partners keep investing in VCs that aren't helping their founders, the life of founders across the board gets harder.  You want the system to be efficient--that the VCs working the hardest get to keep working--and the ones half-assing it go away.  When that Ivy League endowment comes calling, be constructive.  Tell them exactly how much time the fund is spending you and whether or not you are getting what was promised.  Institutional and professional LPs will keep confidentiality and they're dying for some real insights into who is really working for them out there.  

The same goes for VC references by other founders--which I hope founders are asking for.  If you're going to take someone onto your cap table you should talk to other people that VC has invested in.  Ask them direct questions about time spent and what the founders have asked for--and whether they've come through.  Look, we can't solve every one of your problems as an investor, but it's helpful to know who's really engaged and trying versus just spraying and praying with some option bets.

I've been running group reference calls around the fundraising for Brooklyn Bridge Ventures.  I'm very conscious of not demanding too much time from my founders with LP references, so I've asked a few of them at a time to join a group call.  I'll get 2-3 founders and a couple of existing investors and put them all on one conference call line.  I don't participate in it nor do I record it.  

When I have enough investors ready to do references, I'll batch them all together and send them onto the call.  So far, we've gotten great feedback.  The calls have become real conversations--and the founders and investors can either echo each other's sentiments about their experience or show that perhaps I'm not being consistent.  Either way, it becomes more obvious to the prospective LPs what's going on across the portfolio.  It would be easier to BS your way through a 1:1 reference call--but it's tougher to do in front of other founders who have the same relationship with you.  

At the same time, less sophisticated LPs gain the benefit of the questions asked by people who know what to ask.

Every VC should aim for their reference calls to be where the rubber meets the road--because reputation is really all you have in this market.  If your founders don't go out of their way to speak highly of you, you're  not going out of your way for them.