Raising money is often challenging, and a lot has been written about how to optimize the process to get the most attractive deal with the right investors. But relatively little has been written about actually selecting the “right” investor.

When VC’s evaluate a founder or team, they rely heavily on references in their due diligence. I’m often surprised that entrepreneurs don’t do the same with anywhere near the same intensity and diligence. Think of it this way, an investor may invest in 1-3 deals a year, and build a portfolio of 7-12 active companies that they are point on at any given time. Entrepreneurs are typically only choosing one lead investor and board member per round. The stakes are a lot higher, so you’d think the referencing effort would be greater. But often, it is not. Here are a couple suggestions on this.

First, do the work, but be smart about the sequence and timing.  Leverage your own network to the extent you are able to get a decent picture of what it’s like to work with a potential investor.  When you are talking to a handful of investors fairly seriously, one or two references will suffice to give you a gut check of what you might be getting yourself into.  Once you get a term sheet from an investor or have strong indication that a term sheet is coming, start doing more serious diligence.  You probably want to speak with at least three founders that the investor has worked closely with in the past. It should be totally fair game to ask for introductions to certain people, or at minimum, to ask for a few days to do this work.  Do this expeditiously, but don’t let an investor bully you into trying to make a decision on-the-spot without giving you time to do some calls.  Also, don’t do calls if you aren’t pretty serious. These are all founders who are incredibly busy, so be respectful of everyone’s time.

Second, try to speak to at least one founder that the investor has worked with in a failed investment.  This is not always easy to do.  The best approach is to do your own research and reach out to the entrepreneur directly.  You could also ask the investor to introduce you to someone, but you’ll get a much less authentic answer at that point.  Typically, it’s fairly easy to see which companies a firm has invested in that didn’t work out, but not which partner was on point for that investment (success has many parents, failures tend to be disowned).  My tip would be to look at the press releases or Techcrunch articles for the funding rounds of these companies.  8/10 times you see a quote from the new investor, and this is almost always from the point person on the deal.

Third, ask direct questions and try to get to specifics.  Remember that most entrepreneurs have an incentive to be quite positive about everyone they’ve worked with unless they know you really well and have a very high degree of trust in the confidentiality of the conversation. So you tend to get a relatively positive picture overall.  As a result, discount the sentiment of a call, and try to ask questions like:

– What are 2 practical things you can point to the investor doing to help your business in your first year working together?
– Tell me about a time things went wrong or you experienced a conflict with the investor. How did this investor react and how did they help?
– What do you know about this investor now that you wish you knew going into the relationship?
– What was this firm’s process for follow-on financing? How did the culture of the firm or the investor’s standing in the firm impact this? (This is particularly important if the company did an inside round or bridge of any sort).
– What did this investor bring to the table that was unique or better than the other investors you had?
– Of all of your investors, where does this person rank in terms of your enthusiasm to work with them again (you want 1 or 2, anything less is not good)

In the midst of running your business, it’s easy to not be thorough in referencing investors. You worked hard to get term sheets, you targeted investors with good reputations, and you are eager to get back to work. But remember that bringing on a new investor and board member is a very long-term decision that is nearly impossible to reverse. Remember also that most people are on their best behavior when they want to get into a deal, and that their behavior will almost always change in some way post investment. So take the time to be diligent. At worst, it will help you have a better working relationship with an investor, and at best, it may help you avoid a disastrous situation later.