So you’ve decided to raise capital and have figured out what your ideal partner would look like – great! If you’re still toying with theidea of raising or trying to figure out what the perfect investor looks like – check out these posts: To Raise or Not to Raise and Your Ideal Partner. Hopefully you’ve begun to meet with some VCs who match up with your company’s goals and perhaps they are beginning diligence on your business.

One of the aspects of diligence we find to be incredibly valuable is the customer reference call – it offers a unique perspective on your company, people, products, etc. that can’t be gained through conversations with management and reading through your company’s marketing materials.

From a customer reference, we look to understand:

  • Value Proposition: What does your organization allow your customer to do? Does it cut costs, increase revenue, create process efficiency, or something else? What is the use case and what pain point does it solve? Does the actual value they’re seeing match up with their expectations they had heading into the relationship? Is there a measurable ROI?
  • Differentiation: Why did your customers choose your company over others? Were there certain features or functionality that made your product better than the alternatives? Is the solution technically superior to others they may have evaluated? Was your offering the most affordable? Would they ever consider building in-house? What were they using prior to your solution?
  • Customer Satisfaction/User Experience: Are they a happy customer? Are they likely to renew when the contract expires? What could the company do to improve and make the customer experience better? What has customer service been like?
  • Purchasing Process: What does the procurement process look like? Is there budget set aside for the purchase? Is it an RFP that the company responded to? Who makes the buying decision from within the organization? What does the implementation look like? How many vendors did they speak with? How did you come across these vendors?

These are just a sampling of some of the questions we look to answer as part of these reference calls – many of the above questions may not apply for certain companies, and there are likely some other questions that are more specific to the business and the market. By asking many of these questions, we’ll have a 1st-person perspective on your business and how successful you have been at achieving your stated goals.

At OpenView, we try to get to the customer reference calls as quickly as possible once we have interest in a business. It allows us to have a more complete view on a business before entering into a term sheet and provides us with more confidence that we’ll be able to close the investment once a term sheet is signed. I know there is sensitivity around sharing customer contacts with multiple firms prior to reaching an executable term sheet, and I think that is a fair concern. Prior to sharing references, I’d suggest:

  • Trying to answer all other outstanding pre-LOI diligence items first. There may be a “deal breaker” in there and you’d rather not expose your customers prior to getting the other items settled.
  • Figure out if there is a deal that makes sense for both sides. Why go down the path of sharing references if there is an unbridgeable valuation gap?
  • Share references with as few firms as possible. Seems like common sense, but try to limit the amount of conversations your customers are having with potential investors – mix up references between firms and share with as few firms as possible.
  • Provide as much context to the reference as possible. Make sure your customers know that your company is evaluating potential investors and, as such, you would love them to share their experience in working with your company. This will let them know that you are in the driver’s seat on the capital raise and if it doesn’t work out with an investor they spoke with, you can simply say that they weren’t the right fit for your organization.

Also, feel free to ask for feedback from the investors on how the conversation went – whether or not they ultimately decide to invest. Hopefully, they can provide you with a perspective that will allow you to keep improving your business. Sharing customer references may seem like a huge pain at first glance, however if your company is performing well and your customers are happy, chances are they will be more than excited to speak on your behalf! I find that most references do not feel inconvenienced by the call and love the opportunity to provide feedback as well as help a company that has helped them.

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