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On References, Quirkiness, and the Importance of Seeing Things from All Sides

March 1, 2011

Brad Svrluga

I’m struggling this morning, thinking about the importance and challenge of reference checking the entrepreneurs that we consider working with.  I’m struggling in particular because in twelve years in this business, having invested in over 25 companies, I’ve only had reference checks on an entrepreneur materially impact my decision to invest or not invest in his company only once.  Four years ago, solely because of highly questionable references on the CEO from his prior investors, I passed on a deal that I would otherwise have done.  Yesterday I learned that the company was being sold in a transaction that, had I led the Series A (as I was close to doing), would have returned more than 2/3 of my fund in one deal and put the fund squarely and irreversibly into the black. It would have been the best investment of my career.


Consideration of this outcome was further colored by reading my friend and occasionally co-investor Roger Ehrenberg’s thoughtful post on investing in “quirky.” As Roger points out, an important skill in successful early-stage investing is being able to relate to the quirky and occasionally downright maddening traits of the entrepreneurs we choose to work with. As Roger points out, sometimes these are people with whom we are not innately comfortable. But we need to grow up and find ways to see through our discomfort, as often it is the most “quirky” of these folks who are working on the most transformational opportunities.

Thinking back to my decision to pass on the aforementioned rocket ship, I think in reality I may have just misread what I was hearing in the CEO’s (let’s call him Pat) references. While I liked the company, I had a nagging, uncomfortable feeling about Pat going into the references, and those references seemed to validate my discomfort.

Bottom line, Pat is indeed a complicated guy. Quirky, even. His prior company was at best a so-so outcome, and one with which his prior backers were understandably frustrated. Pat had done an OK job, they said, but not a great one. He was consistently overly optimistic and at times very difficult to deal with. Now Pat was embarking again on attacking that very same industry with a new strategy and solution. And none of his prior backers were coming along with him for the ride.

But his entire senior team was, and that’s where I think I blew it. His investors hadn’t made any money with him, so they weren’t coming back. You’ve no doubt heard VCs say, present company included, that we like to back entrepreneurs who’ve failed before and learned from it. While that’s a broadly held belief, it takes unusual courage to apply that convention to backing a guy who’s failed before on your dime (fool me twice. . .). So it shouldn’t have been surprising to hear these guys trashing Pat. What I should have paid more attention to, and probably should’ve let trump the questionable reviews from prior backers, was the fact that his key lieutenants, the guys who had been into battle with him every day for five years prior, wanted to work with him again. These were talented guys – seasoned executives with very marketable skills. They had plenty of options for what to do next, and they were following Pat into battle again. That says a lot about Pat, no?

I was talking about this last night with another friend who summed up the challenge of evaluating entrepreneurs quite elegantly:

“The people who do the really big shit are complex.”

Amen. If we think of the four hottest private companies in the world right now – Facebook, Groupon, Zynga and Twitter – at least three of them were founded and are run by individuals who are notoriously difficult and/or have been accused of fraud or malfeasance. They produced mixed references at best, I’m sure. Heck, anyone who’s seen the Social Network is savvy enough to recognize Mark Zuckerberg as a difficult, complex guy. But man is he doing some big shit.

At the end of the day, I feel fine about having passed on Pat’s company. Hindsight has exposed it clearly as a mistake, though given the information I had available at the time, my decision was not unreasonable. But it also did not consider the available data as thoughtfully as it might have. The important thing now, as with any mistake, is to try to learn from it. So I’ll be thinking carefully about how to read entrepreneur references in the future, and making sure to carefully consider them as only one  element amongst a broad set of critical data.

As he celebrates his success today, I’m truly happy for Pat and his team. As for me, hopefully I’ll make a more nuanced read the next time a Pat walks in my door.



One Comment

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  1. March 1, 2011

    I love brutally honest posts like this. Takes balls to write them. Thanks for sharing.

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