Previous startups, including failures, are strong evidence about a founder. Diligence looks at what happened, how investors, employees and customers were treated, and what the founder learned.
9 min read · Level 3
I think a founder who wound down a company honestly - updated investors early, paid people, closed things properly - has demonstrated something that success rarely tests. Anyone can communicate well when things are going up; the evidence that matters is how they communicated on the way down.
Many strong founders have run companies that failed. What matters is how.
Area Questions What happened Why did the company end? What did the founder see coming, and when? Investors Were they kept informed? Were difficult updates sent promptly? Employees Were salaries and obligations paid? How was the news delivered? Customers and suppliers Were obligations honoured or wound down responsibly? Legal and financial Any disputes, personal guarantees or unresolved liabilities? Learning What would the founder do differently, specifically?
Sources beyond the founder: previous investors, former employees, company registry records of dissolution or insolvency, and public reporting.
A founder who gives a specific, self-critical account of a failure - including their own mistakes - is usually more reassuring than one who attributes everything to the market or co-founders.
Because the way someone handled a company's end is a rare real test of integrity under pressure. It shows how they will behave if this company struggles, when information and money become scarce.
Previous investors, in particular, know whether they were told the truth in time.
Educational, not personalised financial advice. Nothing in the Investor Academy is a recommendation to buy, sell or hold anything — what is right for you depends on your own circumstances and the rules where you live.
Two founders whose previous companies failed.
Founder A: sent monthly updates until the end, flagged the risk six months early, returned remaining cash to investors, paid all staff, found jobs for several. Account of failure: 'We scaled sales before retention was proven. I pushed for it.'
Founder B: stopped updates nine months before closure, investors learned from a registry notice, some supplier invoices unpaid. Account: 'The market turned and our lead investor would not support us.'
Both companies failed. The investor's view of the two founders is very different, based on evidence from previous investors and records rather than the founders' own summaries.
Treating a previous failure as a negative in itself, or accepting the founder's account of it without speaking to previous investors or employees.
Request what happened, when it was visible and what the founder did.
Ask how and when they were informed.
Review registry filings for dissolution, insolvency or disputes.
Look for specific, self-critical lessons.
Before investing in a founder with previous ventures, successful or not.
Do not penalise founders for failures caused by factors outside their control; focus on conduct and learning.
Investors commonly say they would back a founder again after a failed company if that founder was honest and communicated early during the failure, and several well-known founders have publicly described raising from the same investors after a previous company closed.
A well-handled failure can strengthen investor relationships rather than end them.
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