Reference check

A conversation with a customer, supplier, former employee or prior counterparty who has no stake in whether the transaction completes.

Example

Calling three customers to ask what they buy, how often, and whether anything has changed in the last year.

Important

References supplied by the seller are selected. The ones worth most are the ones you found yourself, and a former employee is usually more informative than a current customer.

Related terms

• Independent verification — Confirming a claim against a source that was not produced by, and has no stake in, the transaction - a bank statement, a public register, a counterparty, a regulator.
• Primary source — A document that originated outside the transaction and was created for some purpose other than persuading you - bank statements, filed returns, signed contracts, public registers.
• Diligence request list — The written set of documents and access you ask a counterparty for, normally sent in waves rather than as one block.

Lessons that explain it

• Your reputation is built in the difficult moments — An investor's reputation is formed mostly by behaviour when companies struggle - down rounds, missed plans, founder departures. Founders and co-investors check it, and it shapes future access. (9 min)
• The customers you find yourself tell you more than the ones you are given — Customer calls are the most direct evidence of demand. They are most useful when they ask about past behaviour and include customers the company did not choose. (10 min)
• The information request, and what a refusal tells you — What you ask for, and the order you ask for it in, determines what you learn. The response to the request is frequently more informative than the documents themselves. (13 min)
• References you chose tell you more than references you were given — Checking the people behind an investment means verifying claims, speaking to sources they did not nominate, and asking questions specific enough that a vague answer is itself informative. (11 min)
• The references you find yourself are the ones that matter — Back-channel references come from people who worked with a founder but were not suggested by them. Structured, careful conversations with them reveal patterns that curated references cannot. (10 min)
• How a founder handled a failure tells you more than whether they failed — 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)

All 578 terms in the Investing glossary