How can I confirm a potential investor’s experience with start-ups?

This article first appeared on May 25th, 2011.

I met a potential investor at an informal gathering and he impressed me with the work he said he’s done with several other start-ups.

What can I do to make sure what he’s said is correct? Should I contact the companies he said he’s worked with? Or is there a more standardised way of doing it?

It is absolutely critical that you perform “due diligence” on your potential investor, just as you would and should for any director, advisor or key staff hires.

Remember that all early stage companies succeed or fail based largely on the strength of the team that is built around the founder.

This team includes staff, suppliers, external advisors and, in this case, investors.

There is no “formal” or standard method of checking the skills and qualities and track record of your investor and his work with other start-ups.

A good place to start would be to treat the process as any other “job interview”.

If possible you should perform the following steps:

• Request and review your investor’s CV.

• Spend 10-15 minutes talking to each of his two or three “references”, in this case the other start-ups he has worked with.

• Agree a draft term sheet which outlines how much capital, at what valuation, would be invested in your business.

• Agree a set operational milestones.

• Set some regular meeting times, and agree how much or little time the investor will spend with the business.

• Agree what level of detail your investor needs and wants.

Remember that the best investor should also bring connections, customers, industry expertise, and a path to exit.

They should be able to advise and mentor you and your team.

Cash is good, but experience is priceless.