How to Do Reverse Due Diligence on Investors
Most founders vet products and hires more carefully than they vet investors. Here is how to research a VC before you take their money - and the questions that reveal who they really are.
When you take venture capital, you are entering a relationship that will last 7 to 10 years. Your investor will sit on your board, hold blocking rights on major decisions, and be a reference - positive or negative - to every future investor, acquirer, and executive you recruit. This is a longer commitment than most marriages.
Yet most founders spend more time vetting a $50K contractor hire than they do vetting an investor who will own 20% of their company. Reverse due diligence is the practice of systematically researching investors before you accept their money. It is not optional. It is one of the highest-leverage activities a founder can do before signing a term sheet.
What you are actually evaluating
There are four things to assess in an investor: their value-add beyond capital, their behaviour when things go wrong, their reputation with other founders, and the alignment between their fund timeline and your company's likely trajectory.
Value-add is the most marketed but least differentiated aspect of VC. Every fund claims to have the best network and the most helpful partners. What matters is specific, verifiable help: introductions that led to closed deals, hires they made happen, strategic decisions they influenced positively. Ask for examples and verify them.
Behaviour when things go wrong is the most important and hardest to assess. Almost every VC is easy to work with when the company is growing. The test is what they do when you miss a quarter, when a co-founder leaves, or when you need a bridge round. This is where the character of an investor - and a firm - is revealed.
The three reference calls that matter most
1. A founder whose company failed with this investor - how did the investor behave? 2. A founder who had to raise a down round with this investor - what happened? 3. A founder who had a board conflict with this investor - how was it resolved? Do not just call the references the investor gives you. Find these founders yourself through LinkedIn or mutual connections.
How to find founders who will tell you the truth
The references an investor gives you are curated. They will introduce you to founders who had positive experiences. To find founders who will tell you the truth, you have to do your own research.
Start with the fund's portfolio page. Find companies that are no longer active - acquisitions below the expected return, shutdowns, pivots. Track down the founders of those companies on LinkedIn. A cold message that says 'I am considering taking investment from [Firm] and want to hear about your experience - would you be willing to share ten minutes?' gets a surprisingly high response rate. Founders remember how they were treated.
Also look at board resignations in the public record for later-stage companies. A founding CEO who was replaced by a board-appointed CEO is a sign worth investigating. Sometimes it is the right call. Sometimes it reflects an investor pattern of removing founders at the first sign of trouble.
The questions to ask in reference calls
When you reach founders for reference calls, ask questions that cannot be answered with a PR-approved answer. Specific, scenario-based questions get honest answers; open-ended questions get rehearsed ones.
Ask: 'Tell me about a time the investor pushed back on a decision you made. What happened?' Ask: 'If you were raising your next company, would you go back to this investor? Why or why not?' Ask: 'Was there ever a moment in the relationship where you were surprised - positively or negatively - by how they behaved?' Ask: 'How much of the help they promised in the pitch actually materialised?'
How Ben Horowitz evaluates founder-investor fit at Andreessen Horowitz
a16z founded
2009
AUM
$35B+
Portfolio companies
500+
Founder CEO preference
Stated policy
Andreessen Horowitz built their early reputation partly on a stated commitment to backing founder CEOs longer than conventional wisdom suggested - a direct response to what Ben Horowitz experienced as a founder when VCs pushed him toward replacing himself at Loudcloud.
Horowitz has written extensively about the experience of being a founder in crisis, and a16z's approach to portfolio support - providing operating partners, a talent network, and executive coaching - is explicitly designed to help founders through rough patches rather than around them. Whether this promise holds in practice is something each founder considering them should verify independently.
The broader lesson is that a firm's stated values and actual behaviour in hard situations often diverge. The only way to know which category an investor falls into is to talk to founders who have been through the hard situations with them - not the ones who had an easy ride.
Fund mechanics: why they matter for you
Understanding a fund's mechanics helps you predict how an investor will behave over the life of your relationship. A fund that raised in 2019 and has a 10-year life is entering its final years. A fund in its final years has less flexibility to support struggling portfolio companies and more pressure to mark positions and return capital to LPs.
Ask what number fund this is. A first-time fund manager is building their track record and may be more willing to work closely with you and less likely to push for a quick exit. A large fund on its fourth vehicle has different incentives - they need portfolio companies that can return the fund, and they may push harder toward an outcome faster.
Ask about reserve capital: how much of the fund is reserved for follow-on investments in existing portfolio companies? A fund that reserves 40-50% for follow-ons is set up to support companies through multiple rounds. A fund that deploys aggressively without reserves will not be there for your next bridge if you need one.