How to Go About Customer Reference Asks

In today’s market, most VCs (or at least potential leads) will ask to speak to your customers (both existing as well as potential) at some point during a diligence process.

This may put founders in a tough spot - especially early stage founders with few customers as founders:

• Want to be respectful of customers’ time (i.e. not introduce them to too many investors) / don’t want to make customers feel like they’re being used for the fundraise
• Are aware of the signaling risk if too many VCs pass that they introduced to customers (customers don’t want to work with startups that may go out of business soon as they can’t raise)

On the flip side, without customer references, few funds will invest in your startup. Every fund is different but like us, many funds put a lot of emphasis on customer feedback.

Thus, here’s my take on the three questions we get asked re customer references:

1. When to introduce VCs to your customers?
2. Which customers to introduce?
3. How to prevent needing to ask customers to chat to VCs too many times?

1) When to introduce VCs to your customers?

At some point during a diligence process. you will have to introduce VCs to your customers (unless there’s a lot of competition to lead the round and investors are willing to skip this step).

That said, you don’t have to jump at every request to introduce investors to your customers. You can certainly reserve customer references only for those VCs in the final stages of their due diligence.

Depending on their process (make sure you get a good understanding of what it looks like), that can e.g. after you’ve spent a bunch of time with them diving in on all aspects of your business and / or after their partner meeting. You do not need to provide it after your first or second call - especially if you haven’t spoken to a decision maker at the fund yet.

Not too long ago, most VCs would ask for reference calls after they issued a term sheet but in this market environment there is far more diligence done upfront as, frankly, VCs often have the luxury of time and lack of competition to do so.

If VCs ask you for customer references at a point you perceive to be too early in the process, I’d suggest framing a reply along the lines of:

We’d be happy to introduce you to some of our customers for references yet want to make sure we first answer all the questions you have for us / do so once we both see a good potential mutual fit.

Thus, can we jump on a call to discuss open topics from your end and for me to better understand where you are in your process? Here’s my availability or let me know what works best for you.

[OR]

We’ve had several funds ask us for customer references. As we want to be respectful of our customers’ time, we are prioritizing those that are most advanced in the process.

Thus, can we jump on a call to discuss open topics from your end and for me to better understand where you are in your process? Here’s my availability or let me know what works best for you.

2) Which customers to introduce to investors?

Especially early in a relationship with a customer, it can be awkward to ask them to jump on a reference call with a potential investor.

But again, you may not have a choice. Thus, when doing so, make sure you frame the ask the right way - you want to avoid anything that could cause red flags on your customer’s side (e.g. raising cash to extend runway) but rather use this as an opportunity to create excitement (while not bending the truth) along the lines of e.g.:

We’re strong interest from VCs and are looking to raise [xxx] round to continue building a better product for our customers. Would you be willing to take 15’ to chat to a VC that’s far along the process to share your experience of using [our product] with them? It would mean a great deal.

With regard to selecting the customers, you naturally want to put your best foot forward and want investors to chat to your strongest advocates. Thus, I’d put less emphasis on logos and more on true believers in your startup.

Most understanding / used to this process are likely other startups that use your product as they are familiar with the VC fundraising process. If you don’t have any startups as customers, make sure to select the customers that have the best use case / are seeing the most tangible results from using your product.

3) Prevent needing to ask customers to chat to too many investors?

First and foremost, 2-3 customer introductions should be enough per VC firm. If they want to chat to more, they can also do the work of reaching out to potential customers for your startup in their network and ask them of their take re your product / value proposition (most firms do this). Plus you can also always offer personal references on top of customer references (again, most firms will ask for this anyways).

When it comes to individual customers, you should try to not tap them more than twice - unless they are startup founders themselves who tend to have more empathy for what a VC fundraising process is like. Try to save your best customers for the funds you’re most excited about.

All of that said, you know your customers best and know what you can / cannot put on them. Best of luck with the diligence process.

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Until next week,

Pascal