Trust But Verify: The Importance of Reference Checking

This article is the tenth in an ongoing series on Deal Leadership. To learn more about leading a deal efficiently, download this free eBook today: Lead, Follow Or Get Out Of the Way -The Art and Science of Deal Leadership or purchase our books at


Importance of Reference Checks in Early Stage Due Diligence
Image by K. Kabat

There is an old proverb that was adopted by Ronald Reagan during the later part of the Cold War and which became a signature phrase of Reagan’s in the mid-1980s. When talking about the Cold War adversaries, Reagan always liked to say we should “Trust, but Verify.” It came to summarize the approach the US would use after the signing of a landmark nuclear disarmament treaty.

At Launchpad, we like to follow this advice when it becomes clear that we like what we are hearing, and we believe there is solid investment opportunity with the company. That is the turning point where we start making reference calls on the management team and check in with customers. These conversations are critically important, but they tend to occur during the second half of the diligence process and for good reason.

Ham has gotten pretty good at these reference checks over the years, so let’s figure out his tricks.

Ham, first of all, if these reference checks are so important, why aren't you doing them sooner?

There are many reasons for delaying the start of “Trust, but Verify”. An obvious reason is that it takes a fair amount of time, but that’s much less important than the following reasons:

  1. You don't want to bother your network and invade someone's privacy until you are reasonably sure you are going forward.

  2. You do not want to disturb delicate existing customer relationships with intrusive investor questions unless you are pretty sure you are going forward. Interviews that remind customers of the shaky finances of their vendor are not ideal. That said, interviews with prospective customers with whom the company has no relationship are much less problematic.

  3. All companies will provide you with a set of references that you should assume will have a positive bias. Other contacts should be “blind” reference checks with people in your network that know the CEO or other members of the management team. It takes time to work your network, so you often don’t have good leads on blind references right away.

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How do you go about these management and customer reference checks?

During a typical due diligence process we run four different types of reference checks:

  • Company-provided personal references

  • Company-provided customer references

  • Blind personal references

  • Blind potential customer references

To keep the effort at a manageable level, we suggest you make two or three calls for each of these reference types. So, you are talking about eight to twelve calls that should last around 30 minutes each.

The deal lead should divide call assignments amongst the diligence team members. Personally, I like to give all the CEO reference checks to one person, all the management team checks to another, and then split the customer reference checks across one or two individuals. How you divide things up will be based on the size of your due diligence team.

At Launchpad, we have a well-defined set of questions we use to guide the management assessment interviews. It helps us uncover red flag issues that we need to keep an eye out for, and it helps us apply resources to help the CEO be successful. In addition, we have another set of questions that we use to guide our customer reference checks. And, if you use these two guides, you will have a consistent style of call notes that will help you when writing the summary diligence report.

You should initiate scheduling as soon as feasible, since these calls take time to set up. However, it is best to defer customer calls, in particular, until late in the process when positive outcome seems likely. That way, you don’t disturb customers unless necessary.  And, remember, back channel corroboration and blind reference checks via your organization’s network are always VERY helpful.

Besides reference checks, what else is going on at this stage in the process? Some groups are starting to draft their sections, but are others still working?

Yes, there are always areas that require additional research. It takes time to recognize that need and time to find the resources and do the digging. In many cases, the company is still doing research to help you verify where the key risks lie, or responding to some of the documents you asked for based on your diligence checklist. For example, they might be working on verifying the size of the market opportunity. And, you are also likely getting down into the details of the financial model at this point.

Your status calls will continue during this stage. It’s always helpful for the team to hear how the references are trending. The deal lead should continue to update the CEO, as well (using some caution and circumspection, as noted above). Finally, based on how you are doing in completing the diligence checklist for this investment, the deal lead might need to assign one or two small research projects and enlist help, if needed, to fill information gaps and resolve important issues.

Want to learn more about leading a deal efficiently? Download this free eBook today Lead, Follow Or Get Out Of the Way -The Art and Science of Deal Leadership or purchase our books at