Once upon a time, I met a startup team.

Let’s suppose the two co-founders are Victor and Sarah, with ABC Startup in the insurance industry. Sarah brought the industry/business acumen, and Victor brought the tech and startups side. I first encountered the founding team via Zoom. I followed up and asked for a second conversation. I became very impressed with the startup’s technology.

As part of the conversations with Victor and Sarah, the co-founders showed me a demo video that showed the customer/users walking around using the product. It was very cool technology that clearly solved a large problem in an industry, especially considering the current state of the art. Additionally, we also have several Tundra Angels investors whose businesses had strategic industry alignment with ABC Company.

As part of our process, I have a number of conversations with the founding team to determine fit and if it makes sense to pitch to the entire Tundra Angels group. The conversations up until that point went well. I felt strong enough about the opportunity that I decided to move them to pitch for the entire group. The founders pitched for the group. When we took indications of interest, we had broad enough interest that we moved ABC Company into due diligence.

Per our process, we have a one hour deep dive call with the founding team with Tundra Angels investors who expressed interest in vetting out the opportunity on behalf of our group.

The next step included the next part of the process where we ask for specific pieces of information. One of those requests involves speaking with several of the startup’s customers for customer reference conversations to understand their experience with the product.

That’s when things started to get odd.

I still remember sending an email to Victor asking for several items to kick off the specific requests for our due diligence process, one of them being the customer reference calls.

Instead of an email back, I got a phone call. I answered.

Victor: “Hey Matthew, it’s Victor.” (He was trying to sound cool and collected, but I could tell he wasn’t.)

Matthew: “Hey man.”

Victor: “I have a few questions. Why are you asking about the customer references?”

Matthew: “Well, you said at the pitch that you have several customer pilots in place. Part of our process includes hearing feedback from them about their experience with the product.”

Victor’s non-verbals were screaming through the phone. It was apparent that he was highly uncomfortable with several standard due diligence requests. I maintained that we needed the information.

Victor asked for a Zoom call. We scheduled one a few days later.

On the Zoom call, co-founder emotions threw up red flags.

The first red flag 🟥

Several times, when Victor finished explaining something to me, Sarah would butt in with a "I think what Victor is saying is..." and attempt to clarify what Victor had said in her own words. The first time this happened, I shot a look at Victor’s screen and saw him grimace. Then, immediately turn the grimace to a smile.

Several times during the call, Sarah repeated the exact same behavior - interrupt, say, “I think what Victor is saying is..,” and re-explain it herself.

A second red flag 🟥

During the call, we got into a discussion on product pricing. It was very clear that Sarah had one approach to pricing the product, and Victor felt differently. But the way that both founders brought up the pricing conversation, it was being not positioned as a discussion. I don’t mind different opposing thoughts, as dissension can be a healthy thing. But, after both of them shared their thoughts, one of them asked me, “So, which one of us is right?”

With that statement, they have me into this position of mediator and judge on the one who would settle which one was correct on the approach to pricing.

I answered uncomfortably, still half-surprised that the conversation took this odd turn.

After the call ended, I was a bit stunned. Did all of that really just happen?

A day or two went by. Victor was still being elusive in the customer reference requests and not making the customer introductions for me.

I sent an email to Victor following up, who later called my phone.

Victor shared with me that the several customer references, “Well, it’s going to be harder to get them than anticipated.”

I asked a direct question - “Do you have pilot contracts with these customers?”

Victor, answering sheepishly, responded, “Well, with one of them we do. The others we don’t have a formal agreement in place, but we know them really well.”

Me: “So, who are the people in the product demo that are using the product?” (Referencing the compelling product demo that I saw earlier on and that was shown at the pitch.)

Victor: “They are just industry contacts that we have who agreed to help us out.”

Whoa. Bombshell answer. What at one point was an interesting opportunity was disintegrating.

After the call, I sent an email update to the investors who had expressed interest in ABC Company. My email is below:

“I had a call with Victor from ABC Company today who asked for more clarification on customer references request. Just an update.

Victor mentioned that the several pilot firms that they mentioned during the pitch, they don’t have a formal alpha agreement in place. I looked back at the pitch script and the way they phrased it was “we have partnered with four leading insurance firms for alpha testing.”

One of the several firms is Tip Top Insurance where Sarah used to work, and Victor was non-committal about whether or not they would be able to get a reference on that one because he said they didn’t want to push too much on the relationship. It seemed like the other three firms were not very warm contacts - he indicated that because they were fundraising they were not focused on business development. So basically he said they could try to get Bottoms Up Insurance to give a reference, but they won’t be able to get any other reference. 

I didn’t get a clear answer as to who the people were in the product demo videos.”

I received the following response back from one of our investors:

“Hmmm. That’s another red flag. Not very willing to share customer alphas, mischaracterization in the deck. Also, during our last chat, Sarah clearly stated at the pitch that they had filed for a provisional patent, and it was a totally different story in our deep dive—no patent, just trade secrets. A little inconsistency I would expect, but combined with your comments re Victor, this is starting to feel like a pattern. I think the tech is cool, but feeling uncomfortable with the team currently.”

Two strikes in one email thread. I had discovered an incongruity, and another investor had independently discovered another one.

We had moved from a smoke signal to a fire rather quickly.

Shortly after this, I sent an email to the investors who expressed interest in ABC Company saying that we were passing.

“A mixture of things - but really culminating on the fact that between our in-person, phone call, and virtual touch points with the ABC Company team, there was incongruity of facts re IP, current alpha pilots, and other items based on what we were told was the case and what was actually the case.”

I felt relieved, disappointed, and reminded.

I feel relieved that we made the right call.

Under no circumstances is such unethical behavior appropriate.

Even saying “I don’t know” is even fundamentally different than mischaracterizing situations, people, or scenarios.

Startup investing is about making conclusions about the future from limited sets of data points. When the data points start to become more like a smoke signal, then something may in fact be burning. If I smell smoke, my job and our group’s job is to follow the scent. In the end, shortly after the pitch meeting, we made the right call.

I also felt and still feel disappointed.

Disappointed that people would try to mischaracterize facts and information.

Also, the technology was wicked cool, and I believe this had some definite viability compared to the existing state of the art technology. Unfortunately, all I was left with was questions of, “Well, if the people in the demo were staged, was the entire demo actually staged?” “Were the views of the product actually working superimposed images?” “What’s the extent of the mischaracterization?” I will never know.

But I also feel reminded.

This story is a reminder that startup investing is fundamentally investing in people.

The technology, the product, the market, the strategy and the tactics, the common denominator is the ethics of the founding team that firms invest in.

In fact, all of the startup strategy and tactics are embodiments of the founders and startup leaders themselves. Entrepreneurship is personal. The character and personality of the startups reflect the character and personality of the founding team.

Entrepreneurship is too close to the skin to be anything different.