I don’t spend much time looking at pitch decks or business plans anymore before I make an angel investment. That may sound like I’m not doing by due diligence, but I find it’s too easy to get wrapped up in the promises and highly optimistic tone in the typical pitch decks of startups looking to fundraise. I’m probably not alone in this realization. I’ve tried to think of ways to supplement the info I get from the business plan, the pitch deck, the financials and even from the business owners themselves. Looking further outside the company’s realm of influence can we start to get a clearer picture of reality.
I’ve started to assess investment prospects by deeply examining a company’s public customer and employee feedback and reviews. I don’t think a majority of businesses can be built without loyal customers and a stable headcount, comprising mostly of happy employees. This article provides you the details on this process and how I use it to spend less time trying to cut through overly optimistic “startup speak” and more time assessing them on the basis of these facts. I use this process, in addition to assessing Business Performance Metrics and a Founder Fit Checklist, to make faster decisions on the many pitches I review weekly.
Many early stage startups can be secretive for one reason or another. The data is not there, it’s confusing, it can be conflicting or no one cares to share it with you. The main objective of this process is to not only find out if the company has genuine happy customers and employees, but also determine how the company’s narrative differs from what is factual and publicly available. The more information you can gather from important pertinent questions, the more confident you can be in making your investment decision.
Customer Review Sites: TrustPilot, Feefo, Yelp, Google Reviews and Others
Customer reviews provide a good way for investors to understand if the company is question is providing value to their customers. The quantity of reviews should not be what matters here. It’s the quality that counts. Consider how deep and real are the positive and the negative reviews. One line reviews stating how great or how bad the company is should be taken with a grain of salt, especially with companies that have thousands of reviews. You can tell they request these reviews, either in a selective or biased matter.
|What to look for: The negative reviews to keep an eye out for are ones where big operational or cultural problems are indicated. For example, if there are recurring issues about the delivery process in the company, you can think about what types of questions you can ask to determine the root cause for the delivery issues. If there are customer complaints about the product usefulness, then you know there is likely a fundamental problem about the business offering altogether. Also, keep an eye out for the number of total reviews left by reviewers on average. The lower the average (e.g. one), the more likely the company is asking for reviews from a select customer base, who are ultimately signing up to the review site because the company told them to. This means there is a bias factor that’s in play on the review gathering process. Lastly, look out for company responses to negative reviews, how do these differ amongst negative or even positive reviews?|
|Ease of hijacking by the unscrupulous: Medium risk. Companies can easily get fake reviews by ordering through agencies who pay freelancers or their own staff to leave positive reviews over time. They do this by using different IP addresses and devices to game the review site systems. Otherwise, company’s may have a biased review collection process whereby they invite only customers who have successfully received their product or service to leave a review. Competitors of the company may also seek to leave negative reviews, although these can be removed by requesting the review sites to take them down. Alternatively, fake negative reviews have little effort behind them so they are fairly easy to spot amongst other genuine negative reviews. Fake negative reviews are more likely to come in attack waves through a select period of time.|
|Value of data to investors: High. Investors may need to spend a few hours sifting through fake positive and negative reviews and pick out the real ones to get a good idea where things stand from a customer perspective. A large volume of what appear to be fake reviews|
|What questions investors should ask: When trying to learn more from the entrepreneurs, don’t reference a specific negative review or outstanding customer enquiry. If the business does not have any reviews, ask if they have attempted to gather customer feedback in other ways. Your questions should be posed in a way to gather more information about issues with their operational processes, such as “What are the typical customer complaints you receive?”, or “What’s the average time it takes to resolve a customer issue?”, or “What percentage of orders do you refund and for what reasons?”. A favorite of mine is asking how many orders have been placed on the company website to date, if this number is less than what’s on the review sites combined, and doesn’t match up with the financials, you know then the company is generating fake reviews and is arguably trying to defraud you. If the number of reviews is a large percentage of the company’s total order volume to date, then you know the reviews are biased and being sent to the base of customers who have most likely had a positive experience.|
Employee Review Site: GlassDoor, PayScale, Indeed and Others
Great employees are the backbone to any early stage company going against the odds to become a viable business. Retention and employee satisfaction are key to growth, especially at an early stage company where you need people who can fulfil multiple roles and perform them competently. If a company can’t keep it’s employees, you should consider putting your money into another investment.
|What to look for: People complaining about lack of structure, complaining about management, complaining about low salary. An overall sub 3.5/5 rating should disqualify a potential investment, but if you read about recurring issues then you know the management aren’t likely paying enough attention to the needs of their staff. You can also find out about any past history of layoffs, hiring sprees, training issues and other human resources management practices at the company.|
|Ease of hijacking by the unscrupulous: Low to medium. Creating a profile on an employer review site is slightly more involved than a customer review site. It also takes a convincing narrative to seem believable as there are fewer reviews on these websites compared to others.|
|Value of data to investors: High. Given the lower volume of reviews, investors should not have to sift through as many reviews as would be present on a customer review site.|
|What questions investors should ask: Ask their current headcount as well as a breakdown of what employees have left to-date and their positions within the company. If these match up somewhat to what’s being reported on the employee review sites than you have no cause for concern. If there is a mismatch in the volumes reported versus what the company is saying, then there is likely an issue with retention the company is not wanting to disclose. It’s easy for founders to refute and say “oh, this person wasn’t cut out for a startup”, but numbers don’t lie when they are recruiting the wrong kind of people or are not able to keep them.|
Social Media Sites: Twitter, Instagram, LinkedIn and FaceBook
If you keep digging, you will ultimately find some information that may give you some ideas on what questions to ask the business owners seeking funding. Social media sites are more commonly being used as customer service channels by companies. You can get insight into how well the company is handling and funnelling these enquiries to their customer service channels, or alternatively, how bad the company is ignoring or unaware of their customers complaints on social media.
|What to look for: People complaining or requesting assistance and not being helped. If the company is dealing with customer enquiries directly on social media sites, look for any disclosures of customer information online, which could be a violation of the company’s privacy policies. If there is a customer data leak on twitter, there may be bigger leaks elsewhere.|
|Ease of hijacking by the unscrupulous: Fairly easy. Twitter bots can flood the company with negative reviews or comments, but twitter is fairly good at blocking these and companies can request twitter to remove offensive posts, which will be easy to do by claiming foul play if the negative comments all come in a big wave at the same time.|
|Value of data to investors: Medium. The point here is to spot issues with customer service and data handling. If the company is efficient, they will funnel requests to their support line quickly and take them off twitter, hopefully to the customer’s satisfaction.|
|What questions investors should ask: “What channels do you predominately provide customer support and why?” or “Have you had any customer data breaches in the past?”|
Government Directories: State Business Directories, Companies House Directories
Many countries have directories on the details of companies formed. These details include the founders, shareholders, date of formation as well as other useful company information. By reviewing the documents and information held in these directories, you can potentially spot any issues that may increase the risk of your investment failing in the long-run.
|What to look for: Issuance of new shares or fundraising, disappearing or non-contributing shareholders or employees, missed statutory filing deadlines, undisclosed shareholders, awkward or non-conventional ownership structure|
|Ease of hijacking by the unscrupulous: Hard. These records comprise documents filed by the company as part of its legal duties. Anything untruthful submitted here is a cause for concern.|
|Value of data to investors: Medium. Most of the time, nothing interesting will be found in these documents. In some cases, you will find an issue with a filing or a particular shareholder that gives rise to some questions.|
|What questions investors should ask: Some of these issues found in company directories are the last to be discovered by investors, often just weeks before signing on a deal. Questions investors can ask are as follows: “I see John Doe is a shareholder, what is there current involvement in the business?”, “Your previous annual return stated there were 5 employees, yet there are now two according to your documents, what happened?”|
Criticisms of using customer & employee feedback or reviews
Don’t Customer Lifetime Value (CLV) or other churn related statistics give better indication on customer satisfaction?
They can, however, churn and CLV give a snapshot into the behaviour of a particular cohort or the entire customer pool. They are often not real-time and may not always be calculated correctly. If you have access a historical and life stream of raw user registration and transaction data then yes, these stats could give a better indication of customer satisfaction, assuming the product or service reviews are also mostly positive.
Does this investment ‘method’ even matter if I am purely speculating on share appreciation due to other factors?
No, if you are speculating on the value that your investment will increase over time due to the positive hype around the company or other factors, without really considering the viability of the business itself from a customer or employee point of view, then this method is not for you. You can trust your intuition on the investment sometimes better than insights you can gather from publicly available information. However, for many of us, any factual information we gather outweighs what the company directors are disclosing, no matter how great they can be as entrepreneurs.
The review sites you base this process on represent a fraction of the actual customer sentiment and volume of orders for the company’s services or products
True, they can represent a fraction. But they are in the wild, as in they are public. I can rely on what I see through a collection of third party websites more easily than what I can discern through a fully baked or at least slightly biased document from a company seeking funding. This small sample size can represent a sample of a larger customer or employee base that is being undeserved or mistreated by the company.
You’re are looking at reviews from angry people, who are the most vocal and usually in the minority
Customers and employees provide insight into potential problems at a company. Finding negative reviews or detrimental information are not issues to disqualify making an investment. If the problems can easily be fixed and are on an operational level, then I am not too worried. If the problems vary and touch upon cultural issues at the company, then it’s a cause for concern with the management, that can ultimately make a company unconvincing as an investment.
Can’t companies remove bad reviews and remove other negative posts from customers or employees?
Yes, companies can remove negative reviews from several of the sites. You should be cautious of companies that have very high overall or average ratings such as 4.9/5 or 5/5. Check the reviews of the company’s competitors and other related companies in the industry to determine an overall benchmark or average. If the company in question is well above competitors or industry peers, then there could be intentional manipulation on the review sites.
What if competitors are trying to damage the company by posting negative reviews?
This is a possibility, however, you can determine how genuine the negative posts are by reading them and deciding for yourself if you feel they are legitimate and are related to a problem within the company that would cause enough to concern for you to decide to not invest. Fake negative reviews often come in waves or are sparse on details.
Companies like amazon.com have abysmal ratings, so I guess you wouldn’t invest in them would you?
Fair point, but this process is not intended to be used on vetting an investment in publicly traded companies. Especially those valued in billions or trillions. The value of publicly traded companies is determined by the market and not a small select group of investors. Furthermore, the health and viability of publicly traded companies can be determined more easily by reviewing the history of their financial statements. With early stage companies, it’s usually not possible to get the level of detail in operational or financial reporting that you will get from a publicly traded company.
Beauty is in the eye of beholder. When we fall in love at first site, we are completely unaware or ignoring the underlying facts. A company’s pitch deck, business plan, financials and other documents create a narrative from the company’s point of view. By considering customer & employee feedback, can we get a better understanding if a particular angle investment is the right one to make from a different perspective using primarily public data. This process isn’t to be solely relied upon when making an investment decision, but it can be used to supplement your other angel investment methodologies.