If you sell to the enterprise and are raising capital, you need a plan for interacting with your key customers during the raise.  Potential investors want to talk with a young company’s customers to validate the customer’s intent to keep buying the product or service. However, management lives or dies with its key customers. It needs them for larger future purchase orders and prospective customer references. Asking customers to take prospective investor calls, often from multiple investors, is spending precious relationship capital.

Investors tend to be curious and skeptical types. The questions they ask about how the customer views the capabilities of the team or its products might cause the customer to view the company differently.  What happens if the company does not come to terms with an investor? The customer is then wondering about vendor viability if a funding is not announced.  The type of investor you want will respect the value of customer time and confidence. However, investors need to do this diligence to assess risk before investing.  Managing customer conversations to everyone’s satisfaction is tricky, but we have a few suggestions that have proven helpful.

First, assess the breadth and pattern of your customer base. If you have no customer representing more than 8% of revenue, renewal rates above 90% and increasing average revenue per customer, you can manage investor diligence calls prudently. If you have a customer concentration issue or a material customer that just left or reduced purchase volume, you need to plan differently. Think about the attrition risk in your customer base and the risk that represents to an investor. As risk increases, investors will need broad customer access early in the process.

Next, plan for the interactions. Before you begin the fund raise think through which customers are representative of the buying universe and have enough experience with your product, customer support, etc. to be a useful reference. Err on the side of inclusion, as you may need a slightly larger list. You want a larger list so you can spread the references around to avoid overwhelming a good customer. Talk with the customers before starting investor discussions and make sure the customer is willing to take the call. Do not wait until the references are requested.

If possible, favor customers who operate in metrics-driven organizations. A customer who measures the ROI their company produced buying your product is one who speaks the same language as most investors. If relations with the customer are good, ask if he can drop you an email to affirm the investor call happened. This helps you keep investors honest. If an investor asks for references and then does not call any, that’s a red flag about a firm you may wish to avoid.

Sequence the conversations based upon the assessment described above. When we are financing a later-stage company with reasonable customer diversity, I ask to push customer conversations off until after an initial term sheet. An investor once asked a CEO of one of our established companies for customer references after a 45-minute introductory meeting. I stopped bringing companies to meet that investor.  It is reasonable to ask investors to treat customer interviews as confirmatory diligence for the more mature company. In this environment investors can see a history of customer purchase orders that affirm the intent to purchase and the price point the company has been able to defend or increase. To respect customer time we also ask that diligence calls be scheduled once and all investors in the round participate at the same time.

There are other alternatives to allow investors access to the voice of the customer. We often supplement customer discussions by including interviews with relevant third parties including industry analysts who talk with buyers frequently such as Gartner or Forrester. There are times we encounter tough obstacles to diligence. Some customers have aggressive company policy against granting third-party interviews. Corporate buyers of data security products are understandably disinclined to discuss their infrastructure externally. Companies with certain government customers may not even get an acknowledgement that the organization is a customer. One idea for addressing these real issues is use of a customer satisfaction survey firm. The survey results, in completely unedited form, are a method of giving investors insight to customer sentiment. Our clients often find the surveys provide valuable feedback on product needs, competitive pricing, etc.

Successful customer relations during a capital raise are attainable. Your buyer put her reputation behind your product when she signed the purchase order, so she wants your company to succeed. Just don’t make the frequent mistake of asking for her help on 24 hours notice. The customer diligence request is coming, so prepare to crush it.