Should you build relationships with VCs before a raise? That’s a hard yes.

In my first month in venture, an investor friend of mine called and told me about his newest portfolio company - let’s call it “X.” He was particularly excited about this investment because he had just lost a deal a few months prior, in a similar business we’ll call “Y.”

While diligencing Y, he didn’t just get conviction on the company. He got conviction on the whole category. So if Y didn’t work out, he knew he would eventually make a bet in the broader space. He and his associate reached out to all the founders of related businesses, and met the team behind X. When X was ready to raise a few months later, my friend ran a tight process. While other firms needed time to get up to speed and convince their investment committees to get on board, he had already done the work. He also impressed the founders of X, because of how much he knew about their category. He viewed this whole process as a win, because he ultimately viewed X as a better bet than Y.

Why is that story worth sharing? Well, it provides a window into why it’s so important to build relationships with investors well before a raise. I know some investors feel differently, but for health-tech, I’m firmly of the view that this is time well spent. So I’m ready to argue my case, and bring in the views of investors from firms like ACME, 7wire and Foreground Capital. In this piece, I’ll also provide tactical insights from the field, like how much time to spend with investors before and in the thick of a raise, based on countless companies I’ve spoken to about this topic. And how soon after a raise to start preparing for the next one.

VCs need to sell, too

How do deals get done at most VC firms? Typically speaking, it starts with a series of conversations with one or two individuals at the firm, perhaps a junior and senior person like an associate and partner. At that point, assuming things progress, there’s a pitch to the broader group. That meeting is often on a Monday. From there, the smaller team at the VC - known as the “deal team” - kicks off a diligence process, which might involve talking to customers, getting references on the founders and executive teams, building a financial model from scratch (sorry founders, most VCs will not rely on yours!), and so on. That ultimately results in an investment memo, which gets presented to an Investment Committee (IC).

This whole process can take anywhere from a few weeks to a few months.

Most founders want the process to move as quickly as possible for obvious reasons. To get a term sheet, they often resort to FOMO tactics. But these founders should put themselves in the shoes of the deal team. They need to be able to show up to IC and impress. If they have very little knowledge of your particular space going into the process, they’ll need time to get the learnings they need to make their case. And they’ll need to diligence the company, too, including the founding team and senior executives. That takes time.

Imagine instead the founder has gotten to know the deal team on a personal level, and helped them get educated about their space. This essentially provides that firm with a potential head-start, and they can do a lot with that time. At my prior firm, deal teams would regularly present to the broader investment team on a market segment, say virtual behavioral health, purely for the purposes of educating their teammates. So when they took a company in that space to IC, it would not seem entirely random or purely opportunistic to everyone else on the team. There’s nothing wrong with doing deals opportunistically, and some investors pride themselves on being generalists. But it is always helpful to have knowledge of the space ahead of time.

Remember that founders are not the only ones doing the selling in this process. Investors are also selling to their teams, as well as their LPs. Their memos routinely include a list of risks facing the businesses, and also strategies to mitigate those risks. Founders can get diligence processes moving faster if they can help the deal team effectively sell them, particularly if there’s any hair on the deal (a weakness in the metrics, a market risk, a senior team-member that’s not up to par, and so on). With more time, deal teams can do the pre-work required to ensure they can win in a competitive process when the company is ready to raise. And deal teams will have the ammunition handy, so they can defend the company when another investment team-member asks about how they’ll react in the face of a potential risk.

“The big flip a founder needs to execute is getting a partner to move from assessing them to advocating for them in the partnership,” said Aike Ho, an investor with ACME Capital.

It comes back to human psychology. Relationships are everything, and most firms are political. Investors need to spend their “social capital” to get deals done. And candidly, they’re more likely to do it if there’s a pre-existing relationship with the founder that isn’t purely transactional.

It’s like marrying your first date

“Trying to fundraising without existing relationships is like a shotgun wedding,” Ho told me.

Both sides need information on the other, and there’s no better way to do that than to take some meetings in the months ahead of the fundraise. It’s not just about the VC educating themselves on the category and the market. Founders should also use the opportunity to get to know the investor, and assess whether they’d be a good fit for the board or even remotely valuable on the Cap Table. Not all investors will take a board seat. At my fund Scrub Capital, for instance, we only participate - but even so, we need to make a strong case to the founder that we deserve our stake in the business.

I often suggest to founders that they put investors who offer to the test. Most calls between VCs and founders end with the investor saying “let me know how I can be helpful.” This phrase has become a bit of a joke in our community, because it’s uttered so often it’s rendered meaningless. But it doesn’t have to be.

Founders should use the months before a raise to find ways to uncover just how helpful they can be. That might involve asking for an introduction to someone in their network, or getting their feedback on a business strategy question. Why not find out if they live by their word, or if it’s all just smoke and mirrors? If the VC wants to be helpful, actually ask them for help.

And then there’s the basic human questions that are worth pondering ahead of time. Do you even like each other? Do you get along?

"This is like a marriage,” said 7wire Ventures investor Alyssa Jaffee, noting that 7wire typically takes board seats when it makes an investment. Jaffee said her firm’s partners are on a board for 5, 7 even 10 years or longer.

“Expecting to meet and get a term sheet a few weeks later is really tough,” she told me. “If we already know each other and have a relationship, it feels more natural to dive right in.” Jaffee describes this time as “off-cycle” because the founder is in that blissful period between fundraises where they mostly get to focus on operating.

Even between raises in those off-cycle periods, according to Jaffee, it’s still incumbent on the CEO to be focused on recruiting, retaining talent, telling the story and building key relationships. That includes with investors. And it’s particularly true if the business is reliant upon VCs to continue operating. A business that is wildly profitable might not ever need to raise again. But most companies in health-tech are not in that boat.

Tactically speaking, when should this relationship-building start?

I asked a few of my VC friends about this. Most of their feedback was consistent, and I share their views. So here’s how I’d think about it, as someone who advises founders on fundraising strategy.

• Let’s assume a fundraise takes 3 to 6 months in this market, with a few months before the “pitch” period kicks off to spend on material development, including the data room, deck and so on.
• Working backwards from the “cash out” date, meaning the point where the company has run out of money, I usually suggest founders have at least 9 months of runway when they start raising. 6 months feels short to me, but it depends on the company. If traction, tailwinds and the hype cycle are in the company’s favor, then 6 months might be acceptable. For a company that needs to find its true believers, I’d prefer more than a year.
• Most companies need to raise every 18 to 24 months, depending on their burn rate.
• So assuming all that, I’d argue that founders should start relationship building with investors who could meaningfully contribute to the next round fairly quickly after they raise their prior round. Let’s say it’s a series A and it closes in Q1 of 2025. By Q2 of that same year, I’d suggest the founder should be in the market and spending time with VCs.
• How much time? Well, when I asked a sub-section of VCs in my network, most suggested anywhere between 10 to 25% off-cycle. And as high as 75% on cycle. Founders, I know this is extremely challenging while also running a business.

Bottom line: For most VC-backed businesses in health-tech, the founder is either actively raising or passively raising. In other words, they’re pretty much always raising. If you hate fundraising, you probably shouldn’t start a VC-backed health-tech business.

Not everyone agrees….

I’ve seen plenty of social media posts and columns from VCs arguing that founders shouldn’t waste their time building relationships with investors when they’re not out raising. Some say it’s a better use of time to focus on operational tasks like revenue generation and talent, versus building relationships with investors. And that with strong fundamentals, the money will show up one way or the other.

I agree with this point of view for some founders. If your business is crushing it, you will have no trouble raising capital. But even then, I have personally seen cases where founders raised from investors they did not get along with or they had different philosophies. That can lead to very real tensions, and I can think of at least one notable example.

Founders might have a million better things to do than spend time with VCs. But as I’ve argued, if the business needs a regular infusion of capital to survive, it is a huge and necessary part of the job. These people will own a significant chunk of the company, and can either be a tremendous asset or cause immense problems. The only way to bring down the risk in the latter scenario is to get to know them on a personal level and do the diligence on them.

Here’s another hot tip I tell founders all the time: Don’t just get references on your VCs from portfolio companies that have crushed it. Ask them to speak to a founder of a company they backed that failed or had a sub-par outcome. That’s where you’ll really discover the truth about how they manage in hard situations. It isn’t their job to be nice and pleasant in every scenario, but they are obligated to be direct and to do what’s right for the shareholders. How the VC chooses to go about doing that is a real test of their character.

The takeaway

If you run a health-tech company that has capital needs, start the relationship-building process early. Get to know investors on an interpersonal level. Ask them about themselves and their families and what matters to them, and not just business-related questions. But also ask them for business and strategy advice to see how they react. It takes months to properly do the homework to assess a VC’s potential value as a board-member, and it will take them time to get to know the business and category in return.

As founders are building these relationships, it might even inform business strategy. It is wildly helpful for founders to know what the VC would need to see to get a deal done. With a strong and trusted relationship, notes Alice Zheng from Foreground Capital, a founder could ask directly about the metrics the investor is looking for at each stage. That might include margins, revenue and growth rate. I personally like questions along the lines of: “What would you need to see from us to get conviction by the next round?”

“Let them follow your journey and have trust from the start, not just at the first official pitch,” Zheng told me. On their end, she said what the VC is looking to test is the “say to do” ratio - meaning how much the founder is following through with the big vision, versus purely talking the talk.

All this relationship-building may seem like a lot of unnecessary work. But it makes the process of raising capital far more smooth, fast and frictionless when the time comes.

What’s your perspective on this question? How much time do you spend with VCs off-cycle? And VCs, do you agree/disagree? Reach out to me at secondopinion.media!

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