How to Choose the Right VC
The average health tech company takes more than a decade to exit. That means your investors will be with you for many years, and you’ll want to choose people who will increase your chances of success and, ultimately, those you’re glad to have worked with, whatever the outcome.
Of course, advice about “choosing” investors assumes you actually have a choice. For most founders, it takes dozens of meetings to get a single yes, and the process is even harder for women and non-white founders. One report found that all-female teams with minority members spent an average of 25 weeks raising, compared with 21 weeks for all-white female teams and 17 weeks for all-male teams with no minority members.
You may not have the luxury of choosing among a dozen investors, but you can still go into the relationship with your eyes open. In this piece, we’ll cover how to evaluate the individual investor, the firm behind them, and the fund they’re investing from, including domain expertise, board dynamics, fund size, follow-on capacity, and how investors behave when things get hard
Find the right kind of investor for your company
There are three basic types of investors:
Generalist VCs who invest across industries, like Josh Kushner at Thrive Capital
Specialist VCs who focus on a specific industry, like Reed Jobs at Yosemite, which backs oncology-related startups
Specialist investors at generalist VCs, like Steve Kraus at Bessemer
Healthcare specialists can help founders navigate reimbursement, regulation, clinical validation, and selling into health systems. Tech-focused investors can bring expertise in AI, software infrastructure, and scaling technology products. Which matters most depends on the challenges your company faces.
In an earlier piece, Halle highlighted a PitchBook analysis of more than 26,000 VC deals. In healthtech, 75.5% of companies backed by investors with high domain expertise reached a successful exit, compared with 59.6% of those backed by investors with low domain expertise. That doesn’t necessarily prove causality. Better companies may gravitate toward specialists, or specialist investors may simply have better access to the best deals.
That being said, healthcare has a lot of category-specific ways to fail: long enterprise sales cycles, complex integrations, compliance requirements, clinical validation and ROI proof, multi-stakeholder buying processes, and powerful—and often ruthless—incumbents with their own incentives.
An investor who has seen those problems before is more likely to know which ones are normal, which ones are dangerous, and where companies tend to get stuck. In healthcare, avoiding category-specific failure modes may matter as much as identifying the upside.
Don’t get too hung up on the label, though. PitchBook measured domain expertise based on an investor’s actual investing history, not whether the firm calls itself a healthcare specialist. A healthcare specialist sitting inside a generalist fund may know the category just as deeply.
Ideally, your cap table gives you both: investors who understand the terrain and investors who bring broader networks, experience, and resources.
Search the Digital Health Investor Database by type of investor and fund size.
Choose the person, not just the firm
When you take a VC’s money, you’re choosing both a firm and a person. We believe the person matters more.
An experienced investor or former operator may bring valuable judgment, but don’t automatically dismiss a newer partner. They may have more time, more hunger, and stronger incentives to make your company one of their defining investments.
Ask who will actually hold the board seat. At some firms, the person running your process is not the person who sits with you afterward. VCs also turn over more than founders expect. Venture Forward and Deloitte surveyed 250 VC firms and found that 26% of investment partners had been at their firm three years or less, and 41% six years or less. Senior investment staff turns over at 7% a year. More on what happens if your investor leaves the firm soon.
VC firms themselves are also less permanent than they can appear. Of the 2,220 VC firms that launched funds in 2021 and 2022, less than a third (653) have raised another one, according to PitchBook and the NVCA.
Reference-check your investor
Founders are constantly being reference-checked by VCs. You should do the same thing in reverse.
In addition to understanding the reputation of the firm, talk to founders who have actually worked with the partner you’re talking to.
Ideally, speak with at least one founder they are currently backing and one founder whose company did not work out. The latter may tell you much more about how that investor behaves when things get difficult.
Ask open-ended questions rather than leading ones:
How much time did you spend with the VC? Was it more or less than you expected?
What has been the biggest impact they have had on your company?
How did this person compare with your other investors?
Can you tell me about a time when the company was struggling and how this person showed up?
Would you work with them again?
That last question may be the most revealing.
Know what happens if your VC board member leaves
It is worth planning for the possibility that your VC board member leaves their firm. This has become especially relevant as senior-partner turnover has picked up across venture firms.
This has happened to me (Halle) twice. In both cases, the replacement board member was perfectly fine. But they had not chosen to invest in the company, and they did not have the same history with us or the same conviction in the business as the original partner.
VCs sometimes call this an orphaned investment. The fund is still on your cap table, but your main champion inside the firm is gone. That can matter a lot when you need follow-on capital, help navigating a difficult period, or someone to advocate for you within the partnership.
You cannot control whether a VC leaves their firm, but you can understand, and potentially change, what happens if they do.
The first question is who actually controls the board seat. The answer depends on the documents governing the investment. The designation right may belong to the fund, the firm, an affiliate, or in some cases the individual partner. Typically, the right belongs to the fund, so the fund will replace the departing partner with someone else of its choosing. Cooley recommends understanding this before a transition happens, including who controls the designation right, who can remove and replace the director, and what approvals are required.
If a particular partner is especially important to you, talk with your lawyer about whether you can build additional protection into the documents. Depending on your leverage and the deal, that could include naming a specific individual as the designee, requiring some level of company or board approval for a replacement, or changing what happens to the seat if that person leaves the fund.
Institutional VCs may push back. Firms generally want the ability to maintain their board representation even when partners retire, leave, or change roles. And your ability to negotiate restrictions will depend heavily on how much leverage you have in the round.
Even if you cannot negotiate the board seat itself, there is a simpler form of protection: build relationships with more than one person at the firm. Ask who else knows the company well. Who would take over the relationship if your partner left? Who else inside the partnership understands why the firm invested in the first place? That way, you know and like the back-up plan.
Fund size matters
Fund size changes what an investor can do for you, and what they need from you in return.
Small funds can offer direct access to the person making the investment. Many are run by solo GPs or emerging managers, and Carta has found that the growth of small funds has gone hand-in-hand with the rise of highly specialized investors. That can mean working directly with a domain expert who chose to invest in you and has a meaningful stake in making the investment work.
The trade-off is that smaller funds may have fewer dedicated resources for hiring, business development, or future fundraising. They may also have less capital available to support you in subsequent rounds.
Big funds, on the other hand, often come with resources beyond the partner writing the check. At the extreme, megafund a16z describes dedicated teams that help portfolio companies with hiring, go-to-market, communications, press, and brand-building. Large, multistage funds are also more likely to have the capital to invest in your company across multiple rounds.
But there is a real downside to taking seed money from a large, multistage fund if they do not invest again. When an existing investor with inside information about the company chooses not to participate in the next round, new investors will read that as a negative signal, making your next raise harder or the terms worse.
The other thing to note about fund size is that bigger funds need bigger outcomes.
VCs look for what are called “fund returners,” investments capable of returning the entire fund on their own. If you assume the investor owns 10% of your company at exit:
A $50 million fund needs a $500 million exit
A $100 million fund needs a $1 billion exit
A $250 million fund needs a $2.5 billion exit
A $500 million fund needs a $5 billion exit
A $1 billion fund needs a $10 billion exit
A $10 billion fund needs a $100 billion exit
Therefore, an acquisition that would be life-changing for a founder and a great outcome for a small fund may simply not matter enough to a much larger one.
Before taking the money, make sure the kind of exit you would consider a win is one your investor can support too.
Ask how follow-on decisions get made
Follow-on reserves are the capital a fund sets aside to continue investing in its existing portfolio companies. Those dollars are usually allocated over time based on how the portfolio develops. Some firms try to maintain ownership across many companies. Others concentrate their follow-on capital in the companies they believe are performing best.
That means the more useful question is not simply how much the fund has in reserves (usually 40-50%), but rather how the firm decides who gets them.
Ask how often they invest in subsequent rounds, what typically drives that decision, and whether they tend to exercise their pro-rata rights across the portfolio or selectively. (Pro-rata rights give an investor the option to invest in future rounds so they can maintain their ownership percentage.)
Ask how often they invest in subsequent rounds, what typically drives that decision, and whether they tend to exercise their pro-rata rights across the portfolio or selectively.
It is also worth understanding where the fund is in its lifecycle. A newer fund with substantial undeployed capital is in a very different position from one that has already invested most of its money and has many portfolio companies competing for what remains. Ask which fund your investment is coming from. What year did it close? How much has already been deployed? How many portfolio companies is that fund supporting? How often does the firm invest in subsequent rounds?
The goal is to understand what support may be available later and what your company will need to demonstrate to earn it.
The bottom line
VCs will spend a lot of time diligencing you. You should spend some time diligencing them too.
Look beyond the firm name. Understand who you will actually be working with, how much experience they have in your market, what happens if they leave, how the fund is structured, and how follow-on decisions get made.
You may not have endless choices when you are fundraising, but when you do have a choice, these things matter. The best investor relationships can last a decade or more. Ideally, you end up with people who make the company stronger, who show up when things get hard, and who you are glad were along for the ride.
