This is the third part of our blog series addressing top ten challenges that UK and European companies face after establishing an initial US presence. This Part 3 addresses the challenges associated with attracting US investment.
Parts 1 and 2 addressed various challenges relating to recruitment and management of employees, contracting with large corporates, and protecting key intellectual property.
Debunking the Silicon Valley Myth
There is a myth prevalent among some UK and European entrepreneurs that the best way to raise early stage funds is to fly to Silicon Valley, meet venture capital firms for a couple of weeks, and come away with a large check at a substantially better valuation than is available in the UK or Europe.
If only that were true!
Unfortunately, the San Francisco / Silicon Valley venture capital market is as competitive as it is deep. Getting visibility is difficult, and non-US companies face special challenges unless they can show that they are materially superior to home-grown opportunities that may be perceived as less risky.
Raising Early Stage Funds in the US
So what should UK and European companies consider when trying to raise early stage investment in the US?:
- The Unasked Question. UK and European companies need to answer, pro-actively, a question that will not necessarily be asked: “Why aren’t you raising this round in your home market?” The answer to that question generally needs to be: “We see the United States as the critical market for the development of our business. You should be excited to invest in us based on our US traction to date and prospects, which you are best in a position to evaluate.”
- Proximity. Proximity to the VC’s whom you are pitching to lead your round is critical. Early stage VC’s are not simply bringing their money to the table. They believe their business judgment and experience and networks are a critical part of the value that they provide, and they can only provide those effectively if a founder is proximately located. Their view of proximity may vary – Silicon Valley VC’s may want you to be based within 10 miles of Palo Alto, whereas East Coast investors may have a broader view so long as you are on the US East Coast. But you will find it difficult to persuade a US VC to lead your round if you don’t have a founder in proximity to the VC, even if you have a local US office.
- Silicon Valley is not the only source of venture capital. The corollary to the point above is that the US has a number of venture capital markets. While none of the others are as substantial as the Valley, many have areas of industry expertise that may be relevant to you. For example, Fintech companies may want to think about setting up, and seeking VC funding, in New York. Adtech companies may want to look at New York or Chicago. Media companies may find interested VC’s in New York or Los Angeles.
- Why should the VC be interested in this business? Founders should assume that US VC’s have short attention spans. If founders can’t explain their business in one sentence, they may well not have an opportunity to provide further detail. If a one page executive summary doesn’t persuade the VC that he or she should want to know more, you may never have the opportunity to present a pitch deck. The pitch deck itself should be no more than 12 to 14 slides – its purpose is not to “close the sale” but rather to persuade the VC that he or she should want to learn more. Also, let your best pitcher pitch to the VC – that is not necessarily your CEO, especially if language difficulties or presentational deficiencies make him or her a less effective communicator. Simple, concise, clear communication is critical, as is passion and commitment. English understatement doesn’t work.
- Why is this a 10x business? US early stage VC’s are focused on prospects. Specifically, they will want to understand why your business is a scaleable business, with product market fit and a large addressable market, that can be expected to generate a 10x return for them. In our experience, US early stage VC’s tend to be less focused at this stage on existing revenues than UK or European VC’s, except to the extent that the nature of the revenues can help to evidence the company’s prospects.
- Does your management team have the ability to execute? Establishing VC confidence in the management team is critical – VC’s who invest based on prospects need absolute confidence in the ability of the management to make it happen. This is hard enough for first-time US entrepreneurs, but it can be even harder for foreign entrepreneurs given differences in culture, language and the like. Building this confidence will take time – founders will need to build trust by laying out milestones and then showing progress over time in accomplishing those milestones. Similarly, you will need to have a milestone-based financing plan that illustrates what can be accomplished with the proposed investment round, and why the company should be worth materially more in the next round once those milestones have been achieved.
- How can you meet the VC’s who may be interested in your company? A key first step is to identify VC’s who are likely to be interested in you. While you should start at the VC firm level, you then need to focus on specific individuals in those firms who appear knowledgeable about your sector. This isn’t difficult – US VC’s frequently speak, write and communicate through various social media and public forums, plus you can look at the company boards on which they sit. Once you have identified the key individuals, you should use your UK and European VC’s, angel investors and service providers or business partners as a source of introductions. “Cold call” contacts rarely work – this is a people business. By the way, be sure to show appropriate respect to junior team members at the VC firms – they may have a lot of influence at the screening stage, and in any case they typically don’t stay junior for long.
- Allow yourself enough time. As the discussion above reflects, it typically takes longer than you expect to raise US VC funding. In the meantime, you may need to obtain further funding from UK, VC and other investors. Leave yourself enough runway, since running short of cash not only puts your business at risk but also raises questions about management competence.
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Want to learn more about how best to pursue US expansion or US investment? Feel free to get in touch with Daniel Glazer or Robert Mollen.
Post produced in partnership with Daniel Glazer and Robert Mollen at Fried Frank Technology.