We are frequently asked by UK and other non-US companies what they need to do to attract US venture capital (VC) investment. This post is the first of a four-part series addressing how a start-up can best prepare to pursue funding from US investors, starting with a discussion of the general requirements of US VCs considering non-US investments.
The discussion below relates only to early stage investment (Superseed/Series A or Series B). This is because, increasingly, US VCs are making very substantial later stage investments in successful non-US emerging companies without regard to many of the points discussed below or in our upcoming blogs. Recent examples include TransferWise, Skyscanner, Songkick, Farfetch, WorldRemit, Azimo, SoundCloud and iZettle.
Early stage investments, however, are very different.
Proximity matters – how near are you to the VC?
Venture capitalists – especially in Silicon Valley – place a high value on proximity to their early stage investments. The reason for this is that VCs bring to the table not just cash, but also their experience, advice and networks.
Consequently, we find US VCs are reluctant to make early stage investments in non-US companies without a founder in reasonable proximity to the VC’s location. We have seen exceptions where the VC was willing to invest in a company on the condition that it uses the funds to establish US operations. However, in our experience this is usually where the company already has contracts with, and revenues from, significant US customers and business partners so that its further US business potential is clear.
It is also possible for a US VC to team with a non-US VC. In this scenario, the non-US VC leads a Superseed/Series A round (with participation from the US VC) for a company located near to the non-US VC. The US VC is then in prime position to lead the next investment round when the company sets up in the US. While we believe this kind of cross-border teaming will increase, at present it is not particularly common.
Thus, for the most part, non-US companies seeking US investment are faced with pressure to establish US operations earlier than they might otherwise prefer. This can be done cost-effectively, but it is still expensive relative to the operating budget of a typical early stage company. There also needs to be a founder willing to relocate to the US, and the company will need to work out an approach to cross-border management. For UK or continental European companies, this poses particular challenges if the most likely potential VC investors are on the West Coast – that is eight or nine time zones distant, with potential flight times of 11 hours or more.
As we discussed in our spring 2015 blog (To Flip or Not to Flip), setting up in the US does not require a non-US company to “flip” to become a subsidiary of a Delaware-incorporated holding company, and there are good reasons to resist doing so. However, it is advisable to form a US subsidiary corporation (probably in Delaware) to do business in the state or states where you want to establish your operations.
Comfort with local laws and tax
While many US VCs are prepared to make early stage investments in UK and Irish holding companies, you are likely to find lower levels of comfort with companies based in many other European jurisdictions. That is not because there is anything inherently wrong with those countries’ laws, but rather because it may be expensive for the early stage VC to gain sufficient understanding of the relevant corporate and tax laws. As you would expect, this is less true of larger early stage VCs, who are more likely to have made prior investments across a wider set of jurisdictions.
Relevance of sector, competition and expertise
US VCs are also likely to be more interested in non-US companies in some sectors than in others. Some of this has to do with the reputation that some countries and their start-ups have already developed as leading in certain sectors. For example, European and Israeli companies in fintech or cybersecurity businesses have attracted specific interest from US investors, particularly where the companies have notable US customers and business partners.
As we’ll discuss in more detail in a subsequent post, it is important for you to identify which VCs are most likely to be interested in, and knowledgeable about, your business. You should also consider whether they are already investing in companies that are competitive with, or complementary to, your company’s business. More generally, you need to have a deep understanding of your global competitors. US VCs are only likely to invest in non-US companies if they are seen as having a true competitive advantage over investment opportunities in the same sector within the United States.
* * * * * *
Over the next few weeks, our “Preparing for US funding” blog series will examine how to connect with and pitch to US VCs, how to prepare your company for US VC (and other) investment, and where you are most likely to find US VC investors interested in your company.
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.
Article produced in partnership with Daniel Glazer and Robert Mollen at Fried Frank Technology.