Raising Early-Stage U.S. Venture Capital as a UK/European Company

Over the past few years, U.S. venture capital investors have focused on the UK and Europe like never before. In 2019, U.S. investors infused nearly $10 billion into UK/European technology companies (up nearly threefold since 2015) and participated in 19% of UK/European financings (up from 9% in 2015).[1]

Accordingly, we often are asked by UK/European startups if they should look to the U.S. for their next fundraise. While we have seen a significant number of UK/European growth capital financings led by American investors, we cannot say the same about Seed and Series A financings. In the UK/Europe, it has been our experience that Seed financings tend to be local, Series A financings tend to be regional or national, and Series B and later financings tend to be global. In other words, the earlier-stage the company, the more important it is for its lead investor to be nearby.

To confirm our anecdotal experiences (at least with respect to UK companies and U.S. venture capital investors), we partnered with UK data provider Beauhurst to determine how frequently U.S. venture capital funds with no UK/European operations have been leading the Seed or Series A financings of UK companies with no U.S. operations.

According to the research, UK-based companies raised approximately 2,800 Seed and Series A rounds in 2018 and 2019 combined. Of those 2,800 Seed and Series A rounds, only 52 (1.9%) met the following criteria:

• The UK company had not launched U.S. operations prior to the financing (i.e., by opening a U.S. office with local hires and/or UK founders or employees relocating to the States), and
• The lead investor was a U.S.-based venture capital fund that did not have an office in the UK or elsewhere in Europe at the time of the financing.

These figures suggest that U.S. venture capital investors who do not have UK/European operations would tend to lead a UK company’s Seed or Series A financing only after the company has established a credible U.S. presence and developed a strong “U.S. story.” Stated another way: U.S. fundraising typically follows U.S. commercialization and operational expansion, not the other way around.

This result is logical - albeit perhaps somewhat unexpected, given the publicity surrounding the increasing levels of U.S. investment into the UK/Europe. Many early-stage VC investors look to leverage their expertise and network to shape and guide their portfolio companies’ growth; that often is their competitive advantage as investors and helps mitigate their investment risk. This support can be particularly effective when at least a portion of the company’s executive team is near the investor — either because the company has expanded to the U.S. or the investor has opened an office in the UK/Europe. As a result, most early-stage U.S.-based VC investors focus on building U.S. businesses; leading early-stage financings for UK/European companies that have not demonstrated the extent to which they are likely to succeed in the U.S. may be perceived as too risky relative to U.S.-based opportunities.

While the exceptions tend to be situation-specific (e.g., a repeat founder that has a pre-existing relationship with a U.S. fund), the research suggests a few trends worth noting. Participating in a high-quality U.S.-based accelerator can help establish credibility and lead to connections with U.S. venture capital investors that eventually result in an early-stage U.S.-led financing. Certain industry verticals also tend to have more international reach at an earlier stage. For example, biotech investors typically have deep scientific subject-matter expertise that is less impacted by geography; biotech companies account for nearly 25% of the 52 U.S./UK rounds referenced above. Fintech companies also periodically prove to be an exception, given the close relationship and synergies between the London and New York financial communities; companies in this sector comprise nearly 20% of the 52 U.S./UK rounds.

Notably, these 52 U.S./UK financing rounds were completed prior to the COVID-19 pandemic, and the impact of international travel restrictions remains to be seen. While it seems likely that limiting the ability of UK/European-based companies to meet in person with U.S.-based investors will lead to even fewer cross-border early-stage financings, it is possible that geography instead becomes less relevant given the increasing reliance on remote meeting and working technologies.

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Daniel Glazer is the founding partner of Wilson Sonsini’s London office and U.S. Expansion Group. He can be reached at daniel.glazer@wsgr.com and through Linkedin. This article was co-authored by Wilson Sonsini London associate Amanda Pollard (apollard@wsgr.com). This article does not constitute legal advice and should not relied upon for business or legal decisions.

[1] See Atomico’s 2019 State of European Tech report at https://2019.stateofeuropeantech.com/chapter/investors/.