3 Key Questions for Raising US Investment
It’s been over a month since we announced our US Investment office. In that time the most common question I’ve received from European founders is “How do I raise from the States?” For the past several weeks I’ve been speaking with investors across geographies and sector focuses in an attempt to understand their thoughts and feelings on investing abroad. While every investor holds his/her own viewpoint, there does appear to be a general consensus regarding international venture. This is my attempt to share some of those early insights.
The truth is your ability to raise depends on your market, traction, stage, etc. As a European founder, you have a handicap you’ll need to overcome: the bar is higher for a European company and the sooner you accept that, the sooner you can get to work. It’s not necessarily fair or justified, but that’s the hand you’ve been dealt. So whenever I’m asked, “How do I raise from US investors?” I turn the tables and ask the founder these three questions that can pretty quickly determine if American funding is in her near-term future.
1. Why are you raising in the US?
If there’s one question you need to absolutely nail, it’s this. Almost every American investor has heard one of the following from a European founder:
· “EU investors don’t have enough money.”
· “EU investors don’t get us.”
· “EU investors are too conservative.”
To an investor it sounds like one thing: you can’t raise in your home market because you’re a shit company. The adverse selection concern is incredibly strong for US investors when evaluating EU companies. Most will assume you’ve been unsuccessful at raising funds and have flown across the pond because there’s more money available.
It’s your #1 priority to address this concern within the first three minutes of the conversation. How? Don’t frame your response around investment; focus on your business and your customers. Every American investor wants to know that the States are paramount to your strategy and vision. They want to hear that you NEED to be in the States and why. Demonstrated evidence is always helpful, so having sales/customers/users originating from the US is a very strong way to prove your claim. If you can’t do that, have a narrative such as, “I need to be in Boston because it’s the epicenter of Life Science.” Get your story tight or don’t waste your time.
2. Are you willing to relocate to the US?
It’s no secret that proximity bias is alive and well in VC. Investors want to be able to see their teams at a moment’s notice. No planes, no Skype. Many debate whether this stance is strategic or just lazy (myself included). However, I’ve come to realize this position is rooted in a legitimate desire to be a helpful investor team member. The primary arguments you’ll hear from investors are:
“My entire network is in the US so I can’t be helpful.” A lot of the value an investor brings is connections to future financing, customer leads, talent pools or regulation influence. If all of those connections are in the States (and you’re not), then they quickly become a lot less helpful. Yes, there’s always email, but we all know email sucks. My only pushback on this argument is most experienced investors/professionals can offer more than just connections. Experience transcends location. Bonus points to the founder who weaves this into their pitch.
“I can’t build the required relationship over long distance.” Many have compared taking venture funding to a marriage, and the juxtaposition isn’t far off. Most early stage investments take at least five, if not seven or ten, years to mature. Making it through that timeline requires trust and friendship beyond a quarterly board meeting and monthly update emails. Most experienced investors will tell you a lot of their responsibility as a lead is to simply be a trusted advisor/sounding board/shoulder to cry on when things get tough. Being able to swing by the office or meet for an impromptu coffee is an order of magnitude easier than developing the same rapport via telecommuting. Yes, there are certain elements of control that the relationship requires, and proximity makes that easier too. But at their core, most early stage investors move into this line of work because they genuinely enjoy working with smart people on a day-to-day basis.
3. What investment round will this be?
This is a pretty binary issue, but if you’re raising a growth round (Series B+), then you’ll have a much easier time. As a later stage company, you have years of traction, data, customer references, existing backers, etc. that an investor can dig into to make herself feel comfortable with the business. Transferwise, FundingCircle, Zenly, etc. all demonstrate examples of top tier investors crossing the Atlantic to invest in rocket ships. Why? Because they were already rocket ships! At the growth stage a CEO can really let the business speak for itself, so raising a few rounds in the EU and then crossing over is a proven path to success. For those startups that aren’t yet old enough, raising US capital is still possible, but Questions #1 and 2 become more important for you.
A few other factors can make a marginal difference in your raise probability, like being from a halo industry (i.e. Fintech in London) and having a properly-sized round (US rounds tend to be larger). For the most part though, it’s the first three questions that will determine if a US raise makes sense. I should clarify that this advice is written with securing a lead in mind. There are a few alternatives to gain exposure, which ultimately comes down to cap table allocation.
Once you get past these gates, fundraising will follow the normal process, which I’ll save for another post. Very few global tech companies have succeeded without a US strategy, so if you don’t have one you should start thinking. Venture funding isn’t a requirement for success, but it can be great fuel for hyper-growth and scale. If and when you decide that US investment is right for you, it’s imperative you construct your round as a unique and highly-tailored operation, not an extension of your European run.