How and when to raise venture capital from Silicon Valley — for European and Asian startups
For most parts of the world US VC is the holy grail of venture capital — the best VCs, the best entrepreneurs, limitless capital and ambition, a track record of world changing companies, and access to the scaling networks that will drive your startup on to success. Key questions for non-US based founders are therefore how to tap into this, when is it right for your startup to raise US VC, what will be required to make this work and whether, in fact, it is the right thing to do for your company.
At Entrepreneur First, we invest in founders pre-team and often pre-idea in structured programmes that run in London, Berlin, Paris, Singapore, Hong Kong and Bangalore, drawing in some of the best global talent and helping them build some of the worlds most ambitious companies. In 2019 we’ll back nearly 1000 founders across our locations, producing around 80 new VC funded companies — a processes that massively concentrates quality as only the best of the best reach our quarterly demo day in Europe and Asia. Our portfolio is large and growing fast. But as we saturate local funding networks in some of the territories in which we operate, unlocking US VC and therefore answering these questions is key to the success of our programme, and our companies as they scale.
I relocated to Silicon Valley earlier this year as part of EF’s continued global expansion, currently co-located at Greylock (an EF investor), and because of the strength of our growing network have been in the privileged position to have spoken to partners at Greylock Partners, Founders Fund, Sequoia, Lightspeed, GV, 8VC, Index Ventures, Uncork Capital, and many more over the past few weeks and months.
The conversations have been enlightening, and I’m constantly reminded that despite the challenges of Silicon Valley (costs, competitiveness, housing, etc.) this place still has a unique magic and expertise that has been build on generations of entrepreneurs and venture capital dating back 70 years — a strength and depth you can’t replicate in a hurry, even as the rest of the world races to catch up.
From those conversations a few key themes kept emerging on how US VC sees the world, and its implications for non-US based startups. I’ve captured a few of them here, though this is by no means exhaustive.
A few ground rules
Firstly, if you’ve never been to Silicon Valley, you should come. Not necessarily to relocate, but to see what ambition and scale really looks like — and then go back home either inspired or terrified, either way is good.
Secondly, if you’re thinking that raising money in the US is easy, or that “people don’t get me” in your home market, but “they’ll get me in the US” — all of this is not true. There is a lot of capital in the US, but getting it is non-trivial. There may also be lots of angel tourist money, but if you want capital from the best VC, it is a higher bar — and if you can’t raise anything at home, chances are you won’t be able to here either.
And finally, if it’s VC money you’re after, building a venture capital backed unicorn is super hard. The good people of CB Insights regularly publish data on the success of the VC funnel — from seed through exits — and the unicorn rate remains approximately 1%. Why are you in the 1%? The top VC will constantly be asking that question. And you should too.
What top US VCs look for
So you’ve decided you want to be part of the 1%, now you need to convince venture capital firms to back you. Having a great idea or product is table stakes, but they’ll also be assessing you on how you approach the market, how you win at massive scale, whether your location helps or hinders this victory relative to others in the same space, what you’re like as a founder and the availability of scaling resources to help you on the way. It a multi-dimensional problem, but a few key themes emerged in my conversations.
The best VC want to invest in the global winner
Now this may sounds obvious and like it’s a given, but I’m surprised how often teams aren’t thinking in these terms. Getting to unicorn scale is not just about being a good company with growing sales, it’s about dominating a category or territory or ideally both — it’s about being the company. You need to know why your company will emerge as as the single global winner, have a compelling story for how and why you’ll get there — and genuinely believe it.
This point is often wrapped up in the ambition question (see founder characteristics below) — the most ambitious founders will naturally think in this way, every market is a route to a larger market and the end point is total domination brought about by transformational change. Founders in Europe and Asia are often criticised for not thinking at this scale.
If you’re in a crowded space being attacked by lots of startups and don’t have a clear reason why you will emerge as the dominant victor, that’s a problem. If you’re in a clean new space recently enabled by tech or serendipity, great, get a move on.
Speed of execution really matters in a winner takes all market
If you’re planning to dominate a category, and there are network effects or barriers to entry with scale, then speed really matters (a point made with great enthusiasm by EF investor Reid Hoffman in his Blitzscaling book!). It matters so much that even if you start earlier somewhere else (Europe or Asia), the faster, better capitalised, more aggressive company (often US or China) can still beat you. So not only do you have to believe you can win the category, but you can do it fast enough to hold that spot long term.
This then leads to an analysis of a whole set of characteristics that enable speed of execution, for which Silicon Valley again has market leading credentials. For example:
- Access to early adopting customers — the valley is full of startups at all scales looking for competitive edge through latest tooling. It’s also where the worlds corps come to shop for their next best thing, and where the big valley firms have huge convening power for powerful corporate decision makers — so it’s ‘easier’ to get to scale of adoption and make first sales in an environment like this than anywhere else
(A short aside on this point — I was a top tier VC the other day, and hearing other English accents at reception later discovered it was a large European retail bank doing a portfolio visit — these people can be hard to get hold of in London (!), but here they are flying to SV to meet the ‘next best thing’. It seems crazy you have to come from London to SV to meet potential customers back in London, but that can often be the case).
- Availability of capital — goes without saying Silicon Valley is the world leader in access to capital. There are more firms here at every stage of the VC funnel, and particularly at the larger end there are more firms that can write $20m+ cheques that anywhere else in the world. And it can become a virtuous circle — speed draws in capital, capital fuels speed and so on. For start-ups based in Europe or Asia chances are you’ll need to tap into valley capital when you reach enormous scale — but you need to be compelling enough to win it.
- Availability of scaling resource — this is mostly about people, mentorship and experience. And this is another area that Silicon Valley excels with an ecosystem that dates back to the real Silicon revolution in the 1950s. With 70 years of ecosystem development, there are generations of people able to fuel your startup. As a few VC have said, they know 3–5 people in Europe who can be VP sales, but 100s in the Valley…
Addressable market size
Partly related to scale and speed of adoption, addressable market size will determine how big you can get with the least friction as you start to scale. Winning any market is super hard, but the prize for winning a large market like the US or China is that it can support you to a far larger scale vs. winning a smaller market like the UK (5th largest world economy, but still only 1/7 the size of the US!).
The US and China are also more internally homogenous, making it easier to scale out vs. the EU, which is comparable in size, but requires a tonne of localisation and product customisation — despite the single market. This is one reason why smaller European countries localise more quickly — you can’t even kid yourself that the home market alone is big enough to support your ambition— and sometimes why we make the mistake of beliving that the UK is ‘big enough’. It isn’t.
So the market you’re in also affects the ease with which you can scale, and therefore your likelihood, all things being equal, to win the race to global category domination.
Founder qualities
Many books and posts have been written about founder qualities and the kinds of characteristics entrepreneurs need to succeed — so this isn’t a recap of that — but again, a few points struck me as being notable in these conversations.
- Ambition — do they want to build the world beater? Do they think they can? Do they act that way? A common complaint was that non-US founders just don’t seem to have the same level of ambition, or frame their ambition in this way. This is solvable — think bigger. One VC told me about ambition “If you’re doing $1m ARR this year and only planning $3m next year, we’re going to have a problem working together”. Good times.
- Pedigree — have they founded before? been in a scaling startup? seen it happen first hand? Been a VP in a unicorn? While this is also true in Europe and Asia, there are fewer prior unicorns from which to have learned. There’s no doubt having seen some of this up close — as an early employee or other — is helpful, but there will be a lower instance of this in Europe and Asia for the moment.
- Drawing power — do they have enough personal pulling power to draw in the best talent for scale? This was an interesting one, as it’s very relevant to non-US founders. To get the best hires from a limited non-US experience pool, non-US founders often have to persuade talent to relocate to where they are as they scale. Your ability to do this as a founder will allow you to tap into a global talent base, not just that available in your own country.
And finally ROI on cost of service
- And then ROI of cost of service vs expected reward — it’s harder to service a company 8 timezones away, unless the VC is already making the trip and can coordinate things. As another VC said, Europe is going great, it’s just that the US and China are still better. Which is why most focus solely on the US — except when there are particular exceptions.
A short digression on luck (and location)
Too few founders consider the impact on luck on their path to success. Whether this was luck in timing, an early client, a serendipitous meeting or other, the journey from start to unicorn will include a few lucky breaks. However, many of the factors discussed above will magnify the impact of luck. If you get lucky with a client in a small market, small impact. If you get lucky with a client in a large market, large impact. Just how it is. Same luck x10.
How does this apply to Europe/Asia startups?
So having been though all of this with one partner, she apologised for it being so US-centric — but here’s the thing, it isn’t. As a framework for assessing conditions for likely success it’s perfectly rational, it just so happens more of these conditions are met by US located startups.
The reason Valley firms invest in more Valley startups is that when assessed on the above criteria there are just many more that meet them. The ecosystem alone is enough to create the conditions for more rapid growth even with like for like founders with like for like ideas. So what does this mean to you?
It means even if you’re not in the US and have no plans to come here, it’s a global game you’re playing, so you need to think about it in these terms. Europe and Asia (excluding China) don’t have the same conditions for scale, and despite large markets (like the EU), they are fragmented and impossible to address with a single product/language/team. This doesn’t mean success is impossible, it just means you’re going to have to work hard to overcome some of these challenges. But if you do win, there is defensibility in those positions, which are often hard for US firms to win.
As a US angel investor told one of our European hardware startups “it’s like you’re playing the same video game, you’ve just chosen to play on super fucking hardcore mode”. But if someone wants to take that market away from you, they’ll have to play the same game.
So how and when to raise from the US? Or alternative winning strategies for ROW startups
Given all of this, I hope your first conclusion is that if you want to win globally, you need to think that way from the start, and think about where/how to build your startup to optimise this. That may be the US, it may not. First figure out the right strategy for your business, then optimise fund raising to that.
Optimise for your business, not the idea of raising in the US
Where is the best place in the world to build your business? There may be a number of factors that feed into this, capital, team, market, customers, etc. Where are your customers located? Europe, Asia, US, everywhere? Would there be better adoption in one market vs. another.
This is often a customer story, and optimising for customer access and uptake is a good way to build your company. If all your customers are in Asia, don’t kid yourself there is a US story for this. If your customers are everywhere, and you’re in Asia and not planing to leave Asia, then sell to Asian customers and grow from there. If US customers would be better (pay more, adopt more quickly, etc.) AND this is demonstrable, and you have 100% conviction to do what’s best for your business — go to the US.
Raising from US VCs
There are a few US based VC that will regularly invest in startups anywhere in the world. In fact most will consider it (and have one or two in their portfolio), but usually only when one of the exceptions are met — these often include: having worked with a founder before, founder has already achieved a successful exit, founder has been part of a prior unicorn, or a super group of founders who’ve met multiple of these exceptions.
If you’re a first time founder, this is likely to not include you. But there are still ways and means, and alternative winning strategies.
Seed stage
Due to the availability of local US startups, and the high ROI of servicing non-US based companies. Raising seed from the US when based elsewhere is not likely. So the best way to raise US seed VC is to become a US based company. Compete toe to toe with the rest of them.
However, there is a subtlety in this that is worth noting. Many of the benefits of being in SV are about commercial scale out, capital and growth. And while there is also a high concentration of 10x engineers, seed funds are increasingly happy investing in companies that have their commercial centre in the US, are addressing a US customer base, with a US GTM (go to market), but have their engineering base elsewhere. In fact one fund told me more than 50% of their new investments have their engineering outside of Silicon Valley. This is because the cost of talent is crazy, and keeping that talent from being poached is even harder. (Back in my startup days, we used to joke we had a cheap offshore development team in London. That’s still true today compared to the valley).
So if you want to raise seed from the US, as a CEO founder you need to be committed to go there (your CTO may be able to stay where she is). You need a credible US go to market, and be building for US customers — and for this to be the ‘right’ thing to do, not just some story you made up because you want US money. Why is it right to build your company in the US?
And don’t say “if you give us $2m we’ll move to the US” — move to the US because it’s right for your company, show commitment, the rest will follow.
Series A/B
Again, so much of this is determined by the customers you have, the market you are after and your progress to date. If you started in Europe or Asia, and are still scaling out customers there, then that’s likely to be where you’ll need to raise. By Series A, it’s not likely you will have ‘won’ your home market yet in such a way that you’re ready for the next one — and if the next one is the US, you’ll need a tonne of capital.
As one VC said to me, “companies typically should either go early or go late, not in the middle”. It’s possible that as you head towards Series B you’ll be ready to credibly enter the US, and if you’re emerging as a potential global category winner, even if you’re not yet in the US and have no plans to be there, it’s possible you can still raise from the US — but that’s a particularly high bar!
Later stage
For later stage rounds, you’ll definitely need to be moving into the ‘potential emerging global category winner’ to attract big rounds from the big names in Series C/D/E. You’ll need to have demonstrated early customer dominance and exciting growth and traction. Again the US focus will be on the global victory, so if you don’t have the trajectory or ambition to demonstrate that, you may be able to dig in and hold your local monopoly. But in the increasingly winner takes all world of global VC, you’d better start building those barriers!
Governance
One quick point on governance. If you are raising US VC and not spending a tonne of time with your investors as you dash between countries, you may be missing out on advice, support and challenge of your ideas. Some companies tell me with great excitement that their Seed VC isn’t going to take a board seat or have board meetings. This usually makes me nervous, and is more common in my experience when large distances are involved, or with party rounds where no one has the concentration of capital to really care.
If you really know what you’re doing, you might be able to get away with light governance and support, but this is pretty unusual. More likely the cadence of regularly (monthly or quarterly) presenting your thinking and having it challenged will be of real value to you — particularly at early stages — so make sure your investor is able to commit to this. This can be one reason to take local VC to where you’re located.
So what are the winning strategies for startups based in Europe or Asia
You may have realised reading this, that in fact US VC is not for you. Great!
Remember, the US is not the only path to building a great VC backed company — there are great companies built in Europe and Asia, and a growing band of great VCs backing them too — so don’t overly obsess over this. The best thing is to be honest with yourself about what you’re building, what you’re prepared to do to make it succeed, and remember the criteria for global success still apply to you no matter where you’re based.
So think and compete globally. Don’t be the best French or Singaporean company, be the best company. Localise early to get out of your own ‘small’ market. Set ambitions high and aim for the best you can get at every stage — VC, team, customers. Keeping yourself to this high standard will mean that you can compete with the best on the global stage. Ignoring these points may lead to a nasty surprise later.
I’ve got to know a few of the entrepreneurs on our latest Eur12 batch who will graduate at our Sept 2019 demo day, it’s fascinating to see how they’re already shaping their ambition. One of them asked me the other day “what would I need to do so that you would come and work for me”. Good question. That’s what I’m talking about ;-).
– –
Thanks to Reid, Jerry, Sarah, Nakul, Joe, Drew, Aaref, danny, Mark, John, David, Frederique, Jeff and Andy for your time, thoughts and wisdom.
