Fundraising in the US: Bigger Pockets or Bigger Hurdles?
There are many reasons companies look to the US for capital: bigger pockets; connections to US customers and assistance with scaling into the territory are just a few. So how should European companies go about securing funds from a US investor?
We explored this topic with both US investors and European founders who have successfully received funds from top tier US VCs.
Here in Part 1, we’ll explore the VC perspective. Part 2 will look at the issue from the Founder’s point of view.
Do you have a good reason to be raising funds from US-based investors?
If you are a seed or series A company and you are not based in the US, it’s unlikely (but not unheard of) that your seed or A round will be led by a US investor. Geographical nexus is important and while there is plenty of capital in Europe, it may raise a red flag without a good explanation for wanting a US institutional investor to lead this early-stage round.
If you are a company with at least $3m ARR and on a strong growth trajectory, US investors will be happy to look more closely at you. Pure growth equity investors are more likely to get excited at closer to $10m ARR.
Don’t forget, Silicon Valley A rounds look like European B rounds. You may think this will mean you’ll get a higher valuation than in Europe, but actually, the US investors may be looking at a European investment as a chance to get better pricing than they are used to. Make sure you search out European growth funds as well.
Do your homework and create a shortlist
This goes for any fundraise you ever do, but given the sheer volume of VC funds operating in the US, it’s more important than ever that you have identified sensible, value-add partners who fit your business stage and plans for the future.
Properly understanding and thinking through how your proposed fundraise will marry with your intended investor’s fund profile, required return and exit requirements is the first part of this process. A $300m exit to a founder may sound exciting (and make them rich) but for a $5bn fund that has invested — this just won’t make sense.
This doesn’t just mean looking at the website. Funds’ strategies often change so you will still want to glean information from folks close to them.
Reference these funds within your network, including your current investors. It’s always good to know what value the investor really brings to the table, as well as any egregious terms they may try to get included in the deal.
Think about relationship building early, but not too early
You can lose the interest of a VC very quickly so make sure you are introduced when the timing is right. If you are growing very rapidly and about 6 months out from fundraising, this is probably the most efficient time.
Similarly, coming onto their radar very late may leave a poor impression. Whilst there may be a hot race to fund you, VCs far prefer being able to spend at least a week making their decision and feeling rushed or pressured can end up in you having less offers on the table, missing out on the right partner.
Start with your “tier 2” VCs
Do your first pitches and meetings with VCs you are less attached to. If you start with your perfect partner, the likelihood is it won’t be your best pitch and you’ll lose the chance.
Look at your cap table and board structure and simplify it
Growth funds in particular do not want to deal with a long-tail, messy cap table with multiple angels or a large, unwieldy board.
If you haven’t done this before the round, quickly identify how this will be cleaned up as part of the round and include this in your pitch appendix.
Don’t be too candid in your pitch
European founders can often sell themselves short. Americans are (generally) hustlers and salesmen by nature. They have grown up as part of a very large market and feel comfortable explaining how they will easily become a billion dollar company.
European founders, by contrast, can deliver their pitches far too honestly and self-critically. Suggested market sizes may end up being the sort that the investor would expect to come up with themselves after some diligence and the approach from start to finish can often be far too conservative. Make sure the vision is BIG!
You’ve got to get to that second meeting so don’t give a VC an easy excuse not to take it.
Demonstrate that you are a dynamic and inspirational leader
VCs are looking to you to scale a successful team.
The biggest challenge the CEO will often have ahead of her, is building and retaining a successful, high performance team able to execute strongly against the business plan.
The investor wants to feel inspired by you, and to gain an insight into what your future employees are going to see and they will be analysing this throughout your pitch.
If an investor doesn’t think you appear coachable, or if you miss out small talk and are straight down to business, they may not want to back you. You’ll hear time and again that the average VC-founder relationship lasts longer than the average marriage, so they must be able to foresee a strong working relationship blossoming.
Let everyone in the room talk
If you bring your CTO or CMO or anyone else, make sure they speak — particularly when there are questions relevant to their subject-matter area. If someone attends the meeting and doesn’t speak, this can appear odd and be a red flag.
Don’t forget a VC will be looking at how you communicate between yourselves and they do not expect the CEO to be the only responder. Team chemistry, especially at the senior leadership level, is certainly scrutinized.
Metrics, metrics, metrics
And not just topline revenue growth.
There should be one solid slide of key metrics in your deck and you should be able to talk to these very easily. At growth stage in particular, the data is incredibly important. Have it at your fingertips!
Give a clear, rational explanation for the size of your fundraise
Don’t double the size of the round simply because you are in the US. Yes, there is more capital available across the Atlantic and a number of deep-pocketed funds but they won’t just write a bigger cheque because you say $20m when you really need $10m.
Be able to articulate very clearly what the funds will go towards and what effect you expect this to have on the key metrics of the business.
Know your competition
No VC wants to feel like they know the competition better than you do.
This goes for direct and indirect companies, younger and more mature companies and all that is in between. You should know the competition inside out: you’ve used their product, may know some of their key team members, have spoken to their customers and generally, done your homework.
Explain why you’re different and how you think you can protect that difference.
Don’t miss out anyone obvious or be dismissive of any competitors. It is far better to discuss it head on.
Don’t forget, competition is often good validation, so don’t be afraid of discussing it openly!
With thanks to Insight Venture Partners; Bessemer Venture Partners and Bain Capital for their insights.
