Fundraising in the US: The Founder’s Perspective
Part one explored the VC perspective. Here in part two we look at the issue from the Founder’s point of view.
In case you missed it, here is a link to part one- the venture capitalist’s perspective.
Hot intros are better than warm ones
It will be much harder to get in front of a VC in the US than in Europe. A relationship you thought was warm 6 months ago may now be a dead and your emails will go unanswered.
Intros are most successful from other VCs or CEOs, but these need to be very trusted, long-time, close allies and friends of the VC you are approaching.
Your investor(s) should really come into their own during this process. Hopefully, they have some US funds who they have done other successful deals with. For example, Insight Venture Partners had successfully invested in Delivery Hero prior to partnering with Rocket Internet again with Hello Fresh.
By talking regularly with investors when you aren’t fundraising, you can outline in one meeting how you see the market and your strategy and at the next meeting you should be able to demonstrate how you executed against that strategy. These informal catch-ups can lead to invitations to pitch and even requests to do a deal which is not taken to the wider market (a real win when you think of the time and effort that goes into fundraising).
Prepare for a quick decision and a quick process
A yes or no is reached and delivered extremely quickly.
Often, diligence is being conducted in the background, so expect to be soft referenced.
One company had its first meeting with a US VC, had a verbal yes two days later then an in-person diligence and term sheet negotiation two days after that. First meeting to signing a term sheet took no longer than a week.
After the term sheet, everything was sent across to the lawyers and the investment team didn’t come back on the scene until they were about to sign the deal.
Terms may be different than you expect
A US investor may look at your financial plan, agree with its fundamentals but significantly increase your numbers, suggesting you raise a far bigger round than you originally set out to.
They may propose harsher terms but with a focus on the long-term value your partnership will create.
Conversations feel different
From investors to executives to customers, conversations have a different feel to those in Europe. The US can feel more strategic and “blue sky” compared to the more pragmatic and granular European culture.
Nevertheless, certain US investors are extremely hands-on. They typically come from an operating background and like to be involved with every decision made by the business, from hiring to press releases. Look out for this when diligencing the background of your future board director and try to set the parameters of their ongoing engagement from the outset so you don’t feel suffocated.
Diligence centres around customer and co-investor reference calls
US investors already know whether they like the market you are operating in or not. They want to understand what your existing and prospective customers make of the team and the product offering. References are taken from other team members, employers and existing investors. US VCs can effect this quickly due to extensive and willing networks. The result is a quicker diligence process.
Data is a focus at Series B+ rounds but before that, whilst European VCs appear to care far more about slicing and dicing the data at every stage, a US VC cares more about your vision and the strategy which will make that vision a reality.
If you are lucky enough to be a successful entrepreneur who has built and sold a business previously, the diligence is likely to be based on the key founding team members. This will be a test of chemistry (on both sides) and developing a trust-based relationship. The investor will be making a bet on you but will seek to understand if you know what you want to achieve and how you are planning to get there.
Get them bought into your mission and your vision — and make sure that it’s a big and bold one
US investors are more excited by the big vision that is presented to them. European investors tend to be more skeptical and cynical.
It’s vital to get the US investors bought into your mission early in the pitch process. You can often determine how the meeting is going to go within the first 15 minutes.
You don’t necessarily need to be expanding to the US
It is certainly not a prerequisite to be expanding to the US or to have existing customers and traction there in order to get funding from a US investor.
However, founders and investors alike make the same point: know why you think this investor is a good fit for you, wherever they are based, and be able to explain this with conviction.
If they have a history of successfully investing in consumer businesses coming to the US from Europe, that’s a pretty good reason for a consumer startup following the same pattern to look closely at them.
If you do have traction in the US but don’t yet have a senior presence out there, don’t be surprised if a US investor expects a senior team member to permanently move to the US. They may also insist that the company they invest into is a US entity. This will make for extra fun in the fundraise (watch those legal fees and instruct lawyers who have done this many times before) but, if you ultimately think 60%+ of your revenue will be from the US, it can be a sensible move.
Top tip — get an early agreement on the exchange rate
If you are getting an investment in dollars but issuing your shares with a GBP or EUR share price, don’t forget to get the agreed exchange rate locked in early on, and preferably in the term sheet. This may work for or against you when it comes to funding, but at least everyone knows what has been agreed and the number of shares being issued and at what agreed share price.
For example: X VC has agreed to invest $10m into Y Ltd and to pay that money into Y Ltd in US Dollars despite the company’s bank account being in UK GBP. The agreed exchange rate is 1 USD : 0.74 GBP. The share price is agreed to be 2 GBP per B Preference Share so X VC will pay $10m in order to receive 3.7m B Preference Shares in the company on closing. If the exchange rate is in fact 1 USD : 0.7 GBP on closing — the company will end up receiving less GBP here, or 1 USD : 0.8 GBP on closing — the company will end up receiving more GBP here.
Expect other offers to come flooding in if a Silicon Valley fund issues a term sheet
It is likely that you’ll have received various rejections and some half-baked reasons why you are not getting funding.
As soon as you receive a term sheet from a US investor, expect to be the hottest ticket in town and don’t be surprised if investors who turned you down originally, come back to ask to be a part of the round. It’s simply the herd mentality in play.
Be more bullish
Immediate addressable markets are, on the whole, smaller in Europe than in the USA and it can therefore appear harder to build a very large business in Europe alone. The level of sophistication and quality of execution in Europe can, however, often be much higher because it simply has to be in order to build a successful European business. In the US, you have the good fortune of simply having a really big market in front of you which can lead to apparent success. European founders should have more confidence when thinking about tackling the US market and remember that their ingrained discipline may well be the first stepping stone to success.
With thanks to WeFarm, Hello Fresh, Behaviosec and others for their insights.
