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Here’s Why Silicon Valley Investors Avoid Investing Overseas
(Note: While the stats are for my lovely country Turkey, key findings and learnings are applicable to all non-US startups.)
Turkey’s entrepreneurial ecosystem is growing rapidly. 424 Turkish startups have raised 360 million dollars in last five years. Almost all funds came from local and European investors. American investors are not in the picture. Yet, funds invested in startups in the United States corresponds to almost half of the investments made around the globe. In last five years, 25,472 startups in the United States raised 286 billion dollars.
I invested in high-growth technology companies such as Wirecard Türkiye, Logo Yazilim, and Filo Turk during my time at Mediterra Private Equity. Then, I settled in Silicon Valley to get an MBA degree from Stanford Graduate School of Business. I tried hard to explain the development of Turkey’s entrepreneurial ecosystem and the opportunities it offers to American investors.
I talked to more than fifty venture capital firms in Silicon Valley. Thanks to the successful Turkish entrepreneurs, investors and tech company employees in the region (such as Eren Bali, Selcukatli, Emrecan Dogan, Barış Karadogan, Aydin Senkut, Hulya Koc, Aydın Koc, Ege Ertem, Baris Aksoy, Murat Bicer and Sahin Boydas), investors are aware of the high quality of technical training and young workforce in Turkey. They also know about the local success stories of Nevzat Aydin, Sina Afra, Hakan Bas, Alper Akcan and Hamdi Ulukaya. The success of immigrant entrepreneurs in the United States is not limited to the success of Turks. 25% of technology entrepreneurs in the United States are immigrants. 51% of the companies that have reached 1 billion dollar+ valuation was established by immigrants. So, investors are eager to invest in immigrants in the United States.
While American investors are willing to invest in immigrant entrepreneurs in the United States, why don’t they prefer to invest in overseas startups?
The first reason is that the early stage investors want to act as active partners in their companies. They want to add value to the company by introducing entrepreneurs to their network. Investors’ limited network overseas is the first problem they encounter when it comes to investing overseas. Time difference with the company (11 hours with Turkey, 12 hours with India) makes the communication even more difficult. Thus, the investors think that their value add to the company would be limited.
The second reason is their willingness to find companies which will reach a billion-dollar valuation. The investors are looking for large addressable market and scalable business models. United States, having the highest GDP as well as the highest rate of early adopters, is the most attractive market in this sense.
Another reason is that it is easier for American entrepreneurs to raise funds compared to non-US entrepreneurs. As we mentioned, half of the money invested in across the globe has been invested in startups in the United States.
Considering the last two reasons (large addressable market and reach to funds), investors think that American startups are more likely to beat their non-US competitors. Number of the companies that have reached a value of more than 1 billion dollars in recent years also supports their thesis.
An American investor shared another reason: “Americans refrain from everything that is non-American.” Investors who are not experienced in investing overseas worry about power of rule of law. They want to know how to bring their money back to the US when they exit from the investment or the lawsuit processes if things don’t go well. This discourages investors to invest in foreign markets and jurisdictions.
Last but not least, the prestigious clients acquired overseas, aren’t known by the American investors. Besides, investors become distanced from the client confirmation, which they need to invest. The investors may have difficulties in reaching the startup’s clients when they need to get information about the startup.
If we take all the reasons mentioned above into account, we understand that the advantages of getting into the American market for rapidly growing the business and for raising funds are enormous for non-US entrepreneurs. Hamdi Ulukaya’s story of Chobani is the most remarkable example in this context. His yogurt company raised 750 million dollars from one of the most reputable investors in the US, Texas Pacific Group. He created a company with a value of 5 billion dollars in less than 10 years. This value is higher than the sum of the value of all dairy businesses in Turkey which have been around for more than 30 years.
My next blog post (or may be the next couple of posts :)) is going to be on the issues overseas startups most commonly face in expansion to the United States. Our first webinar (Building and maintaining your United States entity — Compliance Requirements) will be live in December. Stay tuned by and subscribing to our emailing list through www.gatewaytosv.com. Or, send us an email to learn more firstname.lastname@example.org.
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