US VC Requirements for Investing in
We are frequently asked by UK and other non-US companies what they need to do to attract US venture capital (VC) investment.
Increasingly, US VCs are making very substantial later-stage investments in successful non-US emerging companies. Examples include TransferWise, Skyscanner, Songkick, Farfetch, WorldRemit,Azimo, SoundCloud and iZettle.
Early-stage investments, however, are very different. The discussion below relates only to early-stage investment (Superseed/Series A or Series B)
Proximity matters – how close are you to the VC?
Venture capitalists – especially in Silicon Valley – place a high value on proximity to their early-stage investments. The reason for this is that VCs bring to the table not just capital, but also their experience, advice and networks.
Consequently, we find most US VCs are reluctant to make early-stage investments in non-US companies without a founder (or at least a strong decision-making team) in reasonable proximity to the VC’s location. We have seen exceptions where the VC was willing to invest in a company on the condition that it uses the funds to establish US operations. However, in our experience this is usually where the company already has contracts with, and revenues from, significant US customers and business partners so that its further US business potential is clear.
It may be possible for a non-US company to raise early-stage funding from a US VC without a significant US presence if the US VC teams with a non-US VC. In this scenario, the non-US VC leads a Superseed/Series A round (with participation from the US VC) for a company located near to the non-US VC. The US VC is then in prime position to lead the next investment round when the company sets up in the US. While we believe this kind of cross-border teaming will increase, at present it’s not particularly common.
Thus, non-US companies seeking US investment may be faced with pressure to establish US operations earlier than they might otherwise prefer. This can be done cost-effectively, but it’s still expensive relative to the operating budget of a typical early-stage company. There also typically needs to be a founder willing to relocate to the US, and the company will need to work out an approach to cross-border management. For UK or continental European companies, this poses particular challenges if the most likely potential VC investors are on the West Coast – that is eight or nine time zones distant, with potential flight times of 11 hours or more.
To be clear, as we will discuss in a future article, setting up in the US does not necessarily require a non-US company to “flip” to become a subsidiary of a Delaware-incorporated holding company, and there are good reasons to resist doing so. However, it is advisable to form a US subsidiary corporation (probably in Delaware) to do business in the state or states where you want to establish your operations.
Understanding of local laws and tax
While many US VCs are prepared to make early-stage investments in UK and Irish holding companies, you are likely to find lower levels of comfort with companies based in many other European jurisdictions. That is not because there is anything inherently wrong with those countries’ laws, but rather because it may be expensive for the early-stage VC to gain sufficient understanding of the relevant corporate and tax laws. As you would expect, this is less true of larger early-stage VCs, who are more likely to have made prior investments across a wider set of jurisdictions.
Relevance of sector, competition and expertise
US VCs are also likely to be more interested in non-US companies in some sectors than in others. Some of this has to do with the reputation that some countries and their start-ups have already developed as leading in certain sectors. For example, European and Israeli companies in fintech or cybersecurity businesses have attracted specific interest from US investors, particularly where the companies have notable US customers and business partners.
It is important for you to identify which VCs are most likely to be interested in, and knowledgeable about, your business. You should also consider whether they are already investing in companies that are competitive with, or complementary to, your company’s business. More generally, you need to have a deep understanding of your global competitors. US VCs are only likely to invest in non-US companies if they are seen as having a true competitive advantage over investment opportunities in the same sector within the United States.
About Daniel Glazer
Daniel Glazer leads the Tech Group at the New York-based global law firm Fried Frank and is co-resident in the firm’s London and NYC offices. Dan’s team provides US legal advice and practical business guidance to European early-stage and growth-stage companies seeking to expand to the US, raise US capital, and transact with US business partners. Dan can be reached at firstname.lastname@example.org.
About Spark Labs
Spark Labs is the collaborative ecosystem & US expansion platform for tech & media companies. Our mission is to support the creation or expansion of Tech & Media companies. We help tech entrepreneurs develop their business in the US or Europe by leveraging our space and support infrastructure. We believe that fostering great businesses starts with having the right environment, team, mentors and local connections. Being entrepreneurs ourselves, we know that launching or expanding a company into a new market can be difficult. That's why we've decided to develop a revolutionary ecosystem for entrepreneurs with a very strong focus on community, network and relationships.