On our previous webinar in this series, Bring Your Startup to the U.S., we covered reasons a startup might want to expand into or relocate to the U.S. This time, speakers: Joshua Siegel, General Partner for Rubicon VC, Bob Mollen, Partner with Fried Frank, and Glenn McCrae, EGFS Chief Strategy Officer, discussed the U.S. market’s value proposition, how to target and pitch investors, and creating a game plan, including making your startup attractive to local investors, for your raise. Here’s a link to the slide deck for Accessing U.S. Capital or check out the video on our YouTube channel.
Reasons the U.S. makes an attractive base for startups:
1. Local startup ecosystems here are very well-developed: especially in the case of New York and Silicon Valley. This means you can rapidly find the right people and get up to speed with what’s going on with other startups.
Where to move your startup?
When you’re deciding where to locate within the U.S., your decision should reflect not only customers and suppliers, but also access to potential investors. For big capital rounds with the exception of biotech, you really need to be in New York or Silicon Valley. Here’s an overview of key investor communities and corresponding startup markets:
2. Startup achieve high exit values with higher acquisition multiples due to being located in the world’s most developed and efficient capital markets.
3. Capital is cheap and markets are easy to access.
So that’s the business case for tapping U.S. capital.
But as a foreign startup, how do you successfully raise a round of funding here?
Most companies coming to US have raised seed financing and been around for at least a year.
An existing U.S. presence (U.S. based staff is not make or break, but it’s important that you have some sales staff on the ground) or a planned market launch plus, financial backing from U.S. VCs or from VCs/angels in your home market are two key determinants. So those are minimum requirements.
In terms of specifics, venture capitalists are looking for:
- Good teams
- A minimum viable product
- Readiness to execute
- Good potential U.S. market size
It’s not necessarily important to show revenue, unless your product is meant to generate large stage early on. What is important at this stage, is scale (execution; lots of users).
Does business structure matter?
There’s been a shift in thinking recently so that not being structured as a Delaware holding company won’t automatically rule out your funding options. More sophisticated, and especially East Coast investors are now a lot more comfortable with UK and Irish holding company structures because of the big tax advantages (20% and 12% corporate tax rates respectively versus 40% in the U.S.) they offer. They’re also advantageous for exits: acquirers of non-U.S. holding companies can get higher valuations due to the tax advantages.
That said, having a U.S. operating subsidiary is usually an investor prerequisite. Also, you’ll need to have a founder on the ground, and in proximity to U.S. investors.
Fundraising game plan
The best approach to fundraising is to view the process as business development. Start building your investor network early! You need to be able to get warm introductions and network your way to the right person. Cold calls or unsolicited emails with pitch decks just don’t get as much attention from VCs as warm introductions do. Draw on your network to make connections. Professional services providers — attorneys/accounting firms — are great sources of referrals and investor introductions. Use them.
The other thing to know is that your raise might take six months or more. Many firms want to get to know people over time before they invest; so build in enough time and make sure you have 12-18 months of runway ahead of your raise.
Building your pitch deck
Now for the pitch. Your pitch deck should be a maximum of 10-12 slides in which you convey why you’re excited about your business in a structured way. Visuals like charts and graphs are always a good idea. In addition to describing your mission and vision, the market opportunity, your strategy, and providing management team bios, here’s what to cover:
- Problem — VCs want to see solutions to big problems. If the problem’s not big, VCs don’t see much opportunity.
- Technology (how developed it is; what’s special about it)
- Competition — What differentiates your startup? VCs don’t like to invest in me-too companies. They want to invest in people who have a deep understanding of their market.
- Financials — Knowing your numbers well shows your acumen and that you know how to drive concrete results
- Funding requirements — What’s your ask?
- Milestones — What will you use the funds for? Over what timeframe?
Pitching your startup
When you get those meetings, really practice your pitch and make sure to clearly build and communicate your value proposition. And remember, now is not the time to be understated. Confidence counts! For more on how things work, try reading Marc Phillips’ book Inside Silicon Valley: How the Deals Get Done.
Series A rounds
Series A rounds in the U.S. tend to be larger than in other countries —$3M-$5M+ — for a typical valuation of $10M-$15M due to transaction costs. Make sure you’re clear on how dilution works. In the early stages, plan to give up 20-25% of your equity in each round. This might seem high, but don’t be overly worried. You can recover some (5-8%) of that later on in the form of bonuses or option grants. And if you want to raise large amounts of money, you need to be realistic about accepting a lower valuation.
How many investors should you target?
How many investors you should target going into a round really depends on what stage you’re in and how well you identify the right potential lead investors. For a seed round, you should approach no more than 15-20 angel investors and 10-15 carefully selected VCs. Going into your A round, you should identify 6-8 VCs, angels, or angel groups to approach. If you’re able to convince them to invest, they’ll likely refer you/line up meetings with other VCs.
When it comes to funding vehicles, common stock, frequently used in Europe, isn’t an option here. You’ll likely raise convertible debt from angels or if you’re going with VCs, preferred equity.
Investment due diligence
To get ready for due diligence, make sure you have an attorney lined up. You should also inventory your IP and verify your ownership. Lastly, clean up your capital structure. If you’re dealing with multiple investor classes, some of whom are outside the U.S., issues involving subordination, preemptive rights, and differing tax treatment could be sticking points in later funding rounds.
Need help getting ready for your U.S raise? Tell us about it in the comments section below or contact Early Growth Financial Services for a free 30-minute financial consultation.
Deborah Adeyanju is Content Strategist & Social Media Manager at Early Growth Financial Services, an outsourced financial services firm that provides small to mid-sized companies with day-to-day accounting, strategic finance, CFO, tax, and valuation services and support. Deborah is a Chartered Financial Analyst (CFA) charterholder with more than a decade of experience as an investment analyst and portfolio manager in New York, London, and Paris.