We focused in a recent article on key terms and concepts of which to be aware when negotiating US term sheets. Frequently, however, we’re asked for general advice on how non-US emerging companies initially can attract potential US investors.
Our first five tips are below; the next five will be included in a forthcoming article. You can also check out this video for a preview of the full list.
The Threshold Question
Before seeking US capital, non-US founders should ask themselves why they are looking to raise funds in the US. Many non-US entrepreneurs pursue US investment solely because of a perception that “the streets are paved with (VC) gold.” While there undoubtedly is a strong supply of venture capital available in top US hubs like Silicon Valley, New York and Boston, the competition for funding is fierce.
Without a compelling “US story” – US customer or user traction, US presence, and/or a US-focused business plan – a non-US startup may struggle to attract US seed, Series A or even Series B institutional investors. Most early-stage US investors offer not just capital, but also leverage their expertise and network to guide their portfolio companies’ growth. Those investors may show less interest if there’s no US business to support.
Assuming you have considered this question and have decided raising in the US is an appropriate choice, read on!
1. Evaluate Your Company and Team
Company. Generally, US venture capitalists (“VCs”) are looking to invest in high-growth enterprises with the potential for large exits providing outsized returns on their initial investments. There are a range of industries that attract VC investment, but almost all who succeed in attracting VC money will have this high-growth potential. This preference owes to the general VC business model that relies on a few portfolio companies having massive, successful exits that eclipse losses from a majority of the portfolio companies that ultimately fail; in American baseball terms, many US VCs are looking to hit a home run with every investment.
Accordingly, if you’re running a stable “lifestyle” business, it may be more difficult to attract mainstream US VCs. Instead, you may want to target particular investors or more conventional lenders, like local banks and credit unions.
Team. US VCs often look to invest in complementary teams with diverse skills that enable the company to address a range of problems and scale quickly with few initial employees. Moreover, because so many VC-backed companies initially are unable to be measured with conventional metrics like revenue growth or profitability, investors often are investing in an idea and the strength of a team to realize that idea. Give some thought prior to fundraising as to whether your team is sufficiently fleshed out to address any deficiencies that might dissuade potential investors.
2. Prepare Your Materials
Executive Summary and Pitch Deck. Be prepared with (i) a 1-2 page executive summary that can be sent in advance to secure an initial meeting or call (here’s an informative article on executive summaries), and (ii) a well-tailored pitch deck.
Decks typically consist of 10-15 slides detailing the value proposition of the company’s offerings, the problems the company seeks to address, market and growth opportunities, and an overview of the team. Keep it informative, but avoid being too detailed. VCs reviewing your materials may only spend a few minutes or less on each deck they see, and you want to ensure they get to your best content.
Identify Relevant Metrics. You should know the metrics or key performance indicators investors focus on within your sector. For example, SaaS-based companies typically need to address recurring revenue models when crafting materials for relevant investors. Be prepared to answer wide-ranging questions on these topics.
Tell a Story. You don’t need to be a master orator to raise venture capital, but you do need to tell a cohesive, confident, positive story about why your company is worthy of investment and why those funds will help you achieve success. One way to start forming this narrative is by researching similar offerings and competitors to help articulate your company’s value proposition.
Importantly, don’t be shy about highlighting your company’s strengths and achievements; your typical US competitor won’t be.
3. Ready your Elevator Pitch
Your first opportunity to pitch a potential investor often will be when you don’t have your pitch deck or supporting materials on hand. Have a concise description of your business prepared that you can convey in roughly the time it takes for a brief elevator ride. The primary goal should be to secure a further conversation with a busy, potentially distracted investor, so you need to immediately cut to the point with an interesting and easily understandable pitch.
4. Identify Relevant Investors
There are hundreds of US venture capital funds, and even more micro, seed, and other smaller capital allocators. Identifying relevant investors in your sector may seem like a daunting task, but can pay huge dividends. Investors familiar with your industry are more likely to respond to your initial approaches because they “get” your business. Further, they are more likely to add value as investors in your business given their relevant prior experience. As your company matures, having industry veterans onboard can open up collaboration and partnership opportunities with key players in your market.
5. Networking and Warm Introductions
Work hard to obtain “warm introductions” to US VCs you are looking to meet; sending unsolicited emails to potential US investors typically is a last resort and has a relatively low probability of success. VCs are more likely to pay attention to personal recommendations from trusted individuals within their network – e.g., other VCs, founders of portfolio companies, and law firms and other advisors familiar to the VC. VCs also want to see evidence that the founder seeking investment has sufficient “hustle;” it doesn’t reflect well on an entrepreneur’s ability to build a successful business if he or she doesn’t demonstrate the initiative and creativity needed to obtain a warm introduction.
For companies lacking these connections, consider joining a well-regarded accelerator with networks of influential alumni like Techstars, Y Combinator, 500 Startups or Startupbootcamp. While not appropriate for all companies, they can offer mentorship and access to sources of capital and networks that would otherwise be out of reach for founders without extensive US connections.
Additionally, be sure to leverage the networks of your US advisors. Savvy US entrepreneurs often select their US law firm, accounting firm, bank, and other partners based in part on the strength of their contacts and willingness to provide strategic support.
6. Know Your Financing Needs
Many founders fail to thoroughly assess how much money they’ll ultimately need to raise from VCs to reach the company’s next inflection point. This is a critical consideration for founders, as it’s closely linked to how much of their ownership stake they’ll have to relinquish to raise sufficient capital. Understanding two concepts will help founders better determine their future financing needs.
Burn Rate. A company’s “burn rate” refers to how much cash the company spends over a certain period (typically monthly), including needs arising from hiring, market shifts, and seasonality. As a high-growth company begins to expand and penetrate new markets, founders and other decision-makers need to make allowances for significant increases in burn rate (e.g., due to greater marketing and business development requirements) to avoid depleting reserves prior to the next round of financing.
Runway. A company’s “runway” refers to how long it can expect its cash on hand to last at a certain burn rate. A short-hand method to determine this figure is to divide the company’s capital reserves by the monthly burn rate. For example, founders of a company with a monthly burn rate of approximately $80,000 USD and cash reserves of $600,000 USD might conclude that they have roughly seven months to close a financing round. In many cases, this may not be enough time to get introductions and build sufficient investor interest, resulting in a less favorable deal or even failure.
It is crucial to consider the company’s projected burn rate and runway until the next major inflection point in order to contextualize company needs. For many early-stage companies, when the burn rate is low and a small fundraise can provide sufficient runway, foregoing a large round with substantial dilution may be a wise decision.
7. Present a United Front
Each member of the management team should be aligned with respect to financing terms that will be acceptable. In a financing led by US VCs, management not only will be relinquishing part of its ownership stake, but often will be expected to provide the lead VC with board representation, managerial control, and authority to dictate the company’s ultimate fate in the event of a change of control. While these requests are standard and subject to negotiation in many US VC deals, a non-US team should be prepared to address and respond to these requests.
8. Negotiating the Term Sheet
If you have secured a meeting with a US VC firm and convinced them to fund your idea, the next step will be to negotiate the actual terms of the financing.
The key aspects of the deal initially will be set out in a term sheet, e.g. the value of the company, the aggregate amount of money being raised, and the board seats the VC will receive. By this point, your financial and/or legal advisors typically will be helping to navigate this process, but non-US founders should still be somewhat knowledgeable about key concepts, including valuation, liquidation preferences, and voting rights. These terms impact management’s influence over the company and understanding them will significantly help non-US founders in their negotiations with US VCs.
For more on this topic see our recent article on negotiating term sheets with US investors.
9. Corporate Clean Up
While the company’s lawyers and other advisors are preparing the paperwork for the transaction based on the signed term sheet, the investors usually will conduct their due diligence on the company. This involves the investors requesting and reviewing key legal, business and operational documents to confirm their assumptions about the business and that no material information has been withheld.
Non-US founders should plan ahead and work with their advisors prior to raising capital to resolve any outstanding issues, particularly in areas that often present challenges for multi-jurisdictional businesses, such as local market employment and intellectual property matters.
10. Stay Sane!
Make sure to look after yourself and your team throughout the process of raising money from US VCs. The US landscape is competitive, and for many companies raising funds can be a stressful distraction from running a business. In extreme cases, the stress can cause acrimony among team members and derail progress. Remember to keep the larger picture in mind, and always remember your ultimate goal should not just be to raise money, but to run a successful, dynamic business.
Compliments of Wilson Sonsini Goodrich & Rosati – a member of the EACCNY