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.
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!
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.
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, 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.
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.
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.
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, Startupbootcamp, MassChallenge, etc. 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.
This blog was originally published here.