In recent years, there have been a lot of startups from Europe and the UK that expressed their keen interest in raising investments from US-based VCs. Sadly, it is far from easy. As a rule, non-US startups without certain customer traction among the American audience and without local partners, startups conducting no operations in the States, have almost zero chances. That is because historically, US investors prefer startups located in close proximity to their offices – it is more convenient for them to control deployment of their capital.
To deserve American investors’ trust and attention, any European startup should prove their project’s value and explain their looking for funds in the US by demonstrating great local traction and operations.
Noteworthy, there are by now 4 basic transatlantic startup models defined, following which your startup might increase the chances of attracting capital from US investors:
1. 1) European founders come up with a good business idea
2) move to the USA and launch a company there
3) focus on raising funds from US VCs
2. 1) European founders launch a company in Europe
2) raise their first investment rounds in Europe
3) establish operations in the US (sales, marketing, etc.)
4) capitalize on US traction
5) raise funds from American investors for further growth and expansion in the USA
3. 1) European founders launch a company in Europe
2) raise their initial investment rounds in Europe
3) apply the first proceeds to scaling up operations in the US with the following capitalization
4) raise Series B investments in the US, having by now all transatlantic capabilities
4. 1) European founders launch a company in Europe
2) raise several investment rounds in Europe
3) demonstrate global traction, including the USA
4) attract growth capital from US VCs focused on late-stage companies.
Whatever model you choose, there are several factors that must be considered in order to bypass costly mistakes and have higher chances of raising funds in the US:
1. Commercial focus and regulation
To have a proper understanding of this huge issue, it is worth answering the following questions, concerning your business:
- What exactly is your project about?
- Who are your target audience and where are they located? (the same about competitors)
- Where is the best market for your product or service?
- Try to estimate all the regulation complexity (if any is applicable to your business) and choose the “best” place – Europe or the USA.
- Does it make sense for your business to be present in the US in terms of local competition?
Again, explore this issue through a list of relevant issues:
- Estimate necessary development resources (software, workers etc.) and define whether it’s cost effective to develop in the US or outside the US. Maybe, in the beginning, it makes sense to create a small US subsidiary and keep development works in Europe. Plus qualified developers are easy to find in Europe at a low price.
- Do not forget about the visa issues.
- Seriously consider your and your team mates wishes to move to America for permanent living. Although it’s difficult in the beginning, keeping geographically distant offices often makes sense.
3. Investors and money
In most cases, early-stage investors prefer collaboration with local startups, since this allows them to be geographically close and control the business process they support. Especially, American early-stage investors are very unlikely to invest in a non-US startup. The exception can be made for those who at least demonstrate some US traction or have launched a local subsidiary. Large VC funds in the US often consider investing in the UK and Irish parent companies, but that is another story.
Noteworthy, many European governmental tax and grant incentives require permanent presence in the host country and often even a local parent company, which might considerably influence your decision to move to the US.
The tax issue is indeed one of the most essential to consider, although it might seem a far-away problem for a startupper.
Remember that the United States of America is a relatively high corporate jurisdiction and represents the most expensive tax compliance in the world. Besides numerous complicated tax issues, moving out of the US comes at a high tax price in case you realize that you need to become a non-US parent company in order to secure the investment.
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