Founders of startups overseas often wonder about how non-American companies can raise money in the U.S. It's possible—following these steps. For U.S.-based entrepreneurs, everything after step 1 is also helpful for fundraising.
Before you start: Ask yourself why
Why do you want to raise money from U.S. investors, or come to the U.S. at all? The first step is asking yourself that question. International founders typically have some combination of these three reasons:
1. Access to capital
While access to capital has changed a lot recently in certain markets like China and Southeast Asia, it remains true that there are more investors willing to invest at higher valuations in Silicon Valley than anywhere else in the world. Many founders come to the U.S. because they want access to those investors.
2. Help building your company
Another valuable resource to get access to? Silicon Valley’s collective knowledge of how to build a great technology company. The Facebooks and Googles of the Bay Area have created a massive secondary ecosystem of people who have scaled before, whether it be technically or operationally. Talking to experts who have done it before, learning from them, and getting them on your side through an investment is a great way to accelerate your progress.
3. Unicorn aspirations
As mobile has grown in the rest of the world, there’s increasing international opportunity. There are more people buying goods and services online. Companies like Alibaba, JD, Didi, and Gojek have revealed the global opportunity, with increasing interest in finding—and investing—in potential unicorns internationally. There’s never been a better time to get the participation of U.S. investors and entrepreneurs in your international startup, as more investors want to find returns in international technology markets.
Step 1: Become a U.S.-based legal structure
Some investors require international companies to flip to a U.S. company. What’s a flip? It’s when you create a Delaware C corporation and exchange shares with your foreign entity. You effectively have a U.S. entity that’s investible by investors in the U.S. and globally, circumventing additional complexities like international tax reporting requirements.
If you decide to flip, consider the tax implications, which entity owns the intellectual property, and how you structure commercial agreements between the entities. Obtain the right legal advice to help you address considerations.
Another consideration: do it early. The complexity of flipping only grows as your organization and headcount grows. Doing it as soon as possible can save both legal fees and pain later on.
Step 2: Hit your metrics
Everyone always wants to figure out what the hack is to raise money, but the real hack is to build something that has product-market fit and is actually growing really well.
Instead of trying to figure out the hack to fundraising, spend 95% of your effort talking to customers. Figure out what they want, how to make what they want, deliver it to them, and get feedback. If you do that, you will hopefully iterate into something that grows really well. That’s how you achieve product/market fit. You can achieve success by talking to your customers and iterating. That’s what you should spend most of your time doing.
Make sure you've also identified a sizable total addressable market (TAM). It's more difficult to build a big business without this, and it will make raising capital harder. For international founders, this is especially important to prove to U.S.-centric investors. Consequently, when pitching your startup you need to present the biggest vision you can. That can mean aggregating an entire region or attacking verticals that investors know will be big, such as transportation or food delivery.
Step 3: Develop a great narrative
Every narrative in human history is composed of three parts:
- The world is a certain way.
- Something happens.
- The world’s now a different way.
How does it apply to fundraising? You always want to structure your narrative and your conversations with investors as going through these three acts.
- Tell them about the market: where the market is, what the problem is, and why it's big.
- Highlight the inflection point: Maybe now everybody has a mobile phone. Maybe now everyone has a credit card. Maybe now people buy things online.
- Show a new way: How your product solves this problem, what your traction is, and the evidence that you’re going to reshape the world.
You need a well-rehearsed narrative that walks people through a story arc. Practice a lot. Iterate. Try different things until you find the narrative that really resonates. Practice on more than just investors, like fellow entrepreneurs and others in the industry. You’ll know the narrative is working when they’re getting excited about it.
Step 4: Calculate terms of the round
Pre-revenue valuation is based on potential, not results. People always ask, “How do we determine our valuation?” The answer: it’s completely made up. Valuation in early-stage companies is tied to potential. It’s completely disconnected from revenue. Early stage companies should stop worrying about calculating valuation based on revenue and start figuring out how to pitch a giant narrative.
How much do you raise? You'll want enough money to give yourself 18 to 24 months. That’s long enough to achieve some set of compelling milestones, as well as a healthy buffer. There’s a lot of information on raising money, so read up. A lot of companies get trapped in the thought that their valuation has to be dependent on some financial metrics. In early-stage tech companies, that’s not always the case.
Step 5: Get in front of the right investors
Identify which investors you want to pitch. You can save your own time and potential investors’ time by zeroing in on the investors who are most likely to be interested. If you’re a biotech company, you want to raise money from biotech investors. If you’re an international company, find people who are open to the concept of investing in international companies. Do your research. Look at what people have invested in on CrunchBase or AngelList, and figure out specifically who you want to talk to.
In your intro, you want to create a short, concise summary of why you’re a compelling investment. Run through those three narrative arcs in seven to eight sentences.
Step 6: Go into meetings prepared
Once you have the intros, be prepared for the meetings.
1. Avoid assumptions
You need to be able to explain your business and industry like you’re explaining to a reasonably smart person with no context. Make it concise and simple. Walk them through your pitch without any industry acronyms. Don't give your audience an excuse to check out of the conversation. Your job is to keep them engaged. You do that by running them through a powerful narrative and keeping it simple.
2. Know what the meeting is
You should plan for the meeting based on the type of investors. Angel investors may be ready to write a check immediately after. Venture investors will probably ask you to follow their process. If they’re interested, they’ll move you to a meeting with multiple partners, then maybe with other partners, then maybe a full partner meeting. Know who you’re talking to so you know what to expect.
3. Be honest
Being authentic is a powerful way to forge a connection. Be honest about the things that are compelling and good about your business. You can also be upfront about what you don’t know over making up an answer. It’s better, though, if you really know the numbers and metrics, so take the pains to be intimately familiar with these. This also shows you’re more likely to run your business better.
4. Know your Unique Selling Point (USP)
What makes you the best? Weave your USP through the thread of your narrative. Understand what’s most compelling about your business and make sure you hit on it.
Step 7: Close the investment
Let’s say you had a great conversation. They were engaged. They asked you questions. What’s next? Move the conversation along by putting hard deadlines on the process. Ask if they're interested or what the next step is.
It can help to have a timeframe in your fundraising to add some pressure. However, avoid the trap of doing so without any leverage. It’s good to say something like, “I’m spending the next two weeks talking to investors, and then our goal is to close the seed round.” Silicon Valley is based on the trust that investors and entrepreneurs will be true to their word. If you agree on terms, even just through email or a handshake, stick to them, even if you find out the next day that you can get a better deal. It’s crucial for your reputation.
Final notes: Make sure you really want to raise money
Fundraising is a tool to build your business. Raising a lot of money sounds fun and attractive, but it’s not the end game. Don’t raise money when you don’t need it. If you’re not constrained by resources, you should just continue building your business.
Startups are a pass/fail course. Success is an IPO or a merger or acquisition. A lot of companies get caught up in the fundraising beauty contest of trying to get the highest valuation or the most money. That’s not the thing that makes the difference at the end of the day. Just focus on getting a passing grade.