The road to investment can be an arduous one for entrepreneurs. Many recall tales of countless rejections, wild goose chases and tortuous grillings at the hands of venture capitalists (VCs). Some businesses seek more sympathetic ears by heading to the United States to meet investors there. There’s some sense to this; pockets tend to be deeper and some feel US investors are more entrepreneurial and ambitious than “stuffy English VCs”. There are also increasing signs that American investors are more prepared than ever to back overseas businesses. However, before UK entrepreneurs head across the Atlantic they should ensure they are prepared for the challenges that US money markets pose.
Post crash
For US fund managers the pain of 2008 is still fresh in their minds. Many saw portfolios wiped out and will be keen not to make the same mistakes again. Alexander von Welczek, a managing partner at Clean Power Capital, which finds businesses for US venture capitalists (VCs), says investor behaviour has altered post-financial crash. He says investors that backed businesses in their earlier stages never got the chance to in later rounds and may now be wary of long-term projects. “Most of the investors got blown out and never got the chance to re-invest again in businesses. So now nobody wants to invest in a bridge to nowhere. They don’t want to invest $2m in a business to make a demo product, they want to invest in a business all the way,” he says.
The pain of the financial crash has meant that US investors are rethinking their strategies and this could be to the advantage of UK businesses. Dr Mike Pitts, lead specialist at government agency Innovate UK, which works with British technology businesses and funds trade missions abroad, such as the Cool and Clean Mission to the US. He says there’s a lot of interest in UK entrepreneurs as US angels and VCs widen their nets. “I’ve been struck by how much US investors have expressed an interested in UK and European businesses. They are now trying to improve the resilience of their portfolios and see the potential to do this by moving outside of their region.”
Getting ready
Business owners should be aware that US investors are typically looking for very similar things to UK backers: a strong management team, scalable proposition, large addressable market, a solution to a problem, and a personal rapport with an entrepreneur they can believe in. Businesses need to have spent time honing their pitches, learning their numbers and, of course, must have decided how much money they need. However, this final figure can be a problem as often British entrepreneurs don’t always display the required ambition for US backing. “British companies tend to be a little more humble in their approach and in the funds they are seeking. This is understandable because outside of America the capital markets for growth funding are small,” says von Welczek. “To be successful, for the most part, they need to be asking for more money; a lot of these funds only make so many investments.”
Alex Tew came to global attention when he launched the Million Dollar Homepage, bringing in investors from across the world. Following its success he headed to San Francisco and is now the founder and CEO of meditation site Calm.com. So far, the business has raised $1m dollars from angel investors. “US Investors want you to have a bigger vision. They all hope they are investing in a billion dollar company. Having ambition is important, there are a lot more billion dollar companies in the US. In the UK it’s a bit different, as there are less examples,” he says.
Introductions
Cold calling investors is probably not advised. They are too busy and tend to rely on their networks to filter out the better ideas. But the US business eco-system is very inter-connected and for many businesses, their professional advisors, assuming they have offices in the US are a good route in.
Marc Gottschalk is a partner at Sidley Austin LLP based in Silicon Valley and also sits on the board of the Cleantech Open accelerator programme. He says the legal aspect of his work is just part of the services which law firms offer entrepreneurs. “In Silicon Valley lawyers are part of the eco-system and provide connections between businesses, investors and partners. They don’t just do paperwork, they have to bring something else to the equation, and helping businesses make connections is really part and parcel of what they do.”
For businesses seeking angel investment life got easier recently with the growth of AngelList. Founded in 2010, and now in partnership with CrunchBase, the site brings accredited investors together with start-ups. Alex Tew used the site with great success when raising money $1m through two rounds for Calm.com. “AngelList was a big help. I set up a profile and investors asked for introductions. It’s an amazing platform, I’d recommend it to anyone looking for investment in the US. We got about 30 introductions from it.”
Case study: Huddle
Andy McLoughlin co-founded collaborative software business Huddle with Alastair Mitchell in 2006. The business first took institutional investment from UK-based Eden Ventures in 2007, but later turned to US venture capitalists for a further three investments totalling $85.2m. McLoughlin moved to San Francisco in order to seal the deal.
“We felt that we had the potential to be an international business so we went to the US and did a deal with Matrix Partners. They said it was certainly preferential for them that one of the founders was on the ground in the US. “There’s nothing wrong with UK VC scene but we found that US investors move faster, provide better terms, are more ambitious and want to get things moving.
“You have to dance the dance with investors and hopefully end up in a place which is good for everyone. VCs are keen to suggest that you are getting access to their network and experience. That’s certainly true but there can be a bit of a play in that. For any entrepreneur raising finance its good to spend time getting to know the landscape and the names. There are good and bad firms, and good and bad in those firms.
“You don’t have to accept the first term sheet, we always pushed back. We would also play one against the other, you don’t have to accept the first deal. Alastair and I always went as a pair and you feel stronger than going in by yourself.”
Freelance journalist Jon Card attended the Clean and Cool Mission to the US. His flights and accommodation were paid for by Innovate UK
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