A PRACTICAL GUIDE FOR UK COMPANIES
UK businesses, particularly start-ups, can find it extremely challenging to obtain funding from US investors. Having no founder or senior employee/decision maker in the US, and perhaps also without a pre-existing US customer base/business partner in place, US venture capital (VC) investors can have limited interest, and will probably question why investment is not being sought on home soil.
However, US VCs typically look for the best opportunity to achieve their desired returns, and so there are a number of key considerations that UK companies should bear in mind dependent on their specific business model, to ensure that they are well placed to attract both interest and investment from US investors.
Investing time up front in addressing key commercial questions can pay dividends in the future and help to avoid costly mistakes. A UK company should consider its business model carefully, giving thought to what products and services it offers and through which channels, where its key customers and competitors are based and where its best product/market fit is. More importantly, the business should consider the involvement/impact of the US market on the business model at its current and future stage of development.
It may be beneficial for a UK company to move into the US to enable it to secure a level of investment necessary to compete with, for example, a US-financed competitor or there may be a particular, strategic reason for the business to expand in the US. We regularly discuss this issue with our clients. This should always be balanced against the fact that entering the US market could expose it to local regulation that it is not presently subject to and/or increase its risk of liability. It could be more appropriate to develop the UK business outside of the US first where it may be more cost-effective and less competitive to do so.
Consideration is normally given to whether the founders of the business would be prepared to relocate to, or spend significant time in, the US. US VCs are typically reticent to make early-stage investments in non-US companies without a founder of the company being locally based or easily accessible. In such circumstances, the company would need to establish an approach to cross-border management, which would involve working with investors (and, in all likelihood, employees) in different time zones.
Once a decision has been made to seek some form of US investment (whether that be in the form of debt or equity), a UK company should endeavour to pursue those US investors most likely to be interested in its specific business. Given the competition for investment - particularly in Silicon Valley – it is fundamental for a company to have an in-depth understanding of its own sector and the US investors operating within that sector. To this end, it would be advisable for a UK business to conduct extensive research in order to:
- Have a deep understanding/knowledge of the sector. Understanding customers and markets (and indeed competitors) is key, as well as considering what software and other development work is required and where this should be conducted.
- Identify and research key US VCs (and indeed the individuals working for those VCs) that are active in that sector. Specialist knowledge may be required for an investor to understand the business.
- Take part in conferences, conventions and trade missions that interested investors are likely to attend which can raise profile and lead to introductions.
- Take advice from those with deep sector knowledge. Professional advisers, existing investors and other industry sources are likely to be a valuable tool.
- Use contacts in its network to secure introductions with potential investors.
- Consult with angel investors and non-executive and advisory board members that are well-connected in that sector.
A UK company will also likely need to conduct a great deal of due diligence in order to procure investment from US VCs. It would be prudent to have an understanding of a target US VC’s current investments (ie whether it has invested in any direct competitors and indeed whether it is in a position to make a new investment), its reputation in the market and its track record, for example.
It is also necessary to allow time for the investor relationship to develop - it will take a while to build US investor trust. US investors will expect to see a US-focused business plan and that the founders/senior management are expecting to achieve (further) growth in the US market with strong projected returns. It is crucial that investor pitch materials, including slide decks and business plans, are appropriate and relevant for the US market in this regard and we typically shape company materials accordingly. This will include any appropriate US structuring considerations.