European startups raise more money and grow faster when backed by American venture capital dollars, according to Dow Jones VentureSource. Technology hubs have cropped up all over Europe that are kindling exciting new companies. However, despite the abundance of innovative and talented entrepreneurs, raising substantial capital from local investors remains a challenge relative to more established markets like Silicon Valley.
There are a number of reasons for this disparity. The Wall Street Journal and Forbes point to a fragmented digital landscape in Europe (which makes cross-border growth difficult), strict regulations, lagging economies, and a lower appetite for risk as factors. American venture capitalists have proven more than willing to fill in the gaps.
Data from Pitchbook revealed that US investment in European-based companies has consistently grown over the past few years, as leading US venture capital firms are drawn to Europe’s ripening markets, which generally have conservative valuations compared to American startups. Europe is now home to 47 unicorns — Spotify, Asos, TransferWise, and Zoopla, to name a few. High quality US-based funds, like Union Square Ventures, NEA, Sequoia, and Andreessen Horowitz, have made Europe an active area of focus.
While the capital is available, European startups’ ability to access those funds is dependent on six elements:
The further along the investment spectrum you are, the easier it is as a European startup to raise American capital. Seed stage investors like to invest close to home, given the amount of support needed early in a startup’s lifecycle. As you shift to growth and pre-IPO stages, and have proven out your concept and ability to execute, you will find that more funds are willing to invest. These tend to be funds willing to focus outside of the traditional US markets, where they can find better pricing dynamics with less competition for their capital. For example, UK-based Yieldify, where I am on the board, raised its Series A round from SoftBank Capital and GV when it had financial metrics and scale that matched many Series B stage businesses in the US.
Given that capital is relatively harder to access in Europe, US-based investors often find that European startups are more efficient with their capital and focused on near term profitability, out of necessity. A successful European entrepreneur I know who moved to the US was surprised to hear his US peers instinctively define their progress based on capital raised, as opposed to their revenue.
Having a few US customers represents a major advantage over a standing start, particularly for enterprise-focused businesses with larger contract sizes, where buyers are much less likely to take a risk on a foreign vendor. Many successful European startups work with their global customers from Europe or leverage the credibility of international partners to break into the US market.
With the evolution of digital marketing and cloud-based services, it has also become easier to acquire customers globally with no feet on the ground. Zendesk was founded in Copenhagen by Mikkel Svane, Morten Primdahl, and Alexander Aghassipour. They received $500K in seed funding from Berlin-based angel investor Christoph Janz, who later founded Point Nine Capital. From Europe, Zendesk built out a base of customers in the US, with its Buddha icon splashed across many of the sites frequented by the tech community and its investors. Bay Area- and Boston-based investor CRV took notice and led the now public company’s Series A round.
A team with previous experience in global businesses is a big advantage for European startups, especially in the early days. US investors are typically not shy with first time founders domestically. However, running operations from across the ocean in a market where entrepreneurs may not be familiar with the culture and language is another story. First time entrepreneurs with no international experience will find it difficult to raise money, as may some serial entrepreneurs with a historically European-centric focus. One way to navigate around this hurdle is to hire executives who can bring their extensive experience doing business in the US to the table.
In April 2011, Paris-based, Criteo, now a portfolio company of my firm, hired Greg Coleman as its president. Greg had worked previously at another of my firm’s portfolio companies, The Huffington Post, which had a very successful exit to AOL, and had previously led global sales at AOL and Yahoo. Less than a year after Greg joined Criteo, SoftBank Capital led a $40 million Series D round in the company.
4. Team Presence
Most American investors want to see that European startups have (or at least are thinking about) a presence in the US before committing capital. Have you already established an office in the US that shows real commitment to the market? Do you plan to move headquarters to the US or have you already done so? There are stories of European teams that plan to move to the US and get cold feet after the check is in the bank. Being on the ground in the US, particularly if you’ve been there for a while before your capital raise, helps alleviate that concern.
For example, in 2013, we led a Series B round at Celtra, where I am on the board. Slovenians Miha and Maja Mikek conceived Celtra as part of an MBA project at Babson College in Boston. They launched the company with a couple of cofounders based in Slovenia. In 2009, they raised seed capital from RSG Capital, which was headquartered in Slovenia. While product and engineering was being built in their home country, Miha and Maja committed to staying in the US to build out sales and marketing. In 2011, Celtra raised a Series A round from Boston-based Grandbanks Capital and Fairhaven Capital.
5. Investor Relationships
Whether close to home or not, most investors are far more comfortable investing in entrepreneurs who they know well or have tracked over a period of time. Smart European entrepreneurs start having conversations with American investors well in advance of fundraising — maybe even a couple years beforehand.
Local European investors can be a major asset when raising US-based capital, either as prior investors who have funneled other portfolio companies to the US, or as co-investors in the current round, providing support on the ground at the home base. We agreed to invest in on European startup contingent upon finding a local partner. We spoke to numerous quality funds that wanted to partner in the round and ultimately moved forward with GV, which has proven to be an excellent local partner.
For entrepreneurs without an existing network or contacts, a respected accelerator program is well worth exploring. Top tier European accelerators with relationships in the US market are viewed as a high quality filter by many US-based investors. I remember meeting with the team from London-based TransferWise when they visited the US with Seedcamp. NY-based IA Ventures was smart enough to recognize their potential at the time and led their seed round with Europe- and San Francisco-based Index Ventures in early 2012.
Participating in a US-based accelerator can also help you establish a presence here and enable you to connect with local investors without the initial pressure of a one-off fundraising meeting. These programs have become adept at identifying emerging talent in international markets, recruiting them to the US, and helping them tap into the local startup community for sales, recruiting, partnerships, and fundraising.
Seedcamp graduate and Estonia-based GrabCAD, for example, participated in the TechStars Boston program in 2011. It established a rapport with local investors and raised a seed round from Atlas Venture, Matrix Partners, and Next View Ventures. The company also caught the attention of the Boston area team at Autodesk, which acquired the company for $100 million in 2014.
Large industry events can also provide access to US-based investors. In 2015, London-based Digital Genius was a finalist in the TechCrunch Disrupt New York Battlefield. It caught the attention of many local investors, which led to a $3 million seed round, including my current partners at Lerer Hippeau Ventures, Lowercase Capital, Lumia Capital, and Metamorphic Ventures.
6. Corporate Structure
Most US funds want to invest in a Delaware C-Corp. US venture firms and their counsel are accustomed to their local laws and tend to be wary of entering into agreements with entities that are legally tied to regulations in markets where they are less familiar. This is a more of an issue for very early stage companies, particularly in European countries that have relatively high tax rates and/or employment laws that are more restrictive than what US investors and acquirers are used to. The Brexit situation will only add to these complexities.
Double or nothing
While the European market itself can yield billion dollar outcomes, European startups have a lot to gain from raising money from US investors. Data from the Dow Jones VentureSource shows that European startups that raise from US investors often attract more than twice the amount of capital as European startups that rely only on European firms. There is no doubt that US capital can open doors to a much broader market opportunity.
On the other side of the table, US venture firms also have a lot to gain from investing in European startups. It’s an opportunity to diversify their portfolio, both geographically and in terms of sector, tap into a new talent pool, and get more for their money. American funds are paying more and more attention to European startups. Now it is up to European startups to position themselves as favorably as possible to capitalize on this interest.
Joe Medved is Partner of SB Capital at Lerer Hippeau Ventures.