Why are more US VCs investing in international startups?
Take a look at The Fortune Unicorn List: of the top 100 most valuable unicorns in 2016, 39 are currently based outside of the United States. While fundraising of US VCs has dropped slowly as a percentage of global limited partner allocations over the last decade, non-US startups are receiving a more rapidly increasing percentage of that money.
Source: NVCA, Pitchbook
According to the NVCA 2017 Yearbook, in 2004, 77% of global VC fundraising went to US VCs, and 85% of global VC dollars went to US startups. But by 2016, US VCs’ share of the pool had dropped 1,200 basis points to 65% of global VC allocation, while more dramatically, only 54% of total VC investment went to the US, a drop of 3,100 basis points. This implies that the US is still the center of the VC industry, even while there is more opportunity for US VCs to invest abroad.
Venture capitalists like us are investing in three overlapping models of international startups:
- Companies founded overseas. They achieve product/market fit while based abroad, and then sometimes gradually move key business functions to the US and Western European tech hubs. Once we invest in these companies, we can help them become (in many cases) more US-centric, including sometimes changing their legal status to that of a US Delaware C corporation.
- Bi-national companies, which from inception have an international presence. Typically engineering, QA, and support are offshore, while CEO, sales, and marketing are in the US.
- Companies founded by immigrants. According to a report by the National Venture Capital Association, 1/3 of all venture-backed publicly traded companies between 2006 and 2012 had at least one foreign-born entrepreneur. More than 40% of the Fortune 500 companies were founded by an immigrant or the child of an immigrant. These are often 100% US-based at inception, but in my experience they are more likely to both open an office abroad and to sell abroad than a company without an immigrant founder.
I was very happy to see in August 2016 that the United States Citizenship and Immigration Services announced proposed new rules for international entrepreneurs, in an attempt to create a “Startup Visa” similar to Canada’s. Along the same lines, the US state and commerce department launched a digital attachés initiative to connect international opportunities for US startups. Unfortunately, while the International Entrepreneurs Rule was scheduled to become active a long time ago, it has been steadily delayed by the current US administration. This has encouraged entrepreneurs who might have otherwise created jobs in the United States to take their talents to other countries, e.g., Canada.
Canada is a case study of a mutually beneficial relationship between the US and the US tech ecosystem. The Canadians have figured out, as have the Israelis, that there is a limit on how many high-value tech companies they can build headquartered in their home country. As a result, the Canadian government created the Canadian Technology Accelerator Initiative. This initiative accelerates international opportunities for high growth, export-ready Canadian companies in Information and Communications Technology, Sustainable Technologies, and Life Sciences. As of 2017, 421 companies have passed through the program in 6 U.S. markets: New York, Philadelphia, Boston, Denver, San Francisco and Silicon Valley. It may sound peculiar that the Canadian government is helping Canadian companies come to the US, but the logic is simple: they’ll have to open a US office anyway to become major companies, and if they do so it will create jobs back in Canada. Enterprise Ireland is another example.
European startups have also been moving across the pond seeking better funding, more appealing exit opportunities, and a larger, unified market. The Startup European Partnership, an open innovation platform organized by the Mind the Bridge Foundation, found that 1 in 7 of all European startups valued at more than $1 million move their headquarters internationally (with the vast majority of those heading to the United States). These “Dual Companies”, companies that often keep operational presence in their home countries, raise 30% more funding than purely domestic startups. While the single largest group of Dual Companies chooses to relocate to Silicon Valley (42% of all relocators), New York is close behind (22%) and proportionally raises more capital for its share of international relocators (raising 26% of all capital allocated to startups relocated from Europe.).
When HOF Capital invests abroad, HOF is typically collaborating closely with the local, non-US VCs who are investing in their own backyards. Most VCs, like me, will not invest in an international startup unless and until they raise some local money. Fortunately, virtually all of these local VCs want to coinvest with reputable US VCs.
I see four main reasons why US investors like us invest in an international company over a purely US company:
- Less capital intensive and therefore lower valuations
The Founder and CEO of Buddy Ventures, Tim Schumann, emphasizes that compared to US startups, foreign startups typically require less investment capital at the same stage of development.
- Recruitment is easier, cheaper, and employers face less attrition compared to the heated US tech talent market
The Investment Director of NUMA Paris, Olivier Mougenot, points out that once the core tech team is based offshore, it’s easy to build out the larger team over time in that same location, typically at materially lower costs and with lower attrition.
- Determined Founders
For numerous entrepreneurs who are not US citizens, their ability to live and work in the United States is dependent on their job. They burnt their ships behind them.
- Scaling internationally is easier
Being an international founder is a significant advantage if you’re looking to sell abroad. For example, Regalii (HOF Capital investment) was founded by an immigrant from Santo Domingo, and has scaled to serve dozens of financial institutions, primarily in the US and Latin America.
HOF Capital is particularly interested in investing in companies with international roots. To date, out of 21 companies (including HOF special purpose vehicles), HOF Capital has backed 11 founding teams with roots in underrepresented regions: MENA, Latin America, Turkey, and Africa. In addition, HOF has backed 10 companies with roots in Canada, China, Estonia, Finland, India, Germany, Denmark and Russia. Two of HOF’s companies have African-American CEOs; two have Latino CEOs. (I should mention four of HOF’s companies have female CEOs/cofounders; two of the nine full-time staff are women.) HOF’s acceleration resources are relevant for any startup, but particularly for those led by recent immigrants, who typically do not have experience in building a US company.
Our hope is that the federal government will continue to be open to talented immigrants as we’ve historically always been, despite recent anti-immigrant rhetoric by some. As the immigrants and other people with international ties arrive, we will be waiting with open checkbook.
For more on this topic, see Diversity, Why International Startups Love NY, and Why NY VCs Love International Startups.
Thanks to Andrew Ackerman, Dreamit; Alessandro A. E. Anzani, Louis Coppey; Alia Dedhar; Brian Frumberg, VentureOut: Marc Lemcke, New York International; Gianluca Galletto; Justin Kreamer, NYCEDC; Mike Smith; Andrew Sudol; Ben Zlotnick, Eden; and Yordanka Ilieva, Columbia Business School for thoughtful comments.
Cross-posted at Financialpoise.
