When I was a Y Combinator partner, I noticed that more and more of the batches were companies started by international founders. It’s now at 35%, and because of this I’m frequently asked about how non-American companies can raise money in the U.S.
I’ve invested in several startups that started out as international companies and either moved to the U.S. or incorporated here to raise capital. A few include Scotty, Automile, PayStack, Razorpay, Xendit and Sendbird.
Over the years, I’ve seen what works and what doesn’t. I took that experience and broke down the process for international entrepreneurs looking for U.S. funding into 8 steps. If you’re a US-based entrepreneur, everything after step 2 can also be applied to you.
Step 0: 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:
a) Access to capital
The number one answer is access to capital. One of the top complaints from international founders is, “There are no investors in my home country of X or my home market of X.” That’s changed a lot in certain markets, like China and Southeast Asia, but for most countries, it is still true that there are more investors willing to invest at higher valuations in Silicon Valley than anywhere else in the world. I often see founders come here because they want access to those investors.
b) Help building your company
A lot of international entrepreneurs want access to Silicon Valley’s collective knowledge of how to build a great technology company. Silicon Valley is home to many giant internet companies. The Facebooks and Googles of the Bay Area have created a massive secondary ecosystem of people who have scaled before. They’ve scaled the technical side. They’ve scaled the operations side. That knowledge isn’t as readily available in the rest of the world.
Coming here and 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.
c) Unicorn aspirations
As mobile has grown in the rest of the world, there’s more and more international opportunity. There are more people buying goods and services online. As we’ve seen companies like Alibaba, JD, Didi, Careem, Go-jek, Grab, and many more become massive companies, the opportunity has shifted from people thinking the U.S. is “the entire world” in terms of market, to investors being interested in finding potential unicorns internationally. I joined the board of one of my international investments for the first time ever last year.
To some degree it’s a timing thing: There’s never been a better time to get the participation of U.S. investors and entrepreneurs in your international startup, as more investors have realized there are real returns to be had in international technology markets.
Step 1: Become a U.S.-Based Legal Structure
If you want to take this path, how do you do it?
a) “Flip” your business to help it grow
A few years ago YC started requiring that every international company 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.
A lot of funds and a lot of investors don’t want to invest in an international company because there’s horrible tax reporting requirements. It’s often even written into their limited partner agreement. It sounds like a small thing, but flipping is really important if you want to get investment from U.S. investors.
b) Consider tax, IP, commercial agreements
We started this company, Atrium, almost exactly a year ago, to help make legal much easier for founders and entrepreneurs. We work with a lot of international founders and have a bunch of experts. The things to consider when flipping are:
- Tax implications
- Which entity owns the IP
- How you structure commercial agreements between the entities
I’m not lawyer, so you should get legal advice. Our startup legal team here at Atrium handles this all the time. Feel free to reach out.
c) Do it now
If you ever want to flip your company, do it now. The complexity of flipping only grows as your organization and headcount grows. I recommend doing it as soon as possible. You’ll save yourself legal fees and a tremendous amount of pain.
Step 2: Hit your metrics
a) Become a rocket ship
After you’ve flipped, what do you need to do? The first step is becoming a rocket ship. Everyone always want 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.
b) Product-market fit
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.
That’s how we created Twitch. We didn’t come up with a great idea around allowing people to stream video games to this massive market of over 100 million people every month. We started off with this really horrible idea, where I strapped a video camera to my head and created a live video show about myself, kind of like Big Brother (but we called it Justin.tv). We started broadcasting it to the internet. People came to it expecting entertainment, but they found four computer programmers sitting around their computers (which was incredibly boring!).
Viewers eventually told us, “We want to create our own live stream,” so we created this live streaming site that anyone could use to broadcast anything. We kept talking to our customers over the next couple years and discovered they wanted to stream their own video game play, so we started focusing on that. They told us they wanted to get paid, so we created the partner program for them to make money. We talked to our customers to figure out what they wanted.
After eight years of iterating, we finally grew our random video startup to this pretty big website called Twitch. It’s the number 13 largest site in the U.S., and we ended up selling it to Amazon for $970 million.
You can achieve success by talking to your customers and iterating. That’s what you should spend most of your time doing.
c) Attack a huge market
If investors don’t perceive you to be attacking a huge market, it’s extremely difficult to raise capital. It’s also more difficult to build a big business. We ran into that problem at Twitch. People thought the market of watching people play video games was extremely small. It was a really big market, but it was difficult for us to raise capital because it wasn’t perceived as one.
For international founders, it’s especially important that you attack a large market, and really think about how to present that market as large. U.S.-centric investors will be biased to believe that your opportunity is small. 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 people know will be big, such as transportation or food delivery.
Step 3: Tell a Great Narrative
Once you’ve achieved product-market fit, your company’s growing, and you want to raise capital, the next step is figuring out a narrative. Every narrative in human history has 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, why it’s a big problem.
- There’s some inflection point. Maybe now everybody has a mobile phone. Maybe now everyone has a credit card. Maybe now people buy things online.
- The world’s now a new way. Highlight your product, how it solves a problem, what your traction is, and the evidence that you’re going to reshape the world.
You need a practiced and well-rehearsed narrative that walks people through a story arc, where they end up believing that you’re going to be something really big.
I encourage people to practice a lot. Iterate. Try different things until you find the narrative that really resonates. You can practice on more than just investors. You can practice on your fellow entrepreneurs and other people 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: based on potential, not results
People always ask, “How do we determine our valuation?” The answer: it’s completely made up. My co-founder Augie Rakow talked about that in another post. 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 to raise? 18-24 months, based on target milestones
You’ll want to raise 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 I recommend reading 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 certainly not the case.
Step 5: Get Introductions to the Right Investors
Identify who would be interested
Once you have a plan and narrative, you want to figure out which investors you want to pitch. You can save your own time and potential investors’ time by isolating and 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.
Target the right people for intros and don’t cold email
I get half a dozen cold emails every day from people who want money. That’s too many people to give my money to. Instead of cold emailing, get a good intro. Luckily, it’s not that hard.
There are lots of people who can help you: people who’ve raised money from these investors before, friends, other entrepreneurs, or your existing investors. Do it systematically: make a spreadsheet and find out who you want to target. Then, line them all up and ask for an intro.
In that 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.
The first part of preparing is avoiding all 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. Any chance that someone has to check out of a conversation, they’re going to do it. They’ll look at their phone or be distracted or think about problems in their own life.
Your job is to keep them engaged. You do that by running them through a powerful narrative and keeping it simple.
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.
Do your research first. Know who you’re talking to so you know what to expect.
Being authentic is a really powerful motivator for connecting with people. You want to be honest about the things that are compelling and good about your business.
You also want to be upfront about what you don’t know. If they ask a question you don’t know the answer to, it’s really bad to just make up an answer. People can usually tell you’re bullshitting them. “I don’t know” is an okay answer. It’s better, though, if you really know the numbers and metrics, so you should take pains to know them. There’s also an added bonus because if you do that you’re more likely to run your business better.
Know your Unique Selling Point (USP)
What makes you the best? You want to 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.
Be direct in your ask
Move the conversation along to them actually investing. Be direct in your ask. Say something like, “Hey, we’re raising our seed round. Are you interested?” or “What’s your next step?” They’ll often respond, “Oh, well what are your terms?” You want to push the conversation along without being too pushy.
Have a time frame
I find it valuable to have a timeframe in your fundraising. You can’t just choose a date, because if you don’t have any leverage, people will detect that trying to force a specific date to close is bullshit. 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.”
Observe the “handshake protocol”
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 do 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. It’s just a tool for building your business. 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 IPO or an M&A. 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. You should just focus on getting a passing grade.