Guest post by: Chris Vargas, Private Investor at SV-Investors
“We can’t raise money from local VCs. Can you introduce us to some investors in Silicon Valley?”
I often receive this question from Founders outside the US, and cringe almost every time. If you are a Founder of a startup and you are not among the ranks of Rovio, SuperCell, Spotify or Skype (in otherwords: 99.99% of startups out there), take a moment and see yourself from the perspective of the VC.
You see in your startup an exciting, high potential idea that is ready for ’smart’ VC money.
A US investor, however, sees a startup that has not yet been endorsed by its local investors community, a founding team with few, local, trusted references, an offshore corporation subject to completely unknown laws, and a 16-hour trip to get to their headquarters.
Hm. Can you see why the US VCs may be reluctant?
The next time I cringe is when Founders say:
“We want to move to the US market – probably Silicon Valley. We plan to send a few locals to start closing key accounts, hire an A-class team and really get our company going in North America!”
Seriously? Most startups vastly under-estimate the time, cost and difficulty of entering the US market. Here are just some of the challenges:
Hiring. How will you hire A-class talent, when the A-players in the Valley have little interest to work for a foreign startup from a country they’ve never visited and for a CEO they know very little about? There are thousands of local startups competing for the best talent, what makes you believe they will join yours? Most importantly, A-players actually almost never interview for jobs; they are brought in by VCs or ‘networked-in’ by other A-players.
Sales culture. Do you really understand how to sell in the US? Most international startups do not. They often confuse being fluent in English with being able to sell to Americans. Selling in the US isn’t about being able to speak the language. It’s about knowing how to create trusted relationships and build a trusted brand with customers. Knowing how to find the right contact within a large organization and having someone in your network who can connect you. Making that cold phone call and delivering the right message, tone and attitude. And naturally, knowing when to banter about last night’s Niner’s game too.
(Note that I’m referring to startups that need to personally meet actual customers, channels and partners in the US. If your business is completely web-based, you will likely be able to scale without having to relocate to the US).
If I were the Founder of a US startup and wanted to enter, say, the Finland market, I would not think to send a few Americans to Helsinki to try to build trusted customer relationships, hire the best possible talent and raise local venture capital. It puzzles me why Finnish/Nordic/Singaporean startups think they can do this in the US.
Equity culture. Do you understand equity culture in the US? I find that most international startups don’t have a clue because when I look at their cap table, I see only the Founders owning equity. Incredibly short sighted. I rarely see the hard working, rank-and-file employees with equity. It will be difficult if not impossible to build an A-class team in the US with a ‘Founder’s-take-all’ attitude. Not even the B-players will find your startup interesting.
As an aside, the US truly stands ahead in this attitude of sharing wealth among all employees, from the CxO down to the newly hired administrative assistant. I think it is a key advantage of the US startup culture: sharing the rewards of success widely, and in turn creating a healthy, vibrant and motivated ecosystem.
Network. Do you have a strong network in the US? Personal connections to your first 25 customers? Those who have these valuable connection receive a subtle but critical advantage. Many Europeans have a difficult time understanding this because they cling to a belief that a good product will sell itself. Beyond those great products that customers run to purchase/sign-up, (think: Dropbox, Facebook, Angry Birds, AirBnB, etc..), the vast majority will need to win through good customer, channel and partner relationships.
International Founders often make the assumption that the skills that made them successful in their smaller home markets will translate successfully to the much larger US market. A subtle but important shift needs to occur when entering the US market. If you don’t understand this, you can easily get lost in ‘startup translation’.
Some of the differences are quantitative: valuations, term sheets, compensation expectations, cost of working/living, and depth of business networks. Others are more qualitative: the role of sales, negotiation styles, equity culture, the role of the Board & Advisors, credibility with the investor community, etc..
These are some of the most common ‘translation pain points’ I’ve seen international teams face when they relocate to the US:
Translation 1: The market is much larger than you realize. Although the US (313M) is smaller than the EU (505M), South America (387M) or Asia (Bn+), its seamlessness surprises most international entrepreneurs. The US is a single, tightly integrated market bound by one set of laws, language, currency, culture and mindset. This often throws off the European entrepreneur who is used to crossing borders, languages and cultures on an almost daily basis. I worked in Europe for Cisco Systems for 6 years and witnessed, sometimes painfully, the significant diversity of each national culture and the friction this causes in reaching scale. The US market is large and efficient, which is why one can often reach scale much faster than in Europe/South America/SE Asia.
Translation 2: Raising venture capital is (much) more difficult than you realize. The US VC market has more venture capital and does more deals than anywhere else in the world. However international startups face more barriers than their US counterparts. First, there is risk in investing in an unknown team, whose core operations are far from the VC’s home. It is not just geographical distance, but cultural, operational and legal differences that make investors wary. VCs prefer to invest near their home base, which offers a rich ecosystem of startups that are known, trusted, accountable and accessible.
Second, many startups – particularly those from Europe and Singapore – often receive their first investment rounds from their Government and this creates unique problems. For starters, cap tables look odd. Operating Agreements have strange and cumbersome rights and protective provisions that may be a deal-killer for later stage investors. There are often bureaucratic reporting requirements. The company Board still consists of only the Founders. No one from the Government has stepped in to guide the startup, bring in a deep network of stakeholders or push the Founders (hard) to exceed their goals. Founding teams are weakened by this lack of guidance, accountability and healthy control structures. Government venture capital feels good in small doses but is destructive in larger quantities.
Finally, many international startups are unprepared for the rigorous selection process of venture funding, particularly in Silicon Valley. The US market is the most mature in the world. Its VCs are deeply experienced – and its Startups benefit from this more mature ecosystem. They know how to play the funding game better. Many international startups come from countries where they are large players in a smaller market, and find it difficult to transition to being a smaller player in a very large ocean.
Translation 3: The sales culture. Earlier in this post I discussed some of the differences in sales culture. There is another subtle but key difference worth mentioning. I’ve observed in many European startups a somewhat negative perception of the sales role, that ranges from tolerance to outright disrespect.
In general, you will find a very different attitude towards sales in the US. Sales and Engineering are at the heart and soul of most US startups. These guys are the rock stars. When sales execs make over a $1M commission per year, the rest of the company cheers loudly. Why? Because when sales are pouring in, the people who make the real money are the equity holders and in the US, that is everyone. Which is a good reason to cheer (see the next ‘Translation’ below).
You probably already love your engineers. When you move to the US, learn to love your sales team, too.
Translation 4: Equity culture. The US startup community thrives on equity and international Founders need to be ready to allow employees to become owners. Every employee! Plan on an Employee Stock Ownership pool of 10-20% and be ready to negotiate single digit ownership percentages to critical, senior employees. And don’t forget that if you start to offer the US employees stock, you will need to offer the same to your employees back home. Do the math. It will add up to significant dilution. If you don’t want to offer equity to employees, perhaps you should not be in the US.
When international founders get nervous at diluting their ownership, I tell them that the ultimate goal of dilution is to create a stronger network of stakeholders who allshare the common goal and motivation to increase shareholder value. I remind them that 10% of a billion is much more interesting than 100% of a million. Do the math.
Translation 5: More expensive than you realize. The US market is expensive. Salaries can appear astronomically high in markets such as Silicon Valley and New York City. Even in cities like Austin, Boulder and Seattle, executive salaries are much higher than what you pay to equivalent person back home.
And there are other costs. Office leases in prime areas are extraordinarily high. San Francisco is a fantastic city to live – and also fantastically expensive. A studio in SOMA is around $2,000/month; a two-bedroom apartment around $4,000. Mountain View may be a tad less expensive. The cost of healthcare is spiraling relentlessly out of control. Companies are generally expected to offer healthcare plans to employees, which adds to the cost structure. And expect to spend a significant amount of time decoding the US healthcare system, because it is complex: how to buy insurance, the myriad of plan options available, rules on where to go for healthcare, etc.
Visas. You will need a small army of lawyers to help ensure that you and your team can arrive legally and stay legally in the US. Google “Sarbanes Oxley”. When your company grows, you will be required to comply with this law that requires costly and detailed accounting, auditing and internal compliance reporting.
Our legal system is driven by an insane need to provide liability protection, which results in long, complex documents. Finally our tax system is among the most complex in the world.
Fortunately the US has many accountants, tax experts and immigration lawyers who will be happy to help you through all these issues for a large fee.
Translation 6: Networking. This is perhaps the most difficult to describe. In the US, we have a drive to constantly meet and mix and talk and openly share ideas. It is in our genes and it is our lifeblood. It is the casual banter over a business meeting coffee, which to a foreigner feels full of seemingly random talk. It is the speculation about next week’s Giants game or chatting about which colleges our children are applying. It is a distinctly different approach to work-life balance and a tendency to mix business and personal life much more than other cultures. I wrote a longer piece that attempts to illustrate our networking culture. See: http://generationsiliconvalley.com/2012/10/04/create-your-own-coupa/.
In closing, I see many international startups abroad that are indistinguishable from their US peers: driven, customer-focused, networked and perfectly capable of integrating into the US market. Equally, there are many international startups that do NOT need to enter the US market. They will do just fine building a global brand from their home countries.
However I continue to meet startups that have a dream of ‘going to the US’. It is likely the market size, the abundance of venture capital, the ‘cool’ factor of living in young, hip SOMA, the great weather in Silicon Valley – or some combination of the above. But if this is your startup, be prepared to shift your expectations of what it will take to enter, gain grow and scale in the US.
Don’t get lost in translation in your journey of becoming a great, US-based startup.
Link to Chris Vargas blog - http://generationsiliconvalley.com/