How to raise investment in the USA: guide for UK startups
At SeedLegals, founders regularly ask us about raising money from US investors – whether to raise in America, what US investors look for, whether to ‘do the Delaware flip’, and more.
To answer all these questions, and to highlight some of the pitfalls for UK businesses when looking for investment in the USA, we ran a webinar with Daniel Glazer of Wilson Sonsini, the international American law firm that specialises in advising high-growth technology companies from corporate formation to IPO/M&A exit and beyond.
In this post, we’ve summarised the essential information for founders considering fundraising with VCs in the United States. You can view the full-length webinar video below.
Thinking about incorporating and hiring in the US?
Head over to our other post, How to expand into the USA: guide for UK startups
In the UK, Seed funding usually comes from UK or European investors.
- Series A
Again, funding for the vast majority of UK Series A companies is usually from UK or European investors, with relatively few rounds led by a US investor before the UK company has established a substantial US presence (less than 3%).
- Series B and later
For Series B and later-stage companies, investment rounds can be global – it doesn’t matter so much where you’re located because you’ll have the metrics to prove you’re a sound investment, and you’ll be able to attract investors located anywhere in the world.
Be realistic – as a founder of a growing startup, you’ll need to allocate your time according to your chances of success. If your business isn’t yet successfully past seed stage, it’s going to be nearly impossible to attract US investors.
Roughly 3% of UK Seed and Series A rounds have a US lead VC investor, when the UK company has no company or office in the USA
With Beauhurst just before the pandemic, we investigated how many UK Seed or Series A rounds took place with an American lead VC investor.
There were roughly 2,800 Seed and Series A rounds raised by UK companies in 2018 to 2019. Of these, when the UK company had no company or office in the USA, only 52 (1.9%) had an American lead VC investor with no UK or Europe operation.
We haven’t repeated the study post-pandemic but anecdotally, we believe the figure is a little higher now, maybe 3%.
What do US investors look for when they invest in early-stage UK companies? As well as a pitch deck explaining how you’ll generate a big return for your investors, you’ll generally need to hit at least one of these criteria (ideally, all of them):
- Management in the US
You have one or more senior leaders based in America, focused on building your company.
- Significant customer traction in the US
Metrics that prove people in the US are buying or want to buy your products or services.
- Your team have raised with US investors before
Investors bet on your people as much as on your product, so if some of your senior team have successfully raised with US investors before, this reassures potential investors.
- You’re building a much better product
It’s more straightforward for US investors to invest in early-stage US companies, so whatever you’re making, it needs to be substantially better than anything investors could invest in Stateside.
If you don’t hit at least one of the criteria above, attempting to attract American Seed or Series A VC investors might be a waste of time.
Like any VC, US VCs are looking to maximise their return. But the individual decision-makers at US VC firms differ significantly from their UK counterparts: most US VCs are ex-startup founders or have worked at startups.
What does this mean for you? American VCs aim to de-risk their investment by applying their experience to help their portfolio companies. They know how to grow a business in the US – but not in the UK. If you’re a UK company, you’re automatically outside their area of expertise – so you’ll need to convince a US VC that you’re a better bet for investment than any home-grown American company.
For all VCs, your pitch will need to show a credible pathway to their return – but each type of VC is looking for a different outcome. In the UK, VC funds usually fall into one of four categories (with most VCs located in London):
- SEIS/EIS funds
These funds are looking for a strong return but they’re also interested in the tax benefits of SEIS and EIS investments.
- Private equity
These VCs invest for their private clients and are more conservative, often with a focus on managing risk.
- US funds
US VCs often invest more money and at higher stakes than UK VCs traditionally do. Many US VCs bet big, hoping for maximised returns.
- US-style funds
These are UK VCs which take a US-style approach to investing.
If you can offer what a VC wants, then VC cash might be right for you.
Are you ready for VC funding?
Done right, VC cash could be vital to your success. But it isn’t always the right solution. We explain why.
US VCs (and US-style VCs) are typically seeking the highest possible return. They know that many companies don’t return the fund – but to invest, US VCs must be certain your company has a credible pathway to return the fund and the possibility of a big return. How big? Many US VCs look for a $3B+ exit.
Don’t be tempted to fake your forecasts
If you’re seriously aiming to become the next great unicorn story, US VC cash might be the right answer for your company.
But if you’re aiming to build your company for a few years and then sell for a few hundred million, then US VCs often won’t be interested.
If you fake the unicorn aspirations and US VCs invest then find out what you really had planned, they’ll often try to replace you.”
Got a US company interested in buying your startup? Congratulations! The financial upside of this can be higher than with a UK acquirer. But US investors will make you work harder to prove your company is worth what they’re paying.
Be ready for heavy-duty due diligence. US acquirers will scrutinise your documents, contracts, share options and more. It’s sensible to have all your documents perfectly in order before you meet a potential acquirer, and prepare your Data Room. If your paperwork isn’t in order, US buyers might adjust the price or walk away from the deal.
Before you sign a Letter of Intent (LOI) with a US acquirer, ask a US M&A lawyer to check it and advise you.
Due diligence is easy on SeedLegals
If you’ve created and managed your legal contracts on SeedLegals, they’re securely stored in the platform ready for you to retrieve when you need them. SeedLegals members can also set up a Data Room – upload the documents you need to share with the due diligence team, then grant and remove access to anyone, anywhere, as required.
UK companies shouldn’t download the YC SAFE template and use that – it’s Delaware law, includes US tax and SEC obligations, refers to ‘common stock’ instead of ordinary shares and so on.
But there is an easy solution if your US investor is asking for a SAFE: the SeedLegals English-law version of the YC SAFE. This agreement is appropriate for both your UK company and your US investor. It’s easy to create: log in, create a SeedFAST and select YC SAFE (English law version). (As always, if you need some help understanding the terms, start a chat with us and we’ll guide you through.)
A UK limited company can do the ‘Delaware flip’ anytime – that is, incorporate a parent company in the state of Delaware – and it’s usually a tax-free transaction (unlike in some other countries such as Germany).
When is the right time to do the Delaware flip? You don’t ever ‘need to’ set up a US parent company to raise with US investors. But the US venture economy is based around investing in Delaware companies; the earlier stage the UK company, the less likely it is that a US VC investor will be willing to tolerate the friction of investing in a non-Delaware company. For funding rounds led by US VCs, the team at Wilson Sonsini says the likelihood a UK company needs to flip decreases at each round:
If you’re at Seed stage and your US lead investor agrees to your terms but insists that you become a Delaware company, then you can build this into the Term Sheet: you agree that between signing the documents and the transfer of money, you’ll incorporate in Delaware. This protects you because it means you’ll only expend the time and money setting up a Delaware parent company when you absolutely have to. And it protects the investor because their money goes into the Delaware corporation and they don’t need to transact with the UK limited company.
Doing the Delaware flip is not essential to US fundraising
A US VC will invest in your company based on the possibility of a substantial return. They might require you to become a Delaware company to receive the investment – but that’s generally a topic that’ll come up in your investment discussions. If they walk away before you get to that point in negotiations, then it isn’t because you don’t have a Delaware company – it’s because in some other way, you don’t fit their investment thesis.
The full video is one hour: the first half covers how to expand and hire people in the US, which we’ve set out in our blog post: Expand in the USA: guide for UK startups. The second half is about raising money from US investors, as set out above in this post.
Wilson Sonsini Goodrich & Rosati started working with tech companies in the early 1960s, often taking companies from ‘garage stage’ startup to IPO and beyond. Famously, the firm incorporated Google in 1998, took them public in 2004 and still works with Google now.
Wilson Sonsini’s London office is led by American expat Daniel Glazer, with a team of 35+ US, UK and dual US/UK-qualified tech lawyers. Every year, the team incorporates US subsidiaries for several dozen UK companies and works with hundreds of UK and European companies throughout their US lifecycle.
If you have questions about expanding your company into America, raising with US investors or a US acquisition, take a look at Daniel’s comprehensive FAQs on US expansion, fundraising and exit
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