In a recently published ebook on The 7 Deadly Sins of US Market Entry, we called out being undercapitalized as the sixth of the Seven Deadly Sins. In this article, we will elaborate further:
“Most international companies are undercapitalized compared to their US peers. Many entrepreneurs think venture funding is just around the corner when they come to the US. The reality is that it will take 18 - 24 months from the time you set up business here until you have achieved the milestones required to raise a venture round from US investors. That means you need to find the capital at home to fund your US market entry - at least for the first couple of years.”
The Magical Ingredients for Rapid Growth
The US has the magic ingredients for rapid growth: Market, Capital and Talent. Comparing venture capital around the world underscores the relative imbalance:
“… according to the European Investment Fund, VC investment in startups has grown four times to €23bn in the last five years. While this is encouraging news, Europe is still tiny in comparison to its two neighbors: the U.S. and China. According to research from Atomico, an investment fund, Europe invested around €23bn in venture capital in 2018, whereas the US invested $130bn and China $92bn.” - (Forbes, May 31st, 2019, Raising Venture Funding In Europe Vs. The U.S.)
That makes the US something a “promised land” in the minds of many international entrepreneurs. There is a huge mass of VC and an accessible market with no significant legal, cultural or linguistic barriers to entry. If only they bring their company here they can tap into that wealth of venture capital. Unfortunately it’s not that simple.
How to Raise “A-Found” Funding
To raise a so-called “A-Round”, you need to gain significant customer traction. To get significant customer traction, you need to be in the US, figure out a go-to-market and use trial and error to see what works. That takes time. Usually a year and a half or two. That costs money. But money was what you wanted to raise here? That’s what’s known as a “Catch 22” situation.
Essentially what that means is that you have to raise money to raise money. That is not a tautology. You need to raise money in your home market region to fund the time and effort it will take to raise a follow-on round in the US. So US funding is almost never a source of capital to get started in the US. And any home market traction is rarely considered substantial evidence to get you a US venture round. You have to do it here.
Understand the US Competitive Landscape
Now back to the question of “bringing a knife to a gun fight”. Even if you raise money at home and use it to fund your US market, you may be funded, but you might still be underfunded. Good ideas are usually pursued in more than one place.
Often we have seen companies from abroad facing US competitors with more than 10X the capital. This is for the simple reason that they have been in the US the whole time. So they have had more time to grow the business here and they have raised US venture rounds. These are generally bigger than non-US venture rounds.
Hailo vs Uber who we mentioned in a previous article was a prime example of this. By 2014 Hailo had raised around $100M USD. By comparison, Uber, at the same period in time had raised around $3B USD. (Fortune, October 14, 2014, “Why a taxi app with $100 million in funding failed in the U.S.”)
Key Takeaways:
- Companies need to fund their entry into the US with capital they raise before they come to the US. In most cases there is no other choice than to raise this capital in the home market.
- Companies should plan on spending 18 – 24 months figuring out their go-to market, gaining traction in the US and making themselves US fundable.
- There may be much better funded native US competitors. Companies should have a clear understanding of the competitive landscape and a strategy to adapt.
- If it were easy, everyone would do it!
Interested to learn more?
Download our FREE ebook “7 Deadly Sins to Avoid When Entering the US Market.” DOWNLOAD NOW
