Asked: What Stops VCs from Investing in Foreign Companies?

Nothing, it happens all the time. Yet, the question is common, frequently asked; begging a question its own – what are startups struggling with that they think that foreign investors won’t invest?

Start with this appreciation: investing in startups is the riskiest use of capital, in the world. Gambling at a casino is more likely to win.

Most founders overlook this and jump to the conclusions that “good business” = due funding.

No matter how great your business, 90% of startups fail, 74% of funded startups fail, and 54% of businesses fail in 5 years (if not sure the difference between startup and new business, read this).

Because of that, investors actually largely invest in what they know.

Not traction, KPIs, models, due diligence, nor pitch decks. Their first line in the sand is, “do I know this and have interest in this kind of thing?”

Period. I see a couple dozen pitch decks come across my desk (so to speak) every day and easily half of them are in things I know nothing about (FinTech, AI, etc.). Great startups? Maybe. Fundable? Possibly. But I don’t KNOW those things so I really can’t qualify if it’s worth anyone’s time and I don’t have the time to take a meeting to figure out if something I don’t know anything about is worthwhile.

That brings us to our second line in the process.

Familiarity.

Their friend is in the deal, they know another firm in the deal, someone they trust referred the deal…

If I don’t know anything about AI but someone I know and trust says to me, “hey Paul, take a look at this one.” I will.

What stops investors from investing in foreign companies?

Rather, let me rephrase the question to one more valid.

What hurdles make it challenging for investors to invest in startups in other countries?

You see, like it or not, fair or not, you have to overcome these hurdles. Because that investor is going to start with what they know and then include where they’re familiar. Meaning, everything else has to overcome that.

And another country is usually neither known or familiar. Fair?

Here’s why:

• Regional laws. Almost all startups in the U.S. incorporate in Delaware. All lawyers know Delaware law… drastically reducing complexity and the cost of lawyers to work through everything. I don’t even know the laws of Canada and it’s right next door.
• Economics. This manifests in a few ways:
  • Many countries have government funding at their disposal, for entrepreneurs. This upsets expectations. Don’t misunderstand, it’s a great thing that they have the money! But usually public money doesn’t have high expectations. I talked with an incredible startup out of Israel that got (roughly, not knowing the currency exchange and what they actually got), $10,000,000 to start their venture. WOW. That’s incredible. In the U.S., that’s a great Series B round. Thing is, they still seemed pre-seed stage in their development…. they went through $10M in funding and certainly were not a company that meets expectations of that “stage” of capital.
  • Costs of living. Costs of living impact employee costs, value estimations, and much more. A startup in Ukraine talks to us and raises $250,000 because that’s all they need… to do something that here would require $1.500,000. For example. Which might sound great! Give them the $250,000 and lets go… however, a GLOBAL company needs to compete everywhere and just because it’s less expensive where you are, doesn’t mean you won’t need the capital to be where else you need to be.
• Culture and education. We’ll weave these together, even though they are somewhat different. Various countries have their own cultures and values that impact how people think and what they’re taught. I saw a talk from founder in China once in which he noted that the United States will always be a dominate hub for innovation and entrepreneurship because the culture is competitive (sports, history, independence) and because they teach capitalism, sales, and marketing. Startups fail, almost always, they’re risky. And some *places* in the world have people inclined to do whatever it takes and to focus on marketing and selling it. Some places don’t…. many places have brilliant engineers, incredible inventors, or other circumstances that make their culture rich and vibrant, but not necessarily what’s ideal to startups.

Of course, there are people in the U.S. who don’t have those qualities. There are some founders who can’t understand why investors won’t fund them or value what they think their work is worth… and many of us can look at them, try to help, but at the end of the day, know why they’re not getting funding or valued as much as they want.

None of that is disparaging of any other country; the point is, people aren’t familiar with what they don’t know.

And unfortunately, they’re not going to get familiar for your sake, you have to overcome those hurdles they have.

WHY is this more compelling *there*? What does it mean for us to be invested *there*? Are you relocating and opening here? What will you be doing to expand from *there* to elsewhere, or everywhere? How will you compete with the circumstances of that country, the laws, economics, education, and culture?

Investors invest in other countries all the time. Heck, we run startup programs for Colombia, Korea, Italy, and other markets, for that very reason. In fact, we do that, for the reason that there great opportunity globally, we have to help everyone get familiar with what they don’t know.

I want to invite you to join me in such discussions live and together.

Join me online here

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