Coming from a small country that is relatively distant from major markets, New Zealand tech founders are encouraged to think global from day one. Many companies are embracing this challenge, not only on the sales and delivery sides of their businesses, but also by seeking to raise capital overseas.
The USA is a key market for many NZ tech companies, and the most likely source of a high value exit via a trade sale to a major US tech company. It also has the largest concentration of investors in high growth tech companies, not only in Silicon Valley and San Francisco but increasingly throughout the country. For these reasons, NZ tech companies thinking about raising capital overseas will usually consider the USA first.
There is a growing NZ-USA network focussed on helping NZ tech companies get started in the USA, through which companies can access advice on capital raising stateside. For example, NZTE, Kiwi Landing Pad, KEA and the Meteoroid Program all offer various types of assistance. However, for those that like to plan ahead, we have not been able to find much information online discussing how a New Zealand company can prepare for a US raise. We therefore decided to take the bull by the horns and interviewed Kiwi entrepreneurs who have successfully raised US money, and share their experiences and learnings in this blog series.
Today we kick off the series with some advice from Andrew Simmonds, our managing partner. He has been involved in raising capital in Silicon Valley through his investments in Real Time Genomics and Eventfinda, and as a legal adviser to NZ tech companies raising money in the USA. Andrew has seen up close the experience of New Zealand companies who have had varying degrees of success, and shares a few tips on approaching the process.
why raise in the States?
It is worth thinking about a raise in the USA if your company has a focus on US customers, and there is a big addressable US market for your company. This is also something that the American investors will look for – while they do value international businesses (and American tech companies are adept at establishing global operations), companies which are not targeting the USA first will find it hard to raise US money.
The benefits of raising in the USA include:
- a much larger pool of money, where higher valuations are the norm
- a tremendous amount of expertise and networks that will speed up your progress
- boosting the credibility of your company’s brand, particularly if you can attract rockstar investors (as Carnival Mobile did, who we interview next in this blog series).
That being said, raising capital is a starting line, not a finish line – and later in this blog we note some things to be aware of when taking on US money.
a need for customer traction
Assuming that your business has a focus on the US market, in most cases to get investors interested you’ll also need to show some customer traction.
Unless you are already well-funded, setting up a sales operation in the USA is unlikely to be a value-for-money option. Doing business in the USA is expensive, particularly in Silicon Valley and the wider Bay Area. To put several experienced people on the ground is likely to require US $750,000 to $1,000,000 for even a 12 month runway.
If you do not have that sort of money to spend, then there are other ways to get traction.
One route that an increasing number of Kiwi companies are taking is to apply for an accelerator or incubator, for example Tech Plug & Play, YCombinator, 500 Startups, Techstars and so on. One such example is Hapara Solutions, who shares their experience of launching from the edtech-focussed Imagine K12 accelerator later on in this blog series. These programmes are highly focussed on hitting the proof points that will get seed and VC investors interested, for example customer traction.
An alternative is to try to get customer traction in the USA from New Zealand. Depending on what you are trying to sell, there are a number of ways to do this e.g. online customer acquisition. However, in most cases, it will be necessary to get on a plane and spend time in the USA learning about the market, and trying to make contacts that will help you find efficient channels to customers in the USA. KLP, KEA and other “kiwi mafia” connections can be very helpful in this process. Although travel costs can add up, this approach should give you a much longer runway than you would have if you located people in market from the outset. You should also use any time in the USA to do some networking for a raise down the track.
If you are not ready to tackle the USA at the moment but it is part of your longer term plan, then you could consider an intermediate step of raising funds in one of your more immediate offshore markets. For example if you have an immediate focus on Asia, you could consider raising capital in Singapore (where there is a significant amount of money available for seed and series A). Or if Europe is your immediate focus, capital raising in the UK may be an option. Raising money in either of those countries can provide a stepping stone to a later raise in the States, as this is a common path for tech companies in those countries too.
test the waters
Regardless of how promising you think the USA may be for your company, before you dive in headfirst, you should make a couple of trips up to the USA to find out where your company may fit into the ecosystem. This will give you a much better idea of whether your ideas are realistic, and how you could develop a plan.
For many NZ tech companies the logical place to visit is San Francisco and Silicon Valley. The energy in the Bay Area around tech and startups is inspiring, and the expertise and facilities available to the sector is jaw-dropping. However, Andrew cautions not to get swept away by the excitement and novelty of it all. The competition is ferocious, and it is hard to get noticed or stand out. Success in the Valley requires a tremendous amount of hard work and a good amount of luck.
making the most of your time
If possible, try to time your visit with events that are relevant to your business or capital raising objectives e.g. events catering for similar businesses, or something specifically aimed at NZ companies (NZTE and KLP events are great for making initial contacts).
If people are doing you a favour by meeting with you, try to keep the meeting short and to the point. Kiwis have a bad reputation with some people in the Valley for time wasting – particularly treating people they network with as a free source of advice and introductions. While this may be accepted in New Zealand, it goes down poorly in San Francisco.
If you want to delve deep for advice or connections, be prepared to offer payment. If you’re asking people for introductions, you could also ask them “how do you make money out of this? What is your business model?”. For example, a lawyer may make intros to investors if you appoint them as your US counsel.
Once you think you have the right ingredients to raise successfully, you will need to have a nice pitch deck, investment summary, and a short succinct business plan explaining how you’re going to win (and how you’re different from competitors). Make sure you crystallise what you’re looking for from investors.
Even if you are not currently looking for investment, be ready to present a compelling story at the drop of a hat (a skill that Paul Cameron of Booktrack, interviewed later in this series, has mastered well). You never know when an investor may be listening or stumble across you. Aside from serendipitous story-telling, be emotionally ready for the fact that pitching to investors is hard. You’ll be competing with Americans who are very good at it, and even accounting for differences in style between Kiwis and Americans – you are starting on the back foot. Investors see a huge amount of hopeful founders, so be prepared to get knocked back, ignored, criticised, and even messed about (if you come across a particularly unpleasant VC). Regardless of whether you get a yes or no, learn from the feedback.
Like New Zealand, the most likely success will come through warm intros. On your initial trip to the USA, try to fill your time by looking for warm intros from customers, lawyers, bankers and so on. Set yourself up to be in a good position for your next trip, or when you’re ready to raise.
If you’re serious about raising US money, then you are going to need a US lawyer. We suggest meeting a couple of potentials earlier rather than later. Valley lawyers in this space have relevant industry contacts, and form part of the deal-flow pipeline for investors. There are a number of lawyers in the Valley who are familiar with representing Kiwi companies, and it is easy to get in touch with these through KLP, NZTE or us.
In terms of your company’s legal structure, you don’t need to flip into a US company to look for investment in the USA. Andrew suggests founders put off flipping until they at least have a term sheet, and make it a condition to the financing closing. Otherwise, if the deal doesn’t go through, then the flip will have to be reversed as it can be unattractive from a tax perspective for New Zealand investors to have shareholdings in a private US company. Also, while many US investors will require you to flip into a US entity, not all do, so there is no point doing this ahead of time.
On the other hand, if you’re not open to becoming a US company, then you probably should not be raising money in the USA. While it is possible to find investors who are happy to invest in foreign entities, many investors won’t do so. These are not absolutes, but you might as well maximise your chances.
There will be cross-border tax issues involved in taking US money. You should engage New Zealand tax advisors experienced with Kiwi companies raising money in the USA. Once your company is operating in the USA, you will also need US tax advisors for day-to-day compliance with US tax legislation.
the term sheet
The term sheet holds a different status in the USA to New Zealand. It is a fairly solid commitment to doing the deal. Once you sign the term sheet, the core terms are more or less set in stone, and then it becomes a mechanical process to turn this into full investment documentation.
Andrew says that it is essential to get the input of a US VC lawyer when negotiating a term sheet. There is a lot of shorthand in US term sheets which might appear innocuous but can have significant commercial consequences once spelt out in full in the final documentation. For example, participating and non-participating liquidation preferences can have a dramatic impact on the return to founders on exit, but the significance of this small difference in terminology may be missed by Kiwi founders.
things to be aware of
Earlier on we listed the benefits of raising US money – but not all that glitters is gold. Getting US VC money is not success in its own right, and Andrew points out:
- Valuations are higher in US deals, but investment documents also include a lot of mechanisms to redress the high valuation if the business plan isn’t met or successful.
- There is generally a significant loss of control for founders when taking on US investment. Control will concentrate in preference stockholders, versus founders who hold common stock.
- VCs can be ruthless about replacing founders or executives who are not performing (read Hatching Twitter for a dramatic real life example).
- VCs are likely to bring their own advisors, and over time, board executives. They may have a wider relationship which is not apparent to you. If you’re not turning out to be the next Snapchat, your VC can become more interested in maintaining those relationships than contributing to your company’s success.
- Remember that to the VC, you are just one in a portfolio. Things can change, and if your sponsoring partner leaves, you can find yourself orphaned in a portfolio of many other startups just like yourself.
There is an excellent post on Good VCs, bad VCs written by Christoph Janz, an “angel VC” from Point Nine Capital, about what to look for in potential VCs.
remember where you came from
For these reasons, it is good to have strong New Zealand investors to co-invest in follow-on rounds. It keeps some balance in discussions, and local investors are also helpful to ameliorate misunderstandings which can arise from cultural differences in Kiwi and US mentality. If you’re going to be a successful company, this won’t be the last cap raising you do (see Startup L Jackson’s piece on Startups and Shit). Keep your options open so that you won’t be stranded at the mercy of your US investors.
In the unfortunate event that you have to do a recap, the redistributed equity will come out of your common stock. US investors are usually protected by provisions which leave them, and probably any directors they bring on, relatively unscathed. Don’t burn your bridges with the local investors, as they may turn out to be your lifeline in raising back home in New Zealand.