The US: a guide to early-stage fundraising and expansion in the world’s biggest economy

From pioneering research undertaken at world-leading institutions to extraordinary, future-shaping commercialised and applied tech, Europe is at the forefront of the tech revolution, and within the continent, the UK is leading the way. 

We’ve seen extraordinary companies built here and watched them flourish, scaling to global heights. Even so, for some businesses, the opportunities available over the pond can’t be ignored.

US expansion offers huge rewards – but it’s not easy. From fundraising to operations, there are right ways of doing things, and they’re rarely what a UK or European founder might be used to. As the old adage has it, ‘England and America are two countries separated by a common language’. Superficial similarities are deceptive, concealing a wide gulf both in operational and cultural practices.

It’s also important to note that, at the early-stages, expanding in the US and fundraising in the US go hand in hand. An early-stage company with loads of traction and a top leadership team might well be thriving on this side of the Atlantic, but without committed plans to grow in the States it’s going to struggle to raise funds over there.

We wanted to give some of the Octopus Ventures portfolio founders an insight into the practicalities of US expansion, so we got in touch with a couple of experts. Matt Oxley, co-founder and President of Opal, learned how to do it the hard way, relocating to the States for a decade to scale his B2B SaaS marketing platform. Now he’s back, briefing founders on what they need to know.

Daniel Glazer made the journey in the other direction. A partner at the Silicon Valley law firm Wilson Sonsini, he moved from New York to London to set up the firm’s UK office, which supports UK/EU tech companies with US expansion, US fundraising, and US IPO/M&A exits. Together, they spent a morning sharing their tips and experience for founders looking to raise and expand in the world’s biggest economy. In this blog, we’re going to unpack their insights and share some of the key areas of awareness they highlighted for founders with an eye on fundraising and growing in the US market.

Define success

It’s important to state from the outset that growing in the US isn’t for every business – and that’s OK. The UK and Europe represent major, mature markets for tech start-ups. Unicorns have been built here, and many more will follow.

For founders who do feel their company needs to look Stateside, US expansion doesn’t necessarily mean uprooting everything to head west. Daniel explained the importance of defining success for founders: there is, after all, a difference between becoming a US business and making the US one quality revenue source out of many.

The appropriate plays for a founder with some traction in the US she wants to leverage whist remaining firmly based in the UK, and a founder who’s hanging the success (or failure) of her enterprise on winning the US market, are two very different things. The former is less demanding. There may be some questions about hiring a team over there, and down the line the opportunities offered by full commitment to the US might grow too big to ignore, but in the short- to medium-term, so long as a business isn’t seeking US funding, a slower, more organic approach doesn’t necessarily require a major relocation.

For the latter company, however, with a founder determined to build her global business from a firm base in the US, operations are going to have to move. As Daniel put it, founders pursuing this type of success are playing ‘An away match on a different playing field. You can’t leave your best players at home.’ What’s more, as we’ll explain, founders seeking early-stage funding in the country will also need to take further steps to signal their commitment to scaling there.

Founders will need to be making plans to move (at least) one of their senior leadership team (if not themselves!). And that’s not all. We’ll highlight one of the other, key  technical challenges of moving a UK or European business to the States (and what to do about it) further down, but first, for those founders who believe that fundraising and growth in the US represent success, let’s explore what they’ll need to have in place.

Business readiness

As Daniel explained, the makeup of VCs in the US is different to what we find here in the UK and Europe. In the US, the proportion of former start-up founders and operatives in venture capital tends to be higher. With experience building businesses in the States, they’re keen to put their expertise and network to work, exploiting the resources they have at their disposal – which are generally to be found in the US.

Daniel proposed a general rule-of-thumb: the later the investment stage, the further from home investors are happy to look, with Seed stage principally being a local investment up to a more global play at Series B and beyond. What this means, in short, is that raising early-stage funding in the States and scaling there are two sides of the same coin. VCs will be on the lookout for businesses they think have what it takes to crack the enormous market the territory presents.

That doesn’t, necessarily, mean US funding is a pre-requisite for US growth. As we’ll discuss, there are options for founders seeking to build out their presence in the country, without a wholesale pivot overseas.

But for those with an eye on US VCs, what are the sure signs that their business represents an appealing prospect? Daniel offered this useful checklist:

• Management on the ground. VCs considering an early-stage investment into a start-up will want to know that there’s someone they can work with to move the needle and build the business. The most credible colleague is the CEO.
• Is there traction? This can sub in for people on the ground, because if traction or product-market fit already exists in the US, it suggests that whoever gets parachuted in will be pushing at an open door.
• Prior success in US fundraising/scaling. Early-stage investors make a bet on team and TAM (total addressable market). In the US, the TAM is huge, so the question is – can they bet on the team to succeed? Prior success is great evidence that they can.
• Are you better? Seed and Series A investments are risky, which is fine. As in the UK and Europe, US funds are OK with risk – but they want an upside for taking the additional geography/distance risk of investing in a startup based outside the US. The simplest way of proving this is performance. To coax US funds into an investment, non-US founders must show they truly build better.

Matt reinforced this message when he described his own Stateside journey. When he dug into the metrics on Opal, his marketing-focussed, B2B SaaS start-up, he recognised that while the company held considerable promise in the UK, it had to go to the US to be truly successful.

It wasn’t a question of simply following America’s huge TAM like a moth to a flame – the decision was made based on data that confirmed the traction Opal already had in the territory. It was still a personal risk – but a calculated one.

Cultural differences

As Matt was at pains to emphasise, if you’re seriously thinking about pursuing US funding and growth, ‘You need to learn American’. The professional background of VCs isn’t the only cultural difference awaiting UK and European founders in the US. There are more.

Key among these, Daniel highlighted the truth behind the cliché, ‘Lawyers run America’. He pointed to the difference in litigation liability by way of explanation. In the UK, when two parties settle a business dispute in court, the loser pays most (if not all) of the winner’s legal fees. But in the US, each party typically pays their own fees – regardless of the outcome.

This fundamentally changes the nature of the threat of litigation, turning it into a business negotiation tool  that can be used for leverage. It’s a part of doing business, with people or organisations driving their own favourable business outcomes by leveraging a competitor’s exposure to legal risk against them. The effect is that the role of the lawyer in the US, versus the UK, is altogether different.

Here in the UK, lawyers provide a more technical service, helping organisations navigate the legal demands of doing business; in the US, they offer clients problem-avoidance advice on operating their businesses. As Daniel put it, the clue is in language: in the UK, clients instruct lawyers. In the US, lawyers advise clients.

For start-ups scaling in the US, it’s a hard lesson to learn the wrong way, as Matt attested. One of Opal’s most important US hires, he explained, was the position of in-house counsel. UK and European businesses growing in the States need to ensure they have US legal expertise, and view counsel as an integral part of the team.  This may seem jarring to UK and European management teams used to legal being something of an after-thought, relative to other aspects of operating a company, but US competitors native to the US business and legal environment are well-versed in leveraging lawyers to compete and win in America.

Founders looking at American expansion should also be aware of differences in organisational structure and hiring. Salary expectations are significantly higher in the US, while employee options are table stakes.  Over there, start-up talent has been weaned on tales of life-changing money from major Silicon Valley exits (never forget the tale of the Google masseuse!), and employees in the country’s significant tech hubs will be far more engaged with their options package than their UK or European counterparts.

Both Matt and Daniel explained how operational priorities across the territories can diverge. In the UK and Europe, it’s expected that the highest-paid role in a business is the CEO. In the US, it’s the Head of Sales. As Matt explained, this difference in emphasis reflects the go-to-market strategies that win in the US, versus the UK and Europe. Businesses that win in America need to be built for different challenges, nuances and approaches than those that win over here.

How?

With these differences in mind, and for founders who believe their business meets one or more of the criteria outlined above, the question that arises is, how?

What does it take to secure funding and grow an early-stage, European or UK start-up in the States? One of the key questions that came up as the founders sat down with Matt and Daniel was, ‘Can US VCs fund a company headquartered in the UK?’ To put it another way, is it necessary to set up a US company to secure funding from American VCs? And are there other, operational reasons it makes sense to turn a UK or Europe headquartered business American?

As Daniel explained, there are a couple of inflection points where the answer, in almost every case, is yes:

• Employees are on the ground. Hiring through an EOR (employer of record) service is possible, and makes sense for some early hires (allowing a company to test the market early, without making the financial commitment to setting up a US entity). But the truth is that senior hires will have a hard job convincing the tax authorities that their relationship with the company doesn’t reflect employment. If they have a title, they’re likelier to be deemed to be an employee (and early hires on the ground will tend to be senior). This also complicates things when it comes to recruiting highly competitive talent. As outlined above, a focus on the upside of options is a key cultural difference between the US and the UK and Europe. Employees know EOR options aren’t as tax favourable – without a US company, recruitment will be a challenge.
• Raising a US Seed (or Series A, sometimes). At the later stages, VCs can deal with what Daniel refers to as the ‘friction’ of investing in a corporate structure with a non-US parent company. When it comes to investment at the very earliest stages, US VCs typically look to invest in US (specifically Delaware) companies – friction, in this context, describes obstacles raised by asking them to commit to corporate governance and legal processes they’re not optimised for, and means a UK or European founder will need to set up a US company to receive investment.

The solution in the first case above is a Delaware subsidiary of the UK company.  The solution in the second is a Delaware flip.

Over the years (many, many years) the state of Delaware has made itself particularly hospitable to business. Today, well over half of Fortune 500 companies are registered there. Amongst US VCs, there’s an expectation that UK or European start-ups seeking early funding will make a Delaware flip themselves, and insert a Delaware holding company into their structure, making the US holding their top company.

It sounds daunting but in practice, it’s straightforward – although it can be expensive. Daniel was at pains to caution that while a Delaware top company may be a necessary condition for investment by a US VC, it’s not a sufficient condition for investment. They have to love the company too, which means a great TAM, a great team and, ideally, traction in the country. For founders, there’s a straightforward way to navigate this. The best tactic is to approach US VCs with an open mind. If they take issue with your corporate structure, the best option is to build the flip obligation into the term sheet. These two transactions, the flip conversion and the financing, can be run in parallel. That way, the founder doesn’t assume the cost and hassle of the flip only to find funding isn’t forthcoming after all – and the VC only ever has to deal with a Delaware company, per their requirements.

What to remember

What we’ve seen here is only a snapshot of the topics covered on the morning, but we hope it offers some food for thought for founders considering their prospects in the US. The truth is – it’s not for everyone. Raising there is hard, but the rewards for businesses from this side of the Atlantic that can crack the country are outsize. Here are a few things for UK and European founders to bear in mind:

Presence, traction, previous success or industry-leading tech. Make sure your business has one (or more) of these before seeking out US funding.

The US is an ROI play. It’s expensive, yes. Salaries are higher and there’s far greater dependency on professional services, such as legal. But get it right and the upside is massive.

Decide what success looks like. There’s a difference between a start-up happily headquartered in the UK that wants to turn the US into one quality global revenue source among many, and a start-up that’s betting everything on the US market. If the latter is your path, you need to make sure your best people are there heading up your efforts.

Lawyers run America (and other cultural differences). Remember that old adage, ‘Divided by a common language,’ and ensure that any US-directed growth is underpinned by a healthy amount of diligence, and the recognition that things are done differently there.

One final, and key, thing to note is that for many founders, a move to the US doesn’t just involve themselves and the business. It’s also likely to be personally significant, impacting relationships with friends and relatives, partners and children.

Quite apart from the technical advice and business implications, over the course of the morning both Matt and Daniel spoke openly about the personal significance of the move for them. Before approaching US expansion, it’s essential to ensure it has buy-in from everyone it will affect, and that relationships aren’t overlooked. Moving to a new place is an extraordinary challenge. It can be an incredible journey – but everyone needs to be excited to be along for the ride.

Hopefully, this hasn’t raised more questions than it answers. If it has, it’s worth checking out this useful FAQ Daniel has put together on US expansion, fundraising and exit. You’ll see that Octopus Ventures’ own report, Question the Questions, is listed as the top resource (thanks, Daniel!). Equally, Matt and US Expansion Partners are helping more and more companies launch in the US, so if this is on your radar perhaps you should talk to them.

And you can always read more about what Octopus Ventures offers the world-changing businesses we back, from transatlantic expertise to an industry-leading team dedicated to supporting our portfolio companies through their talent needs, on our website