The Pros and Cons of International Funding
If you're desperate to raise growth capital and are striking out on U.S. shores, this wise advice may help you track down the money you need on foreign shores.
If you've read the business section of any large newspaper lately, you've probably noticed that the venture capital industry is back! Investments are at record highs and the money is, once again, gushing from the proverbial "money tree." The situation's not quite as good as it was at the end of the previous decade, but it's as good as it's been in a long time. That's good news if you're part of the 2% to 3% of companies that will actually benefit from this largesse. But if you're not, what will you do?
If you're still in the early stages of growth where you can control such expenses as salaries, rent and manufacturing costs (because you have no product to sell), you can just suck it up and do your best to keep making some progress until you find a relative or angel to pony up just enough to get you to the next milestone. But if you already have a committed burn, it's going to take a much bigger investment to prevent you from being forced to shut down your dream. So this is the time where desperate minds begin exploring every conceivable option for keeping their company afloat.
One option that intrigues more than a few entrepreneurs is the prospect of raising money outside the U.S. Some consider the concept "romantic" and others (those who've done their homework) realize that some countries are just crazy about U.S. entrepreneurship. For instance, in most European countries, there are virtually zero programs available for financing the early growth of companies until they're ready to go public. In other, less democratic countries, the government will dictate and control all aspects of how a company exists. Both systems have caused their more wealthy inhabitants to look closely--and jealously--at the seemingly endless success stories created under the U.S. system. Realizing these trends, an increasing number of entrepreneurs have looked for any way in which they could leverage this knowledge in their favor.
Here's the long and short of what they've found:
Raising money in a foreign country is expensive. The time it takes to conclude a deal isn't any shorter than it is in the U.S., and if you must stay there to nurture the process, it will cost you even more money than if you'd tried it at home.
Investors in foreign countries are highly suspicious of anyone coming to their country to raise money. Their natural inclination is to believe that you're only there because you couldn't raise any money in your own country (now, where would they get that idea?).
In many countries where you'd think the opportunity would be good (in Europe, for instance), entrepreneurs have found that the infrastructure wasn't as well developed and clear as it is in the U.S. For example, angel networks aren't as well organized or even that easy to find, and venture capital firms are almost nonexistent. So, unless you have a clear plan on where to go and who to see (preferably with some solid introductions in place), you're probably wasting your time. Sound familiar?
One option is to hire a specialist to help you raise the money you need from investors in one or more countries. These specialists will claim they have networks of investors who trust them to bring them quality investments. They will further claim that having locals who understand the language and cultural nuances representing you is the only way for a foreigner to be successful. Further, these specialists will require an up front retainer for their work coupled with a generous success fee for the money they raise. Sound familiar? (If you're willing to work with them--and pay their fees--you may find the money you need.)
Finally, if you're lucky enough to raise some money, you may experience one very unexpected negative outcome. Our own U.S. Homeland Security office, in an effort to enforce the Patriot Act, may delay or even prevent you from being able to get your money into this country. I currently have a client who's had a signed term sheet for $10 million for more than 9 months and hasn't been able to collect this investment. Why? Because Homeland Security has forced the investor to provide detailed information concerning where his $10 million came from, even to the point of asking the next two sources beyond the investor where they got their money. Obviously, Homeland Security is just trying to ensure that any money coming into this country is neither coming from terrorists nor being used for terrorist purposes. But how would you like having to document to a foreign government where every dime you made came from?
So there's the down side of raising money in foreign countries. Now, you may ask, is there an upside? That all depends on how you look at it. Basically, the best entity to interact with when raising money in a foreign country--are you ready for this?--is the government. Why? Because all they care about is improving the local economy, creating jobs and collecting taxes. If you can help them do that, they'll love you. As you can probably guess, however, the only way you can help them achieve their objective is to move all or part of your company into their country. If this isn't an option you're willing to explore, you can stop reading the rest of this article. If you'd at least like to know how it works, read on.
Here are the two ways I've found tend to work best. Because the international market is so much more complicated than the markets in the U.S., I don't, for a second, pretend that these are the only options available. I just know, from personal experience, that these options can work.
First, look for countries willing to subsidize foreign investments. Back in the 1980's, the government of Ireland went overboard trying to attract foreign investment in their country. Their goal was to diversify their economic base, create new jobs and change the country's international image. Companies locating all or a portion of their businesses in Ireland got government subsidies to build plants and hire workers. Taxes were either nonexistent or ridiculously low. Dozens of major companies from around the world jumped at the opportunity, and Ireland's economy has benefited tremendously. More recently, Scotland decided to do the same thing. The key is to open a dialogue with the proper government office and see if they would take an interest in your company.
An interesting alternative on the above idea is to find a large, corporate strategic partner (SP) that not only wants to do business with you but also wants to do business with one of the countries you've identified that are willing to subsidize foreign investments. Often, these nations will limit the amount of business a large company can do with their country unless they participate in their program of building a plant in their country. If your big SP doesn't want to build a plant in that country but instead presents you as an alternative, you both may get what you want.
The deal would be structured something like this: The SP agrees to make an investment in your business--to help you cover what the government subsidies don't--in exchange for getting the government to grant them the rights to conduct more business in their country. The upside for the SP is that their costs are substantially lower than what they would have spent to build their own subsidiary. Also, they don't have the local exposure, and their increased profits on the incremental business will quickly pay off their investment. The government gets a new business operating in their country, and you get to build your business with two new partners vitally interested in your success.
As you can see, finding money in foreign markets isn't necessarily as romantic as it might seem on the surface. However, if you're careful--and you don't mind the tradeoffs--it can be a viable way to achieve your goals.