Enterprise Ireland has teamed up with Daniel Glazer a partner at Wilson Sonsini Goodrich & Rosati, where Daniel leads the New York office’s technology transactions practice and also advises Irish and other European emerging technology companies on US expansion, fundraising and strategic partnership transactions. This series will offer perspectives on setting up a business in the US and considerations for Irish companies looking to raise VC investment from US investors
What US VCs Require to Invest in Irish Companies
We are frequently asked by Irish companies what they need to do to attract US venture capital (VC) investment. This article discusses the general requirements of US VCs considering early-stage investment (Superseed/Series A or Series B) in Irish startups.
Proximity matters – how near are you to the VC?
Venture capitalists – especially in Silicon Valley – place a high value on proximity to their early-stage investments. The reason for this is that VCs bring to the table not just capital, but also their experience, advice and networks.
Consequently, we find most US VCs are reluctant to make early-stage investments in Irish companies without a founder (or at least a strong decision-making team) in reasonable proximity to the VC’s location. We have seen exceptions where the VC was willing to invest in a company on the condition that it uses the funds to establish US operations. However, in our experience this is usually where the company already has contracts with, and revenues from, significant US customers and business partners so that its further US business potential is clear.
It may be possible for an Irish company to raise early-stage funding from a US VC without a significant US presence if the US VC teams with an Irish or another non-US VC. In this scenario, the non-US VC leads a Superseed/Series A round (with participation from the US VC) for a company located near to the non-US VC. The US VC is then in prime position to lead the next investment round when the company sets up in the US. While we believe this kind of cross-border teaming will increase, at present it’s not particularly common.
Thus, Irish companies seeking US investment may be faced with pressure to establish US operations earlier than they might otherwise prefer. This can be done cost-effectively, but it’s still expensive relative to the operating budget of a typical early-stage company. There also typically needs to be a founder willing to relocate to the US, and the company will need to work out an approach to cross-border management. For Irish companies, this poses particular challenges if the most likely potential VC investors are on the West Coast – that is eight time zones distant, with potential flight times of 11 hours or more.
To be clear, as we’ve discussed in a previous article, setting up in the US does not necessarily require an Irish company to “flip” to become a subsidiary of a Delaware-incorporated holding company, and there are good reasons to resist doing so. However, it is advisable to form a US subsidiary corporation (probably in Delaware) to do business in the state or states where you want to establish your operations.
Comfort with local laws and tax
While many US VCs are prepared to make early-stage investments in Irish and UK holding companies, you are likely to find lower levels of comfort with companies based in many other European jurisdictions. That is not because there is anything inherently wrong with those countries’ laws, but rather because it may be expensive for the early-stage VC to gain sufficient understanding of the relevant corporate and tax laws. As you would expect, this is less true of larger early-stage VCs, who are more likely to have made prior investments across a wider set of jurisdictions.
Relevance of sector, competition and expertise
US VCs are also likely to be more interested in Irish companies in some sectors than in others. Some of this has to do with the reputation that some countries and their start-ups have already developed as leading in certain sectors. For example, European and Israeli companies in fintech or cybersecurity businesses have attracted specific interest from US investors, particularly where the companies have notable US customers and business partners.
As we’ll discuss in more detail in a subsequent article, it is important for you to identify which VCs are most likely to be interested in, and knowledgeable about, your business. You should also consider whether they are already investing in companies that are competitive with, or complementary to, your company’s business. More generally, you need to have a deep understanding of your global competitors. US VCs are only likely to invest in Irish companies if they are seen as having a true competitive advantage over investment opportunities in the same sector within the United States.