Bridging the Expectation Gap: UK Startups & Silicon Valley Investors

If you missed our roundtable discussion on Thursday, March 18, here’s everything you need to know about some of the differences in expectations between UK startups and Silicon Valley investors. These insights were shared by Ben Narasin (Venture Partner, NEA), Jeremy King (CEO & Founder, Attest), Emily Lincoln-Gordon (GC & VP Operations, Attest) and our moderator and co-host Daniel Glazer (Partner, Wilson Sonsini).

Observations on first meetings with UK and US investors:

UK startups familiar with UK investors may see differences in US venture capital’s approach from the first meeting:

UK investors focussed on financial performance often, with less specialised context for the specific market (in this case SaaS)
US investors were found to have deeper specialisms, and had completed unexpected levels of analysis on the business before the first meeting. This allowed them to offer insights and ask targeted questions on the team and business results.

Key takeaway: In general, it seems like US investors do more analysis and intelligence gathering upfront.

Differences in risk tolerance: Playing for profitability (UK) vs. Playing to win (US)

The UK’s Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) are gifts to entrepreneurs starting a company, as they make it attractive to angels to invest.

However, Jeremy King observes this type of investor can come with the mindset “don’t die and maximize potential routes to achieve profitability”
In the US, early-stage capital can come from various sources where there’s “more of a value-driven mindset where risk is accepted and welcomed, in order to win an entire market”, explained King.
Key takeaway: UK investors tend to be focused on profitability from an early stage, while in the US, early-stage capital is more willing to risk although this comes with expectations of rapid growth.

Focus on short-term profitability vs. rapid scaling

“If you want to understand what US investors want, look at the US public market and what they want: it’s ridiculous growth and phenomenal margins”, says Ben Narasin.

Profitability is desirable, but the growth of market share and revenue is even more relevant. The Amazon story is a great example, early on Jeff Bezos was not interested in book market share, he was interested in the share of wallet.
The differences in expectations are such that Jeremy King shared they were advised to create two different models when running Attest Series A: (1) Route to profitability for European investors and (2) Maximum growth path for US investors. They only made one model because they believed in only one model: an EU company seeking to maximum growth, but this seems to be a rare combination.
Key Takeaway: “It’s important to understand that not all capital is looking for the same outcome”, summed up Daniel Glazer.

Frequency of US investment into UK Seed/A rounds

“A Wilson Sonsini and Beauhurst survey shows that U.S. venture capital funds with no UK or European operations rarely lead the Seed or Series A rounds of UK companies with no U.S. operations; such rounds comprise only 1.9% of all Seed and Series A rounds raised by UK companies.” Attest is among these few cases.

Emily Lincoln-Gordon shared why: “The company has a great story, great metrics, big name clients, and a unique CEO and Founder. Jeremy disarms any expectations [of a UK founder]. He makes an impact and, of course, the company performance backs it up with metrics.”
As a seed investor, Ben Narasin looked for 5 things: “people, people, people, a great idea, and a huge market that works”. The Founder, their impact and leadership, are even more important at Series A.
Don’t overestimate the power of storytelling as critical for fundraising… and for hiring.
Key takeaway: It takes a great story, a leader able to inspire others, and numbers that back it all up.

Handling a board with US and UK investors

It’s common to hear concerns from UK founders that U.S. investors are demanding as Board members. However, the panel felt that there are more myths about hybrid UK/US boards than actual challenges.

Emily Lincoln-Gordon shared examples of their U.S investors being highly proactive in offering benchmarking for US talent and helping with new hires, especially for the expanding US team. Emily sees the hybrid board as “a welcoming environment with lots of helpful insights and advice”
If you have chosen the right investors for your company, having them together on the board shouldn’t be an issue. “Figure out who the human beings are and who you trust, align views, do the due diligence”, said Ben Narasin.
Attest credits aligning key investor terms, irrespective of the stage of their investment, to creating universal interest and alignment across the board “despite very different backgrounds, horizons and return expectations, it is possible for everyone to want the same things”, shared King.
Key Takeaway: Do your due diligence and leverage your US investors’ domain expertise and networks.

Myth-busting: Are valuations higher in the US?

Historically, U.S. valuations are certainly higher, they are based on U.S. companies that have had big outcomes, and great successes fuelling further successes.
If you get a big valuation you will have to live up to it. You are not going to get a big valuation unless you can justify it, unless you have the opportunity that’s big enough.
“The only valuation that matters is the last one”.

Myth-busting: Does a UK company need a US parent company to raise from US investors?

“Total myth. It never even came up in our conversations with investors. At the simplest level, you just need to create a U.S. subsidiary, in order to receive revenue and employ people locally. Nothing else came up.”, shared Jeremy King.
For Ben Narasin, the answer would be based on the investor’s experience: “(1) If it’s a global firm, there’s no need to create a US top co. (2) If a firm hasn’t invested in the UK before, it might be a barrier that slows the process down. Be open to it”
Daniel Glazer commented that US investors leading the Seed rounds of UK companies typically require the company to “flip” (i.e., create a Delaware parent company), but at the Series B stage and beyond flips by UK companies are exceedingly rare. Even the percentage of flips required for Series A rounds has declined.
Key Takeaway: “Whether a flip is required as a condition of U.S.-led investment depends on the stage of the company and the experience of the investor” summed up Daniel Glazer.

Do I need to use a banker to raise funding in the US?

Whilst perhaps more common in the UK, generally speaking, at an early stage, bringing a bank advisor to a US VC is considered a negative signal.
US investors will either be finding you or want to get to know the founder well fast – without an intermediary.
US investors often want to move quickly in transactions and there is a perception that a banker might slow the process down.

Final thoughts

Jeremy King: “A lesson I learned when applying to a US business school can be equally applicable to fundraising in the US: …Remember you are up against Americans, and their submission essays will be full of the word ‘awesome’. Your British essays will likely be full of the word ‘quite’ and ‘hopefully’! You might want to dial it up. A lot. If only to match, not even to exceed. You have to get comfortable to make it at least equally awesome!”

Emily Lincoln-Gordon: “Avoid fear-based prejudices, be open-minded, and don’t listen to all the negative experiences other people have had. You might not experience them.”

Ben Narasin: “US venture capital was founded to fund phenomenal businesses, the 1% of the 1%. If you have that type of opportunity there’s no place better in the world than here to access capital, experience, and the network to help you hyper-grow the business. But be realistic with yourself: do you have that phenomenal business? Or do you have a great business that can grow and be bought for a couple hundred million dollars? Find a partner that matches your needs and your reality. Narasin’s Rule: If 20% of your perceived ultimate outcome does not match 1 half of the fund you are pitching, you should not be pitching that fund.”

Daniel Glazer: “Generally speaking, there’s no easy way through this. If you want to raise from top tier investors, you need to create a fantastic business. You need to understand who invests in what and why, and what do you want out of your investors. How big is your business going to be and how do you find the right fuel for that growth? Different investors provide different fuel. You need to do your due diligence and determine the right fuel for your business.”