European startups: Here’s how to (not) raise capital in the US

Editor’s note: This is a guest post by Stefano Bernardi, who is on the founding team of Betable, where he heads Customer Development. Previously, he worked in venture capital in Europe. He is a part-time hacker, angel investor, and product advisor, and was selected from more than 300 people to “shadow” Dave McClure at 500 Startups. You can check out his blog and follow him on Twitter.

If you’re a European and work in tech in San Francisco, every summer you’ll be inundated with dozens of emails from friends, contacts and unknown European entrepreneurs who will ask you for advice and introductions to US investors for their classic VC fundraising trip.

I’ve been in San Francisco less than two years, but I’ve met with countless entrepreneurs during their fundraising trips and I believe I now have a statistically significant pool of data and experiences to analyze, in order to save time and money to the ones who’ll follow.

Here’s the hard cold truth: Your chances of raising money from US investors are extremely low. It’s almost impossible.

But it’s not all doomed. There is a lot of money in Europe, and if you’re willing to learn from your US trip, it might actually be easier to raise money back home than in the almighty Valley. One of the last entrepreneurs I met on a funding trip, ended up raising a $6M round in Italy.

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Coming to San Francisco to network, meet interesting people, get advice on your company is a great learning opportunity and the cost is well worth it. But don’t expect to go back with a check.

Put yourself in the shoes of a US investor

Investors work in pattern recognition mode, and as a European entrepreneur in the valley, the pattern doesn’t look too good.

• You probably haven’t gone to Stanford and MIT.
• You probably didn’t work in a major successful US startup.
• You probably don’t have many mutual connections with the investor.
• You probably have visa problems.

Investors worry about these things. As much as you think you can be the exception because your idea is revolutionary, investors have no way of knowing you, in fact, might be, and will turn you down consistently. It really helps to understand the reasons.

It’s all about the network

As with every other thing here in SF, it’s all about the network. Network comes into play in every aspect of the fundraising process but also, most importantly, in the process of running and growing a company.

Reference Checks

On top of deciding if the market is big enough, most investors only do one type of due diligence for seed deals: reference check the founders. If you have no mutual connections with the investors and thus no credible references, well.. it’s hard to check them. Investors don’t know who you are and have no way to figure out if you’re really as good as you say.

Hiring

This applies mostly to EU founders who want to move permanently to the US. If you have no network, you will not be able to hire the best people in San Francisco. Startups are made by people, and hiring a killer team is the only way to succeed. If an investor thinks you can’t hire, you’ll not get funded.

Fundraising

Raising a seed round is one thing, but without a network, will you be able to effectively raise all the money your startup will need to grow? Again, if an investor doesn’t think you can, you’re done.

So, then what?

If raising money in the US is so hard, what should a European startup do?

In my opinion, the best strategy is to raise your seed round in your home country and prepare the ground for a future, larger A-round in the Bay. That’s what most startups who come here will have to do anyways, you might as well prepare and execute.

Practice your pitch

Meet investors and angels, and practice your pitch. They will poke holes all over it and you should be glad, as you’ll go back to Europe with a much stronger pitch and deck.

Build Relationships

Meet investors. Tell them who you are and what your company does. Let them understand at what stage you are and ask them when you should come back to them. Usually this will be for a small Series-A. Building a relationship prior to raising money is crucial and Mark Suster’s article on investing in lines vs. dots explains why perfectly.

Network

Talk to competitors, executives, engineers, recruiters. Find people that did it before and seek their advice and connections, you’ll need them for your next round.

Join an accelerator

Your best bet as a European founder is to join an accelerator. This will help you develop your network and get the legitimacy you need to show bigger investors.

Some accelerators are more keen to letting European startups in than others, but most of them will not discriminate as much as institutional investors. Your best bets are Europe-focused accelerators like Mind The Bridge (disclosure: I am a board member) and international-friendly ones like 500 Startups (disclosure: I shadowed Dave McClure at 500 Startups). A small number of EU companies have also made it through Y-Combinator.

But as always, the final tip of advice is: don’t let this post discourage you. Do what you feel is best for your company and shareholders. If you think you can raise money in the USA, by all means try it. A handful of entrepreneurs made it, and I was happy to be a backer. And who knows, maybe you’ll be the next Stripe.

Image credit: Adam Gault / Thinkstock