11. April 2018

Dear Foreign Founder, Don’t Come to Silicon Valley to Fundraise

"Every day a dozen sparkly-eyed startup founders come to Silicon Valley with the hope to meet VCs who will fund their companies - My advice... get ready to be disappointed!"

RECENTLY I'VE FOUND MYSELF GIVING THE SAME bit of non-obvious advice to a dozen foreign startup founders. On an average day, over 100 international flights land at SFO. It’s a good bet that each one brings a dozen sparkly-eyed startup founders from far away lands. All filed with hope (and hype) to meet venture capitalists who will fund their companies (at Silicon Valley valuations) and make their dreams (and growth projections) come true. My advice… get ready to be disappointed.

Silicon Valley is the Olympics of startups. Over $84B was invested by US VCs in 2017 with ~40% of that in SF Bay Area (San Francisco + Silicon Valley). Yet the number of first rounds has been consistently dropping since 2015 and the average round size climbing, as VCs increasingly double and triple down on their winners. As high as the bar has always been with each subsequent round raised; it is getting increasingly more out of reach.

Lets unpack this a bit. Startups in Silicon Valley get the highest valuation in the world (I’ll leave China’s startup scene for a different discussion) not because the investors here are dumb whales who like to overpay but because the companies are worth more. Tech talent is hard to come by (aka expensive) and if you’ve managed to put together a great team, it is worth its weight in bitgold. It helps that just about all of the biggest tech companies have either HQ or outpost offices here.

Not enough engineers and a housing shortage = fierce competition = higher salaries and inflated housing costs = need to raise more money to have the same runway (time to get to the next milestone and be able to raise the next round.) Honestly, it is a pain in the ass with little relief in sight but when the goal is selling for zillions or taking the company public, many brave (or foolish) founders are willing to play the game. How this affects the normals in all of the other industries is a separate and very long debate.

Enter hopeful foreign founder who’s gone through an accelerator or five, maybe raised some local angel money and has found a major gap in “real money” locally. So now she is shooting to come to San Francisco to raise a Series A. She’s put together a deck with the minimum amount of money the company needs to feed a conservative, pragmatic approach.

European founders, in particular, are taking cues from traditional business where extreme attention to detail and a slow, steady conservative growth approach is the culture. This bottoms-up method leads to developing something that more often resembles a feature instead of a product, let alone something that can become a fast-growing platform business that will eat a new category.

Mistake #1

Thinking too small. Startups are a binary business. A technology breakthrough gives you a short window of opportunity to disrupt a large existing market or build one (quickly) where one didn’t exist before. This means 10X cost, speed, or convenience advantage over the “old way” of doing something and a product that sells itself. If you’ve stumbled on this opportunity, rest assured you are not the only one working on bringing this technology to market. From that point it is an all out sprint and land grab.

So while you are thinking: “what is the minimum amount of money I can raise and how can I over-engineer every percentage point of equity in my company?” the smart founders are playing a winner-takes-most mentality: “if money was no object, how fast can I grow and eat this market?” Surely, the later usually win and build companies the rest envy.

Mistake #2

Thinking you’ll get funded as a tourist. The best and brightest move their companies to Silicon Valley for a reason. That is; when they are looking to build the best technology company in something universal (vs. a regional ecommerce business for example.) Silicon Valley investors have the pick of the litter and in a given year, seed 2,500–3,500 startups here. So with that in mind, why would they risk investing in a far-away company with a team they don’t know where they can provide little value besides writing a check and the results are likely to be mediocre, at best? Most simply wouldn’t.

There is a small but growing minority of Silicon Valley VCs (myself included) who have recognized the technological strengths of various regions around the world in Canada, Israel, Europe, and Southeast Asia. We get on a plane, build networks in those regions and look for the best companies with universal technology to invest in… at local valuations (which can be 5–10X cheaper than Silicon Valley.) Then we help these companies open offices in San Francisco, fill up their management teams with experienced, inner-circle operators while keeping the engineering back home where it is far more affordable and–a little while later–raise their next round as a newly-transformed Silicon Valley hero.

So realize the rules of the game you are choosing to play. Come to Silicon Valley, absorb how it’s supposed to work, make connections and continue to work with your head down back home. Then–when you have product market fit and feel like you are truly one of the best globally in your category–save up a year’s worth of expenses to setup an office here and transform into a Silicon Valley company. Alternatively, make an effort to meet and impress the investors who are hunting on your turf and can help you make the transition.

In either case, I wish you success and hope to see you in San Francisco and/or your hometown.


Originally posted in Medium on March 22nd. Header Pic © spiritofamerica via Fotolia