Road Map to Europe - Executing Venture Capital Deals Easily in a Complicated Landscape

04.14.15

The number of European startups in search of funding and full of ambition to compete on the global stage has never been greater.  U.S.-based venture capital funds are in prime position to take advantage of the opportunity of investing in a dynamic market which is less competitive and has lower valuations than the U.S. The key to successful venture capital investing in Europe is to understand the differences in this landscape and identify ways to turn these untapped ventures into opportunities.

What are the key factors you need to consider before hopping across the pond in search of the next Soundcloud, Shazam or Criteo? Here are the top tips that every U.S. VC needs to know about executing venture capital deals in Europe:

  1. Leverage U.S. Experience And Perspective – Why are U.S. VCs considered attractive investors by European start-ups and technology companies? We all know the old adage that "Silicon Valley doesn't have a monopoly on innovation", so why would a European company seek an investor on the other side of the world? Access to the largest technology and public markets are important, but is that it? Savvy European companies see the depth of experience of a major U.S. VC as a game changer.  They are seeking a collaborative, team-like partnership, as well as access to state-side connections and other synergistic opportunities U.S. VCs are able to offer. Stress the specifics of what an investment by a U.S. VC can do for a European company early on in the discussions, noting that it is both the U.S. Plus your specific fund connections which will differentiate a U.S. VC term sheet from that of a local VC.
     
  2. Cultural Differences Matter – Much is said about the difference in market terms and approach between the East Coast and West Coast in the U.S., but what about the difference between the U.S. and Europe? While much can be said about every company or founder being different, a lot can be said regarding the sector or industry differences between Europe and the U.S.. It is important to recognize that the same terms and approach may not work in every situation – and it is critical to be sensitive to those cultural differences.​​

  3. Know Your (Local) Competition – U.S. VCs need to anticipate what the local competition is saying. If there is a local VC competing to fund the company, are they down-playing the ability of a U.S. VC to make an impact remotely? Are they suggesting that European VCs will assist the company now and help get better terms for the company in the future?  It's helpful to stress the ability of a U.S. VC to fund the company throughout its lifecycle – as most U.S. VCs have significantly deeper pockets than their European counterparts.

  4. Price Isn't All That Matters – One of the key differentiators between Europe and the U.S. is that European ent​repreneurs place a large emphasis on   deal terms and direction, in addition to  post money valuation. Listen to the feedback provided on deal related terms from the initial draft of the term sheet, and be ready to change those terms more often than the price per share.

  5. Approach To Execution – Due diligence investigations matter in European investments by U.S. VCs – not being present in Europe means that many U.S. VCs may not be aware of material red flags as they relate to diligence. Something that is an issue in the U.S. may not be so in Europe, and vice versa. For example, employment and pensions liabilities can be far more material in Europe than in the U.S. Further, regulatory concerns and thresholds are different in Europe than in the U.S. Be mindful of these potential issues – ignoring these at the term sheet stage, or taking a more U.S. approach in a European environment, can impact the investment process (and exit valuations) dramatically.

  6. Deal Structures – While it may make sense to flip the legal holding structure of a business to a jurisdiction that is trusted and stable from one that is not, blindly putting a Delaware holding company on every European business could be counterproductive and even detrimental to medium and long term valuations and exit opportunities. The impact of currency fluctuations or taxation on the investment is as important a consideration as the exit strategy. Will an exit be subject to withholding tax? Will an option plan work or be valued by the business' employees? These are key considerations that will impact the exit multiple and should be at the forefront of the investment decision.

  7. Beware Of Wrong Advisors – U.S. VCs should ensure that their team includes advisors who are as transatlantic as they aspire to be. A trusted advisor of a U.S. VC in Silicon Valley may not necessarily be the right advisor to execute a deal for you in Europe. Find an advisor who has a solid understanding of U.S. VCs as well as how Europe operates – it will be advantageous in guiding smooth execution of the transaction and ensuring there is no disconnect between investor and advisor.

Noting the above will be invaluable to the deal execution process in Europe – and the ability of a U.S. VC to execute quickly and seamlessly will be seen as a positive by the European entrepreneurial community.

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