Some Practical Advice on How to Raise Fund from Foreign VC

10 min read

Hi, I am Jonathan Hayashi. After graduating from University of Rochester with double degrees in Optical Engineering and Financial Economics, I worked in one of the top 3 investment banks in Japan, SMBC Nikko. Later on, I joined one of the largest VC firms in Japan, SBI, and took charge of growth stage investments in Blockchain, Fintech, and AI Sector. I joined Cornerstone Ventures in 2020.

Target audience of this article:

• Founders as well as employees who are interested in raising fund from VC in foreign countries for their startup companies
• Local financial advisors and local early stage investors who want to help their clients or portfolio companies to raise fund from foreign VC

Purpose of this article:

• As I have executed a significant amount of investments in oversea startups, I would like to share some practical advice to startups on how to make the process more efficient.
• I also have experience making investments without physically meeting the founders or visiting the startups’ offices. If you are raising funds under the current COVID-19 situation, (or even after the situation is settled,) I hope you can get some hints on how to execute this process from my own experience.

First question to ask yourself: Should you raise from foreign VCs?

• As you can imagine, compared to raising from a local VC, there are some drawbacks in raising funds from foreign VCs. I’ll just list a few of them:
  • The speed and quality of communication before/during/after the investment might be frustrating.
  • The network and resource that the foreign VC can provide might not be very relevant.
  • The capital cost as well as the time cost to deal with due diligence and closing might be high.
• However, foreign VCs can for sure offer some unique values:
  • They might have invested and supported other companies who operate a similar business as yours, but in a different market. Some CVCs’ (corporate venture capital) parent companies might run a similar business themselves.
    • Thus, they can share with you what problems you might face, how to solve them, and how to expand your business, etc.They might be located in a more mature capital market, so they can invest with larger ticket size.
  • They can help you break into their market, which would be an oversea market for your business.
• Lastly, even if you think you need to raise from foreign VC, you should consult with your attorney or legal team on whether there is any regulation in your country that is related to foreign capital.

If you are sure about raising from foreign VC, you should perfect your pitch

• To raise from foreign VC, you need to be able to 
  • Pitch within a one-hour video call, including Q&A
  • Present firmly and clearly in English 
• To achieve so, I recommend you to
  • Keep your deck shorter than 15 pages of slides.
    • But you can include some more slides in Appendix for Q&A 
  • Finish your pitch in less than 40 minutes. Leave time for Q&A.
    • Practice, practice, practice.
  • Prepare your response to any possible questions, and try to keep your answer short.
  • Make sure you explain
    • What problem you are trying to solve?
      • Do conduct research on whether the problem exists in other countries too. If not, make sure you explain why the problem exists in your country
    • What are the incumbent solutions, who provides them, and what is your solution?
      • Some incumbent players might be large and well-known in your country, but not so much in others. A one-sentence explanation of them would be great. 
      • You may use an analogy to let the foreign VC know what you do. Eg. “Lazada in SEA is as to PChome in Taiwan” or “It’s Uber for XXX sector.”
    • How big is the market?
      • Both the current market and the potential market in the future.
    • How is your traction? 
      • Analyze and explain the characteristics of your clients/users. They might be very different from those in other countries.
    • What is your revenue model and go-to-market strategy?
      • Different countries/markets have different characteristics, and by the time you pitch to foreign VC, you should already figure out and be able to explain what revenue model and strategy will work the best in your market.
    • What is the forecast of your business?

Once your deck is ready, you can approach them by … :

• Asking your existing shareholders or connections for referral
  • Preferably, a prestigious local VC / incubator / accelerator / angel investor
  • Your entrepreneur friends who have raised from foreign VC would be a great start too
  • Of course, financial advisors can make the introduction, but they won’t do it for free.
• Attending events 
  • My advice would be: attend the sector-specified events and the small investor-matching events. It would be more effective than attending large generic events, if your goal is purely getting connected to foreign VC
• Reaching out to government and embassy
  • Sometimes they facilitate business matching or simply make introductions via emails. Yet, they are not incentivized to be proactive, so you should be.
• Utilizing social media, like LinkedIn
  • Don’t send long boring messages. At this point, you do not need to have the VC fully understand your business. You just need them to be interested.
    • Short bullet points of some highlights of your company would be great
      • Ex. MoM growth, number of clients/users, prestigious partners/investors … etc.

After first pitch call, if the foreign VC is interested and starts to set up follow-up calls:

• Make sure you are on the same page regarding the fund-raising timeline
  • Ask the foreign VC regarding their process of decision making
  • Establish a reasonable and mutually agreed timeline of
    • When to kick off DD (due diligence)
    • When to complete DD
    • When to hold the Investment Committee (or any other decision making process)
    • When to sign a term sheet
    • When to close the deal
  • There are cultural differences between countries on how to communicate and get things done. Therefore, do not assume the common practice in your country can be applied to the foreign VC. 
• Make sure your data room is tidy.
  • Use data rooms like Intralinks, Dropbox, Carta, Box, Google Drive, and Microsoft OneDrive, instead of file transfer services like Docsend, WeTransfer or Transfernow.
  • Either save your files in an order that matches the foreign VC’s DD list, or provide a separate guideline on where to find each file requested by the foreign VC’s DD list
• Share the following items early on, maybe during DD, would be helpful
  • Materials that explain the corporate governance structure, basics of corporate law, regulation on foreign capital, etc. of your country.
  • Your company’s MoA (Memorandum of association. Might also be called AoA, Constitution, etc. in different countries) 
  • Investment related agreements (ex. SSA, SHA) of last round, if it is fine with your existing shareholder.
    • Sample agreements would be great too.
    • The idea is not to check the actual term, but just to check the major differences in investment agreements between your country and the foreign VC’s country.
• Maybe slightly adjust your daily schedule matching your foreign VC’s time zone

During closing

• Schedule management becomes even more crucial than during the DD process
  • Ex. When to circulate the first draft of agreements; When to provide the first review; When to set up a call to go through the comments and changes; When to sign; When to initiate wire transfer, etc.
• There are some additional steps that local VC can skip, while foreign VC might need to complete
  • Set up SPV (Special Purpose Vehicle) or other entities, due to regulatory reasons
  • “Local check” for the legal documents
    • This means hiring a local law firm to review the legal documents. Usually this is required when the original legal documents have to be written in a local language that is not English.
  • Application for tax exemption or regulation exemption
  • Preparation for foreign currency conversion

Conclusion:

• If there is only one takeaway for you from this article, I hope it could be this one:
  • The communication would be frustrating, the culture and common practice would be different, and there would be additional steps that might need to be completed. Thus, make sure both you and the foreign VC are working within a reasonable and mutually agreed timeline.
• As described throughout this article, raising from foreign VC will be more time consuming than raising from local investors. I would suggest kicking off the due diligence process with at least 6 months of runway. 
• If you are interested in Taiwan Market, Cornerstone Ventures will be happy to be connected.
• My colleague Samuel has written several articles regarding Taiwan market. If you are interested, give them a read!

The Future Is Unwritten.