June 24, 2021

Tips on How to Successfully Fundraise in the U.S.

Written by Yuki-Katharina Olbrich

For many startups, the U.S. is the place for the big money. The majority of the largest venture capital firms are indeed based in the U.S., and funding rounds tend to be bigger. But U.S. dollars don’t grow on trees and accessing this money isn’t easy. Especially for a foreign startup, it can be quite challenging to raise money in the world’s largest market. There are some key differences between fundraising in the U.S. and Germany that are good to know before you start the process. It requires a lot of research, preparation, and a solid network. We’ve put together an overview of the most important steps on how to successfully fundraise in the U.S.

How Are American Investors Different From German Investors?

First, let’s take a look at some of the distinctions between German and U.S. investors. As a German founder coming to the U.S., there are certain things you should keep in mind. One major difference is the way Americans communicate and express their opinions. In Germany, the communication style is quite direct, and you quickly know where you stand. In the U.S., this isn’t always the case. A valuable piece of advice from Christian Busch, Managing Partner at German Accelerator in the U.S., is to not confuse accessibility with interest. “U.S. venture capitalists may seem very accessible – you can often find and contact them on LinkedIn or Twitter – but that doesn’t necessarily mean that they are interested in your company or that there is a shortcut you can take,” he says. “You will still have to go through the whole process, which starts with trying to get the investor to look at your pitch deck in the first place.” In general, you will find that in the U.S., the bar to receive funding is higher. The market is much noisier, and venture capitalists have better pattern recognition. They have seen numerous big deals and have a good understanding of what works and what doesn’t. Don’t expect them to say that directly to your face, though. You will rarely hear a clear no from U.S. venture capitalists. If they say something along the lines of “interesting, maybe later, let us know how you are progressing,” you know that you need to keep looking. Christian says, “when you get rejected, and you will, it’s important to stay focused: Don’t take it personally and move on.”

Quote from the text what is important in case of rejection by Christian Busch.

Another crucial aspect Christian points out is that already early on, U.S. investors have a strong focus on metrics. In his experience, German pitches tend to be too “fluffy,” talking slide after slide about product features but not presenting enough numbers behind them. Going hand in hand with the metrics, you will need traction in the U.S. to raise a round with U.S. investors unless you are a successful serial entrepreneur already. A simple definition of traction by AngelList co-founder Naval Ravikant is “quantitative evidence of market demand.” The more U.S. traction you have, the easier it will get for you to fundraise.

This leads us to the next question: At which stage should startups look for U.S. investors? Most German startups start their business in their home market and then think about expanding to other areas in the world. Given the general necessity to have a good record of U.S. traction if you want to raise money in the U.S., it is common for German startups to begin approaching U.S. investors at a later stage of their business, namely, stage B and after. This doesn’t have to be true for every startup, though. Suppose that your product is specifically aimed at the U.S. market. In that case, your first customers might be in the U.S., and you might therefore have solid U.S. traction earlier on.

Get the Basics Right

As with everything, there are exceptions to the rule. But in general, you need to be legally based in the U.S. to do business there, which means that you need to set up a business entity. The most common entity foreign companies choose is a C corporation. While forming an LLC (limited liability company) is also an option and has its benefits – e.g., flexibility in management structure and pass-through taxation – the most significant advantage of a C corporation is that investors prefer investing in them. Most of our German Accelerator portfolio companies create a U.S. subsidiary. However, some decide to have the U.S. Inc. be the parent, especially those who know they would like a U.S. investor.

What Do Investors Look For When They Look at Startups?

Regardless of which sector the startup is in, the most crucial metrics are the total addressable market and the product-market fit. Or to phrase it differently: What benefits does the product give to its users, and are there enough people who need those benefits? Investors want to see that there is a market for your product in the U.S., and the best way to show that, again, is U.S. traction. Without any U.S. revenue, the chances of getting U.S. investors are meager. Once you have secured some revenue, the next important factors are growth and retention rate. Investors need to see that your product is scalable, that you’ve achieved some growth in the U.S. market, and that you can keep existing customers.

German Accelerator alumnus Frank Wolf, co-founder and CMO of Staffbase, knows the challenges of fundraising in the U.S. and the importance of U.S. traction. They started their U.S. expansion very early on, and once they saw that there was product-market fit, good growth, and some early traction in the U.S., they made the step to approach U.S. investors. They received their first pure U.S. investment a year later when they “were big enough and had enough traction in the U.S.” From Frank’s experience, “enough traction is at least one million dollars of pure U.S. business and showing strong U.S. growth. Investors are looking a lot at the product’s success. Of course, they want to see new business, but they mainly want to see if we have a high retention rate.”

Quote from the text what investors want to see by Frank Wolf.

Samer Hamadeh, founder & CEO of Zeel and German Accelerator mentor, has helped dozen-plus companies raise over $200M – from pre-seed to Series C. The serial entrepreneur and investor cites readiness as one of the key success factors in raising money: “No one is really ready to fundraise; building the model and the pitch deck takes a solid three months.” One of his general fundraising tips is to have a robust financial model and understand the cash burn and unit economics. He also adds not to claim the company to be more mature than it is.

Quote from the text about Fundraise by Samer Hamadeh.

Frank emphasizes that when a startup fundraises in the U.S., they need to know their numbers. By the time you are ready to fundraise in the U.S., you will likely talk to later-stage investors. Frank says, “at that point, you will have numbers-driven people. For us, the biggest thing was, they were asking us questions that we’ve never heard before. Not just, what’s your ARR or your customer acquisition cost? But questions about our sales quota, how many account executives we have, our quota coverage going forward, and how the quota attainment is.” His tip is to get your numbers together on a very detailed level and ideally have one dedicated person to help with investor relations.

Numbers are without a doubt a key indicator of your success, and the later your company stage, the more important they are. But especially if your numbers aren’t that strong yet, the founding team moves more into the focus. Investors want to see what background you have, how you tackle problems, and how you approach your go-to-market strategy. If the founding team has a strong track record and the investors feel that you can do it, it’s more likely that they will invest in your company.

How to Find The Right Investors?

When it comes to fundraising, the first thing every startup should do is to build its investor pipeline. It is essential to pitch to the right investors, so having a good overview of the investors that fit your company stage and industry is a huge help. Gathering all the necessary information requires a lot of research. According to Christian Busch, “the biggest mistake you can make in fundraising is not doing research and speaking to the wrong investors,” so make sure to take your time and do the preparation right.

Quote from the text about the biggest mistake in fundraising by Christian Busch.

The internet is full of resources and lists to make your research easier. Every investor or firm states on their website which company stage they invest in. Some are only interested in Seed or Series-A, and others invest across stages. An important aspect to include in your research here is the fund size. This will help you estimate how much money they can actually invest and evaluate what impact the investment in your company has on them. If the fund is small and they make a medium investment, their commitment is likely very high, whereas if a large fund makes a relatively small investment, it is a sign that the investors may not be fully committed to you. You want investors who have your back, who you can rely on, and who are willing to share their time and expertise with you.

Speaking of expertise, you should target investors who focus on your startup’s area, e.g., sustainability, digital health, fintech, etc. An important note to startups with a hardware product is that 90% of VCs don’t invest in hardware, so you need to make sure to pick those that do; otherwise, you will be wasting your time. As mentioned, there are many resources out there that you can check to find investors and their fund sizes, focus industries, etc. Try Dealroom, PitchBook, Foundersuite, Crunchbase, etc., to get started. If you need help building your investor pipeline, we recommend the presentation on how to build an investor pipeline by Jenny Fielding, Managing Director at Techstars NYC. Another great source of information is startups in your space that are further down the path than you. Reach out to them, find out who invested in them – maybe they can point you in the right direction or even make an intro for you.

Samer Hamadeh advises entrepreneurs to be ready to talk to over 100 investors and prepare sufficiently for each one. He continues: “Often companies are not successful because they are ill-prepared or don’t understand the time required.” Christian confirms Samer’s recommendation and adds that a 2-5% conversion rate is good in investor outreach, so if you need to get five investors on board, you need to contact at least 100.

Quote from the text why some companies are not successful by Samer Hamadeh.

Probably the most crucial question in fundraising is: Who can make the intro? You have done all the necessary research and have a list of investors you want to pitch to. Now you have to find out what connections you need to get to them. Although a warm introduction will always be more successful, you are unlikely to get one for each of the 100+ investors, so you will have to work with a mix of warm and cold intros. Some VCs are open to cold introductions, but it has to be convincing. Christian Busch says, “the biggest benefit of a warm intro is that someone will at least look at your deck. To achieve that with a cold intro, you need to hustle.”