International investors present a big opportunity for startups in need of capital. Here's how to navigate the world of international funding.
For many businesses, access to working capital remains one of the biggest barriers to growth, especially for new ventures that are trying to compete in a crowded business ecosystem. It also ranks highly as one of the reasons why new businesses fail. One study by CB Insights, for instance, found that about 29 percent of startups failed after running out of cash, which shows just how critical the money issue is for small and medium businesses (SMBs).
While many factors contribute to a business’ inability to access funds, none ranks higher than the stringent lending and investment requirements placed by most financial institutions. This, coupled with the increasing number of startups and SMBs coming up every other day, makes it extremely difficult for business to get investment from regular sources. Therefore, for businesses that still want to grow despite the challenges, casting a wider net into the global arena often offers a better chance at success than staying local.
There are always venture capitalists, private equity firms, and other investors that are willing to put their money on businesses located outside their countries of domicile. In Finland, for instance, startups attracted about $241 million from foreign investors last year, showing just how thirsty foreign investors can be for businesses that are interested.
So, if you choose to go global in the way of funding, here are a few things to keep in mind.
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Prioritize Documentation and Compliance
Regulations and compliance issues vary from region to region. Foreign investors always want to make sure your business complies with regulations in your region so their investment doesn’t go to naught when you’re nabbed for breaking the rules. To that end, ensure your business complies with the relevant employment and benefits regulations, FDI and banking regulations, and that your organizational structure complies with set rules and regulations within your region.
Proper documentation also helps your business stay deal-ready. A detailed description of the competition, pricing and financial model, organizational structure, company leadership, product description, and related documentation will ensure your business is ready to roll as soon as you’ve made your pitch.
Beware of Fees and Charges
One popular option for businesses looking for overseas funding is to use a finder, a company or individual who usually helps businesses locate potential partners or investors. And while these often make it easier to secure funding, they can impose exorbitant rates as “finder’s fees.” In the U.S., for instance, it is common for finders to use the Lehman Formula to calculate how much you should pay a finder once funding is secured. Accordingly, paying anything above 10 percent for any amount of funding would be considered exorbitant, so it always pays to be vigilant.
Because you’ll be dealing with multiple currencies from potential foreign investors, it’s also important to ensure you know your way around the forex market. Banks and many other financial institutions often add as much as 3 percent as markup above the market rate for most currency pairs, costs that may eventually see your business get less in the way of funding.
You should also keep note of recurrent charges such as taxes and annual fees that your investors will have to pay before and after getting into an investment agreement with your company.
Don’t Shy Away from Emerging Opportunities
Technology is also changing the way investors interact with potential businesses. Initial Coin Offerings (ICOs), for instance, have helped startups raise billions of dollars in funding in recent years, even surpassing investment totals from traditional investment vehicles like VCs and private equity funds.
New investment vehicles like ICOs allow investors to put their money on businesses outside their home countries, sometimes without intermediaries that often make it more expensive to invest. They also allow businesses to interact with potential investors who reside outside traditional banking systems. According to data published by Paydayr, for instance, about 13 million Americans have limited to no access to elements of the traditional banking system. This, however, doesn’t mean the same people wouldn’t be interested in an investment opportunity, provided it’s the right platform.
So, do your homework on every opportunity that presents itself as a result of emerging technologies. Check out blockchain-powered peer-to-peer lending platforms, AI-powered investment vehicles, and related opportunities to ensure your business doesn’t miss out on any opportunities of going global.
Explore Networking Opportunities
Foreign investors have to contend with unfamiliar tax regimes, legislation, and markets that make global investments a risky venture. Consequently, it always helps to have an intermediary or common platform that both your business and potential foreign investors will share to help mitigate some of these risks. International communities and events offer the perfect platform for risk mitigation and building trust.
Be on the lookout for local events such as Startup Grind and TNW Conferences that connect global investors to local SMBs and startups. Check out international accelerators like 500 Startups and make an effort to join international trade associations across continents.