Why US Angel Investors Don’t Typically Invest in International Startups

angel investor tax credits QSBS

The topic of international angel investing seems to come up more often these days. Both India and China are on fire with startup investing opportunities.

This is a great sign; talent is increasingly global and I’m positive many of the biggest outlier investments will increasingly be found abroad. It’s also a great sign more cultures are embracing cultures of entrepreneurship to help solve problems. No American founder will solve healthcare or fintech problems unique to say, the Arab world. That will take local founders.

For many international founders it seems like a no-brainer to start reaching out on Linkedin to profiles of US angel investors. I receive 4-5 a week myself. Unfortunately most US angel investors are likely to ignore you. Here’s why.

Taxes: QSBS

First it’s important to know that investors in the United States are incentivized to invest in qualified private companies from a tax standpoint. If an investor invests in qualifying private company and holds that stock for five years, if that company then generates capital gains, investors don’t pay tax on the first $10 million, or 10 times the basis of the initial investment, whichever is greater. This is not the case if the investment is into a foreign company.

Bottom line, this is one of the most advantageous tax incentives available so investors understandably want their investments to qualify.

Governance Concerns

Next, there is considerably more risk when investing in a foreign entity. Foreign governments don’t typically protect investors in the same way they do in the USA. In the event of a legal dispute, foreign court systems represent a lot of risk. Governance is also a question.

Lack Of Exit Opportunities

Historically the best liquidity events (exits) for investors are via US IPOs. While other countries do have stock exchanges, there has not been the same potential massive returns outside the US. Likewise M&A activity has traditionally been much more aggressive in the US vs. elsewhere. Traditionally your highest likelihood for a seeing a liquidity event is by simply investing in a US company.

Pattern Matching

While perceptions are certainly changing, the fact is that US investors have tended to be biased in thinking the best founder and startup talent resides here in the USA. Many investors have scars from off-shore development projects gone wrong, worry about fully remote teams and want to invest in people that speak fluent english and remind them of themselves. Major international successes like Spotify (Daniel Elk), Flipkart, Byte Dance, Alibaba, Careem and many others are changing perceptions of the ideal team and founder, but angels tend still tend to pattern match to their biases.

All that said, there is still hope.

How International Startups Can Find Angel Investors

Despite the cards being stacked against international founders seeking US angel investors, there is hope! On AngelList in particular, I increasingly see international deals. Here’s what works:

Dual Entity Structure: I know less about this myself but it seems that Y Combinator has promoted the idea of a dual entity structure (one US entity, one foreign) for many of its companies. In this scenario, investors can still get QSBS tax treatment and benefit from US laws and governance standards.

Accelerator Social Proof: As accelerators have proliferated competition has increased, causing incubators and accelerators to look further afield. US accelerators are increasingly open to foreign applications. Being accepted to a program like TechStars or Y Combinator immediately gives foreign companies a stamp of approval. This “social proof”  is often enough to attract top tier angels.

Reg CF & Crypto: There has been a massive tailwinds to lowering barriers to entry for angel investing: Reg CF (crowd funding) opens angel investing to anyone, rather than exclusively for accredited investors. In parallel, it has also become easier for companies anywhere to raise funds via platforms like Republic, Seed Invest and on the crypto side, CoinList. Even Ethereum’s ICO craze helped lower barriers to entry for global angel investing. Angel investing is being democratized.

Price & Talent: There are many upsides for US angels investing in international teams. Valuations tend to be much lower internationally. Talent is often cheaper and easier to scale. Coupled with an increased pace of international M&A and even some areas of innovation leapfrogging the US (China and messaging or Fintech in Europe) and there is a lot to like about the potential of foreign startups.

Combat Pattern Matching: Lastly do everything you can to show investors that you and your team can “fit the pattern.” Have a Zoom and present your team, office, etc. Make sure you communicate in clear, concise English and preemptively address concerns mentioned above. Have a dual entity from the start and perhaps seek a US advisor or two who can help bridge the gap and lend some additional credibility.

Above all else, know the bar will be high: exceed expectations by letting your traction and product do the talking.

Also check out my post, Secrets Angel Investors Won’t Tell You.

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