​American VCs Aren’t the Reason Your Startups are Leaving

There isn’t a week that goes by without well-meaning ecosystem supporters around the world posting about how startups from their city/state/country keep moving to the U.S. because they raised funding from American investors.

 

 

Every time I see one of these posts, I want to scream.

 

 

If you’ve never participated in a startup board meeting, I can promise you that no VC spends time trying to convince a company to move, unless there’s a very, very good reason to do so. Moving a company — especially internationally — is expensive, disruptive, and risky. Scaling a company in a country where the founders have no lived experience is similarly fraught with risks.

In my experience, there is exactly one reason that rises to the level where investors will push a company to move or scale elsewhere: velocity.

For startups, velocity is the one metric that matters most. If investors sense that a company is going too slow or, conversely, believe that there’s an opportunity to dramatically increase the velocity of a startup, then they will flag that to the founders. The most common scenarios where this happens include:

• Founder Velocity: This is fairly common when a company is very young (e.g. just the founders plus maybe an employee or two). Investors may believe that the individuals and, thus, the company as a whole, would benefit from the founders being in a larger, more intense ecosystem. We see this both domestically (e.g. startups in small Canadian towns being encouraged to relocate to Toronto or small UK towns being encouraged to relocate to London) as well as internationally (with San Francisco and New York as the most frequently-recommended destinations).

• Sales Velocity: Other than outsourcing (which is typically more of a cost argument than a velocity argument), the opportunity to increase sales velocity is the most common reason why companies scale internationally. We normally think of this as occurring later in a startup’s life cycle (e.g. after the company has established strong domestic sales, it expands into new markets). Such international expansion is fairly well accepted and doesn’t usually bother hometown advocates. But it can also occur early on if the company struggles to sign pilots and/or secure early sales with local companies. If a startup finds that its early sales traction is much stronger in the U.S. — especially when sales are still founder-led — investors may encourage one or more of the founders to relocate.

• Executive Velocity: This scenario typically arises when a CEO travels back-and-forth between the company’s home base and a larger, higher-velocity ecosystem (usually San Francisco or New York) and begins to recognize a difference in velocity between the executives they meet in that ecosystem and those on their leadership team. The result could be replacing one or more executives at HQ with higher-velocity individuals elsewhere or relocating one or more executives to a higher-velocity ecosystem. (I know of one Canadian company that recently raised a $5M round for the express purpose of relocating their entire leadership team to San Francisco because of a lack of executive velocity — a move that the CEO proposed to his investors, rather than the other way around).

• Hiring Velocity: Another common reason why companies move/scale in the U.S. occurs when founders struggle to hire senior talent with the necessary skills and experience locally. Like it or not, there is more experienced talent in almost every job function relevant to tech in San Francisco/Silicon Valley than there is in any other ecosystem on the planet. The most ambitious founders and investors inherently understand this. If hiring velocity becomes an issue, investors won’t hesitate to recommend that the company change tactics.

In none of these situations do the investors issue an ultimatum to the founders. VCs simply don’t have that power. And these discussions don’t generally occur if the company is firing on all cylinders.

In reality, these moves almost always arise synergistically between founders and investors. The reason why there’s a higher correlation between a startup taking investment from U.S. VCs and a move/expansion into the U.S. is that American investors can facilitate these “aha!” moments earlier in a company’s journey. Silicon Valley VCs often encourage founders to spend more time in the U.S., help them build their U.S. network by making introductions to other founders, inviting them to events, etc. and help with introductions to potential customers in the U.S. They can also flag issues of velocity earlier in a startup’s journey than a founder (or a local investor) would typically recognize them.

As the strengths and opportunities of higher-velocity ecosystems become more apparent (and, in contrast, the weaknesses of being based in a lower-velocity ecosystem), many ambitious founders naturally start to think about moving/scaling elsewhere. That’s the #1 reason why complaints about a lack of ambition in other countries misses the point. Once ambitious founders experience high-velocity excellence, it’s difficult to unsee.

 

 

I should also note that there is a category of founders who intrinsically want to move to the U.S. These are typically younger founders with relatively few attachments and for whom the adventure is part of the motivation. It’s really no different from young people wanting to leave home to go to college or moving from a rural town to the big city. There’s no point in trying to change their minds and no benefit to complaining about it (*cough cough* Waterloo).

The reality is that the vast majority of founders who either move to Silicon Valley or setup significant operations in the U.S. do so reluctantly. Almost all of them want to build their companies in their home towns/countries, but eventually come to the realization that it is impossible to do so (at least, if they want to compete globally). The decision to move/expand elsewhere is not “because Silicon Valley VC”. It’s because of the limitations of their own ecosystem — and the contrasts that they see first-hand traveling back-and-forth to the U.S.

So instead of blaming American VCs for “taking” your high-potential startups, stop and take a look in the proverbial mirror:

• It’s not the fault of U.S. investors if there isn’t enough senior leadership experience in your ecosystem

• It’s not the fault of U.S. investors if the established companies in your ecosystem aren’t willing to buy from local startups

• It’s not the fault of U.S. investors if the “work-life” balance in your ecosystem prioritizes surfing and snowboarding over…work

• It’s not the fault of U.S. investors if taxes, regulations or other government bureaucracy in your ecosystem make it more difficult to get a startup off the ground

And it’s definitely not the fault of U.S. investors if the VCs in your ecosystem aren’t willing to invest.

“Remember, all I’m offering is the truth.

Nothing more.”

– Morpheus