VC firms are increasingly investing in foreign startups. Why? It's still a puzzle. Help me crowdsource an explanation so I can keep researching this topic!
A great article! I am happy to contribute my two cents in the context of Israel:
1. Israel is not considered cross border anymore in the sense that investors know the different army units and groups that can signal success. In addition, most groups that invest in Israel have a Jew/Israeli person on their team or have opened an office here. So basically, they have Build (BBB anyone?) a presence here that helps them to navigate the tacit knowledge.
2. Another reason for cross-border investments is replicating a successful business model. Two good examples I've seen is ArboreVenture that invests in fintech. the BNPL model can be invested in again and again in different geographies. Same with 468 Capital that replicates the Thras.io model for different markets again and again.
3. The sale pitch - VCs are facing increasing competition. It is getting harder to make deals with great companies, and a great company will most likely have many term sheets to choose from. Going international can be a great differentiator - "We can open a new market and help you expand". Israeli VCs that does that - MizMa, UpWest
I am happy to continue brainstorm the model and help :)
Years ago, I went with the Missouri Botanical Garden to Madagascar because of a pre-existing connection between the garden and the country. It turns out that the big botanical gardens have divided up the world to better focus their conservation efforts. I guess it is a form of implicit coordination. Perhaps it is possible that something similar exists in the VC world. To avoid competition, they localize their efforts. So it would be interesting to see how the choice of country or region is determined by activities of salient other VC firms in the U.S. just prior to the focal firm commencing its foreign VC efforts.
My best guess here is based entirely on what I've witnessed in Latin America...
My hypothesis is that it's all about US VC's relationships with local VCs, and that if you look at the data on individual deals in markets outside the U.S., you'll see that certain US-based firms consistently do deals with the same local VCs. It's also often a single partner driving all the deals in a given region for a given American VC firm. Long story short, the American GP build a relationship with a local GP and sources all cross-border deals with that GP. It's random by region, because it has to do with relationships established earlier on in life, not with a thesis for a particularly market. The thesis is "There are good deals to be done outside of the U.S., and I can trust Partner X from Firm Y in Country Z so I'll do deals with him/her there."
Some examples from LATAM include Bill Cilluffo from QED investing in Kaszek-backed fintechs and Kevin Efrusy from Accel investing in Monashees-backed companies. Softbank LATAM has been investing as an LP in many top funds with the largest probably Valor Capital (my speculation), and have perhaps disproportionately invested in Valor-Capital-backed startups.
My best guess here is based entirely on what I've witnessed in Latin America...
My hypothesis is that it's all about US VC's relationships with local VCs, and that if you look at the data on individual deals in markets outside the U.S., you'll see that certain US-based firms consistently do deals with the same local VCs. It's also often a single partner driving all the deals in a given region for a given American VC firm. Long story short, the American GP build a relationship with a local GP and sources all cross-border deals with that GP. It's random by region, because it has to do with relationships established earlier on in life, not with a thesis for a particularly market. The thesis is "There are good deals to be done outside of the U.S., and I can trust Partner X from Firm Y in Country Z so I'll do deals with him/her there."
Some examples from LATAM include Bill Cilluffo from QED investing in Kaszek-backed fintechs and Kevin Efrusy from Accel investing in Monashees-backed companies. Softbank LATAM has been investing as an LP in many top funds with the largest probably Valor Capital (my speculation), and have perhaps disproportionately invested in Valor-Capital-backed startups.
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A great article! I am happy to contribute my two cents in the context of Israel:
1. Israel is not considered cross border anymore in the sense that investors know the different army units and groups that can signal success. In addition, most groups that invest in Israel have a Jew/Israeli person on their team or have opened an office here. So basically, they have Build (BBB anyone?) a presence here that helps them to navigate the tacit knowledge.
2. Another reason for cross-border investments is replicating a successful business model. Two good examples I've seen is ArboreVenture that invests in fintech. the BNPL model can be invested in again and again in different geographies. Same with 468 Capital that replicates the Thras.io model for different markets again and again.
3. The sale pitch - VCs are facing increasing competition. It is getting harder to make deals with great companies, and a great company will most likely have many term sheets to choose from. Going international can be a great differentiator - "We can open a new market and help you expand". Israeli VCs that does that - MizMa, UpWest
I am happy to continue brainstorm the model and help :)
Shai Kivity
WG19
Shaikivity@gmail.com
Zeke,
Years ago, I went with the Missouri Botanical Garden to Madagascar because of a pre-existing connection between the garden and the country. It turns out that the big botanical gardens have divided up the world to better focus their conservation efforts. I guess it is a form of implicit coordination. Perhaps it is possible that something similar exists in the VC world. To avoid competition, they localize their efforts. So it would be interesting to see how the choice of country or region is determined by activities of salient other VC firms in the U.S. just prior to the focal firm commencing its foreign VC efforts.
Cheers,
Markus
Hi Zeke!
My best guess here is based entirely on what I've witnessed in Latin America...
My hypothesis is that it's all about US VC's relationships with local VCs, and that if you look at the data on individual deals in markets outside the U.S., you'll see that certain US-based firms consistently do deals with the same local VCs. It's also often a single partner driving all the deals in a given region for a given American VC firm. Long story short, the American GP build a relationship with a local GP and sources all cross-border deals with that GP. It's random by region, because it has to do with relationships established earlier on in life, not with a thesis for a particularly market. The thesis is "There are good deals to be done outside of the U.S., and I can trust Partner X from Firm Y in Country Z so I'll do deals with him/her there."
Some examples from LATAM include Bill Cilluffo from QED investing in Kaszek-backed fintechs and Kevin Efrusy from Accel investing in Monashees-backed companies. Softbank LATAM has been investing as an LP in many top funds with the largest probably Valor Capital (my speculation), and have perhaps disproportionately invested in Valor-Capital-backed startups.
Hi Zeke!
My best guess here is based entirely on what I've witnessed in Latin America...
My hypothesis is that it's all about US VC's relationships with local VCs, and that if you look at the data on individual deals in markets outside the U.S., you'll see that certain US-based firms consistently do deals with the same local VCs. It's also often a single partner driving all the deals in a given region for a given American VC firm. Long story short, the American GP build a relationship with a local GP and sources all cross-border deals with that GP. It's random by region, because it has to do with relationships established earlier on in life, not with a thesis for a particularly market. The thesis is "There are good deals to be done outside of the U.S., and I can trust Partner X from Firm Y in Country Z so I'll do deals with him/her there."
Some examples from LATAM include Bill Cilluffo from QED investing in Kaszek-backed fintechs and Kevin Efrusy from Accel investing in Monashees-backed companies. Softbank LATAM has been investing as an LP in many top funds with the largest probably Valor Capital (my speculation), and have perhaps disproportionately invested in Valor-Capital-backed startups.