As global stability continues to free fall, international investors are increasingly looking to the U.S. innovation economy as an attractive investment opportunity, despite the stalled tech IPO pipeline and the trickle-down slowdown of the late stage market. These investors bring with them both enormous amounts of capital and access to growth opportunities.
Unfortunately, this incredible opportunity has largely been met with frustration and fear. Most recently, CRV investor George Zachary complained about the aggressiveness of some emerging foreign (namely, Chinese) investors, whose hardball tactics he blamed for a number of stalled deals. In that interview with TechCrunch, he recounted a number of investments that got delayed because those investors in question were aggressively pushing for senior rights over earlier investors due to their purported value add.
These sentiments and this story is nothing new, but that Zachary’s interview was one of the first times it has been brought up in a major startup forum. While I sympathize with the frustration, it’s important for any entrepreneur and investor paying attention to this story to be careful not to paint these new entrants with such broad strokes that they miss out on the opportunity for collaboration altogether.
It’s true that the last couple of years have seen a significant number of new entrants to venture capital from other geographies. There have also been similarly very many new entrants to venture capital from other sectors such as corporate development, private equity, real estate and more from WITHIN the U.S. Many of these newcomers play hardball just has aggressively as the Chinese investors Zachary encountered, if not harder. From my vantage point at NewGen Capital where I’ve met newcomers from both Asia and Europe, as well as entrants from other asset classes, I can assure you that although the occasional bad actor does exist, there is no bumbling boogeyman to fear.
How to evaluate a “new” VC investor
Many startups and investors have been burned because they were blinded by the dollar signs they saw when engaging with these new entrants. As should be the case with even well known institutional investors, never take any money offered before you check all the strings attached. George Zachary’s recent experience further underscores the importance of doing your diligence before you even engage with an investor, in the interest of not wasting crucial time.
Because many of these investors lack U.S. venture capital track records to examine, entrepreneurs and institutional investors often characterize them by the following myths and mental shortcuts:
Myth 1: Foreign investors are unsophisticated.
Many of these foreign investors have made startup investments in their home markets. Most of the ones who are entirely new to venture capital have made investments in real estate, private equity, stocks, and other investment vehicles. It takes a lot of money to maintain a competitive edge in venture capital, which automatically weeds out a significant number of hayseeds and unsophisticated players.
These asset classes operate on very different growth timelines and investment management needs. In my experience, this is the most common denominator behind the misalignment of expectations that have led to much of this frustration. As Zachary mentioned in the interview, some of these investors come from home markets that are much more crowded and competitive than the U.S. and have consequently been trained to operate much more aggressively than institutional investors.
That said, there are some investors with more money than sense. The same can be said of a lot of institutional investors with long startup investing track records.
Myth 2: Foreign investors are somehow fundamentally different from the old guard.
Most of the investors you’ll meet in venture capital, institutional or new, are investing other peoples’ money. Consequently, the stakes are a lot higher than personal investments because their jobs are on the line. Like with mainstream US investors, there are “good” foreign investors, and there are “bad” foreign investors. At the end of the lifecycle of an investment, even the most initially friendly of institutional investors can turn on a dime against even close friends to win the lion’s share of returns — the aggressive pursuit of returns and growth is the universal nature of this job, and it is certainly nothing new among the insider circle of Silicon Valley.
Above all, this growing friction between institutional US venture capitalists and these new entrants underscores the supreme importance of diversifying what is all too often an incredibly closed network. There are myriad ways to evaluate an investor beyond looking at their existing portfolio, and much of the diligence of these emerging investors will have to lean heavily on personal reputation, making those diverse networks all the more vital. Globally-minded investing is here to stay, and the opportunity to leverage that collaborative potential is enormous. Make sure to find the right partners to help you build those connections.
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