We got the chance to talk to venture capitalist Arne Tonning the other day. Arne is partner at Alliance Venture, and Investor in Residence with Nordic Innovation House, Palo Alto. Alliance Venture’s main focus is to invest venture capital in Norwegian startups.
You have been living in Silicon Valley for about 3 years, what is your reflections on the local investor market and how it has developed over the past years?
“From a macro perspective the market has calmed down and is more selective in its investments. Proven winners get more capital and newcomers on the market have a harder time attracting capital. Noticeable is that even if the number of deals has gone down the amount of money being invested stays the same. The structure of the startups has equally changed, there are less inventor startups and more of the structured startups with experienced management. The focus on getting quality for our VC money is very present.”
You have already mentioned picking a few times, please explain the selection structure of the Venture Capital market?There are endless companies looking for investments, on what criteria do you pick your investments/companies?
“In our newest fund we looked into about 1,400 projects and companies, out of these we have invested in about 1 to 2%, so of course the evaluation process is crucial. Alliance Ventures primarily look for early stage startups – early stage means you need to have a concrete idea and somehow started to realize it. A good idea on paper rarely get good investments. Because the startups are in such an early stage of their life cycle, Alliance Venture must see beyond hard metrics and financials. Summarized, we invest in good teams, the potential of the idea/product, and how it is executed.”
How do you recommend a startup to attract the VC’s?
“To increase your chances to find an investment, think through what VC to approach and who might be relevant for your particular product/service. Remember that VC’s look for objects and you look for money. Your best chances to get a VCs attention is a specific and warm intro from a personal connection but don’t be afraid to send cold emails, we look at everything. But, after years in the business you know that you only give a cold email a split second before making a decision if it’s worth taking a closer look at or not. It is therefore an art to quickly created attention and interest. Once you have a dialogue and you want them to take action and go from interested to actually invest, trigger them with one of following three, their passion for your product or business, their greed of great capital gain or their fear of missing out on a great project (FOMO).”
USLawforNordics often get the question if a Nordic startup need to set up a U.S. Inc. when they are in the process of expanding their business to the U.S. What is the VC’s perspective on this?
“It depends, if your plan from day one is to attract U.S. investors you should set up an Inc. in the U.S. and preferably in Delaware. However, for a non-U.S. investor it is more tax efficient to invest in the home country, not the U.S. Also, the market is definitely opening up and the major international VCs have local branches all over the world and can always find local money to invest in foreign companies. If you have a company in your home market and no investor ready, don’t initiate expensive structural changes before you know what your investor’s needs are. I’ve seen too many examples of companies coming over to the U.S., starting their Inc. and then they don‘t find U.S. investors and have to go back to Norway for capital. This is just costly and tax inefficient.”
So, what is the drawback of an Inc. if there are any?
“Taxes can be complex and M&A are terribly expensive in the U.S. It’s always better if you can do the transaction in Europe as the number of legal documents will decrease as well as the hours of legal advising.”
Arne tells us the story when a traditional U.S. production company bought one of his companies. The situation was an inexperienced buyer and a small Norwegian company on the seller side. They ended up working with two of the bigger U.S. law firms, everything was done with U.S. standards and the process took almost 6 months and required a lot of efforts from both sides. The final transaction cost was very high. Compared to a similar type of deal with a more experienced buyer with a European subsidiary the cost differences are very important.
At USLawforNordics we always have legal structure top of our minds, what is in your opinion critical for startups when they seek for investments?
- “The company’s intellectual property (IP) must sit within the company – if this is not the case, this is the first thing the company need to do before they get any investment. We sometimes see that an interesting company hasn’t secured it’s IP. If this is the case it has to be secured before we invest. Also, messy license structures are a total no-go for all investors. However, for Alliance Venture who invest in early stage companies we see more messy IP structures than investors who invest later in a company’s life cycle and if it’s fixable, it doesn’t scare us away. But an advice is to secure IP early on.”
- “The company must clean up the capital table, examples of this could be to get rid of/ renegotiate agreements with “sharky advisers” or rearrange when too important market share was given to friends and family.”
- “In Europe you have to take care of the shareholder agreement, including rights of the VC, divide the tasks, corporate governance letter, and add on the right persons to the team”.
- “Being in the U.S. you add a few more things to the list, take care of subsidiaries, legally correct offer letters, making sure that the company has the correct transfer pricing structures and accurate tax advisors is crucial. The U.S. structure is not necessarily more complex, but it’s expensive to set up”.
- “The incentive schemes are very different looking at U.S. and Nordics, so this is normally something we have to look into as well. I wish this part was more standardized, but we have accepted that this is an important but complex matter that needs to be looked into properly.”
Finally, an advice from Arne that we want to share with you, as it is so easy to get distracted when you get attention from a potential buyer or investor so it is hard to stay cool, but that is exactly what you need to do!
“When an investor approaches your company and shows interest in your business, play hard to get! First of all show that you have a plan to build your business into something big and you are not looking for a sale. Secondly when you start to feel that a potential buyer could call you, create a bullet list, discuss internally what to say so that you are ready if and when that call comes, this increases your chances to secure a good exit.”
By Olivia Gorajewski & Sara Maxence
