How US and European investors differ

#GuestPost

There can be immense differences between US and European investors: mindset, “Silicon Valley capitalism” vs. “social market economy”, different expectations – there are many factors that influence an investor-startup relationship.

In the dynamic environment of venture capital, startup founders are faced with important decisions regarding their sources of investment. There can be immense differences, especially between US and European investors and venture capital firms: mindset, “Silicon Valley capitalism” vs. “social market economy”, different expectations – there are many factors that influence a good investor-startup relationship. Founders should therefore think carefully about which type of investor they choose before their financing rounds. Both US and European investors have different advantages that should be weighed up when making such an important decision:

US investors: high risks, high returns

1. Big funds and big bets: US investors usually manage larger funds, often in the hundreds of millions of dollars. They can therefore make larger investments, usually between 10 and 20 million dollars, and they are more willing to value companies higher and provide correspondingly large amounts. American investors take more risks. They want to have the next unicorn in their portfolio that will pay back their fund. They push for high growth rates with high burn rates. If this succeeds in one out of ten investments, that is enough for a high-performing fund. However, this also means that startups that do not make it to unicorn status quickly fall out of favor with investors. Follow-up rounds are then only possible on worse terms (down rounds), if at all.
2. Market recognition and access to talent: An investment from a prominent US fund can bring immediate market recognition in the US. This visibility can open doors to further funding rounds and attract top talent, especially in the US where a well-known investor on the list of shareholders can be a strong persuasive argument for recruiting experienced professionals.
3. Expertise and resources: US investors often bring a wealth of expertise, especially in scaling companies in the US market. For startups looking to expand aggressively and become global leaders, this experience can be invaluable.

European investors: steady growth and sustainable support

1. Balanced risk management: With a focus on sustainable growth, European investors invest external amounts that are in line with the startup's current capacity for expansion without overextending themselves. This reduces the risk that startups will burn through capital too quickly and fail to meet increased expectations.
2. Broad portfolio approach: European investors are betting on their portfolio to develop broadly. Their strategy is not to make fund performance dependent on a unicorn, but to ensure fund returns across a broader base of investments. This more cautious approach means that they are more likely to fight for the success of each portfolio company to make it a sustainable and profitable company. European investment partners therefore offer startups more security and constant support at the same time.
3. Long-term commitment: European venture funds are less inclined to abandon companies that do not immediately achieve aggressive growth targets. They offer ongoing support, are milestone-oriented and work closely with startups. Together with their investment partners, founders can overcome challenges and optimize growth strategies over a longer period of time.

Implications for startup founders and their companies

For startup founders, the choice between European and US investors depends on several factors, such as growth stage, market strategy and risk appetite.

1. Early stage investment: In a seed or Series A stage, a European investor might be a better fit. Such a partner can offer a cautious, supportive approach that fits well with the trial-and-error nature of early-stage growth. The stability and hands-on support can be critical for first-time founders still refining their business models.
2. Growth phase: As startups mature and demonstrate solid growth rates, it can be beneficial to bring in a US investor as a partner. At this point, startups are better positioned to manage larger investments. At the same time, they can leverage the expertise and networks of US investors to scale quickly and enter new markets.
3. Strategic Fit: Ultimately, the best investor is someone who believes in the startup's mission and can provide the right mix of capital, expertise and support.

In summary, both European and US investors offer unique advantages. Founders should consider their specific needs, growth stage and market strategy to select the investor that best fits their long-term vision.

About the author
Wolfgang Krause, Managing Partner at Hello Inovhas extensive experience in entrepreneurship, investment and business development. He heads Hi Inov's German business and has lived and worked in France, the UK and the USA. Wolfgang holds a PhD in Economics from the University of Munich.

Startup jobs: Looking for a new challenge? In our Job market finds your job advertisements from startups and companies.

Photo (above): Shutterstock