3 excellent reasons for US investors to invest abroad.
If you’re an European company trying to raise money in Silicon Valley, you’ll know the song’s chorus quickly: If you ain’t here, you’re not raising money. That’s pretty silly.
Your peers will tell you that ‘Investment? It’ll never work unless you’re based in the US’. I didn’t want to believe them, but from friends & colleagues, I hear that the phrase ‘let us know when you’re an US corporation’ came up more than a few times as I have been talking to various investors in various contexts. A soft no? Perhaps — but a particularly infuriating one, if so.
Especially because there are a few excellent reasons why, as a Silicon Valley investor, looking further afield may make a lot of sense…
Reason 1: US Taxation is a mess, and leads to trapped cash.
In the US, between federal, state, and local taxation, a company can expect to pay up to 40% taxes on their profits. This is in a large part why Apple is holding more than $160 billion in cash in accounts outside the US, and the same applies many other large, successful companies.
In the UK, corporation tax is 20% and is set to be reduced to 18% in the next few years. In addition, there are significant tax incentives available for companies that are doing heavy R&D — including Patent Box and the R&D Tax Credit system.
The tax problem is causing an unintended side effect known as the Trapped Cash problem: Companies have large stockpiles of cash in foreign countries, but if they bring the money back into the US, they incur serious tax burdens. So what is a company to do — bring the cash in, or leave it abroad? In the case of Apple, they have a history of just borrowing cash in the US when they need it instead of repatriating money held abroad. Why? It’s cheaper.
As an investor in a revenue-generating company, having the company domiciled in the UK is a particular benefit: there’s no language barrier, and there are plenty of law firms who are familiar with the legal particulars of both countries — and then there’s the tax advantage.
As a result, more an more investors are choosing not to insist on a ‘Delaware Flip’ — where the foreign-domiciled company is being ‘bought’ by a Delaware company in order to become US based in order to attract investment.
Ergo: Companies are moving abroad
So, to avoid the heavy local tax burden, we’re seeing a number of companies going through so-called tax inversions.
The idea is to get acquired or merge with a foreign entity, in order to make the company a subsidiary of the non-US-domiciled company. Through licencing deals or transfer pricing arrangements, the company then reduces the amount of taxes that need to be paid in the US.
There’s been a few high-profile examples of this: Burger King ‘merged’ with Canadian fast food chain Tim Hortons, and in the process became a Canadian company, and Pfizer recently spent a god-awful amount of money in an attempt to merge with AstraZenica to become British-based.
Successful companies are willing to spend millions of dollars to be taxed abroad; so when an investor has an opportunity to invest in a company that’s based outside the US in the first place, why not at least consider it?
‘Investing the money’ could take many different guises — real estate, shares in other companies… Or M&A activity.
Trapped cash means acquisitions
There’s another effect of this issue that’s is less obvious, but potentially more significant: for companies that have large quantities of cash stashed overseas, what are they meant to do? Well, they can build a giant money bin, and go for Scrooge McDuck-style swims… Or they could invest the money somehow.
Of course, ‘investing the money’ could take many different guises — real estate, shares in other companies… Or M&A activity.
Which is where things get really interesting — the recent Activision acquisition of King Entertainment (that’s the Candy Crush guys, based in Ireland) is a fantastic example; it is expected that Activision — a US company — will complete the transaction largely with trapped cash and loans.
Reason 2: Less competitive market means better deals
Of course, Silicon Valley VCs (and, for that matter, VC firms across the rest of the US) have no shortage of deal-flow: There’s always companies raising money within a lazy stones-throw from your office.
But there’s also some extreme competition… We’ve seen the valuations coming out of Silicon Valley recently, and while I’m the first to admit that unicorns are pretty exciting, it’s tricky to defend some of the valuations we’ve been he. It should come as no surprise that the investment climate for investments into UK companies is less frothy than those for its Silicon Valley brethren — with the valuations and investment opportunities to match.
Reason 3: Oh, and wages aren’t insane
Have you tried to hire a software developer in Silicon Valley recently? If so, you’ll know exactly what I mean. It’s supply and demand at work: A lot of companies have a ton of VC money, and they need a ton of A-list talent to make their products sing. Makes perfect sense, and simple economics, but the truth is that it drives the price up something awful.
The real victims aren’t the large companies — they can afford it — it’s the young startup that are hurting, resulting in them waiting far too long to hire additional staff. Hiring dramatically increases the burn rate when more than anything, you want to keep spending under control as you figure out your product/market fit and your market proposition.
I’m just going to find a cash machine…
VC companies are futurists and enablers of technology. Investing locally only just seems as if it’s too easy, too shortsighted, and too limiting.
I understand a lot of the arguments of investing only locally. Because a lot of startups are flowing to Silicon Valley, there’s no shortage of local dealflow. Legal fees are lower when you can use in-house council, flying out to board meetings is simpler, and being able to jump in your car to drive over and check on an investment is a definite plus — no argument there.
To me, the baffling thing about being told that ‘we never consider companies outside the US’ is that VC companies are futurists and enablers of technology. Investing locally only just seems as if it’s too easy, too shortsighted, and too limiting.
95.5% of the world’s population lives outside the US, should’t some of your investments do, too?
(Bonus points if you spotted the Big Lebowski reference; if you did, we’ll get along just fine)