The Ten Commandments of Taking Your Company to the US
Do’s and Don'ts You Must Know Before Crossing the US Business Border
Congratulations! You’ve identified a need in the market, developed a technology, and built a startup. From a purely market perspective, all the factors may indicate that it is now timely and a good business decision to enter the United States market. Establishing your presence in the US will open opportunities for you to reach investors, business resources and potential customers. At this stage, it is important to be aware of the cultural and informational barriers that prevent companies from maximizing their opportunities when setting up shop in the US.
This article is designed to equip you, the Israeli CEO/entrepreneur, with basic tools needed when accessing the US market, whether it is the consumer or b2b markets, the capital markets, or all of the above. Broken down simply into five Do's and five Don'ts of doing business in the US, below we present “Ten Commandments” to help CEOs/entrepreneurs transcend some of the main barriers to success as an overseas entity operating in the US market.
Let's get the “Negative Commandments”, or "DONT'S", out of the way first:
Rule #1: DON’T Go on a Hunch- Test Your Assumptions!
DON’T proceed on your plan to do business in the U.S. based on assumptions about what the market needs. Despite the overuse of the term “data driven decisions”, when it comes to entering a new market, informed decisions can be a game changer. That does not necessarily mean that you need to collect a statistically-significant sample size and run predictive models. It does mean that you should be speaking to potential customers and industry experts, generating information and extracting insights that will help you make informed decisions.
Although the American markets (there is no such thing as a single American market, as it is highly segmented) often appear as a home base for Israeli startups, when it comes to consumer behavior, trends and B2B, that is not always the case. Take, for example, the basic difference of ordering a cup of coffee in a local coffee shop. This same order is likely to yield different cups of coffee when made in NYC vs. Tel Aviv. To make sure you are making decisions based on the local standard, drop the assumptions, speak to plausible partners, competitors and customers in order to validate everything- the problem your startup is solving, the target market and the value proposition. Those are fundamental steps that will help you to avoid the “I know it all” and “it works in Israel” traps and increase your chances of finding product-market fit in the market you are aiming to serve.
Rule #2: DON’T Overlook the Cost of Capital Raising
It costs money to raise money, so DON’T go into a capital raise without a budget allocation for your raise. Depending on the size and type of capital raise you are engaging in, costs may vary. On a broad level, the following are common expenses to consider when planning for your capital raise: 1) Service provider fees, such as an experienced accountant, corporate/securities attorney, investment bank and advisors 2) Associated filing fees 3) Cost to market the offering, which is highly dependent on the type and size of the raise, 4) Payroll costs for employees working on the raise, 5) General business expenses needed during that time, 6) Cash on hand- just in case.
A quick aside about service providers and costs: Always use an expert, and verify that he or she has the requisite experience to take you through your entire capital raise. For example, DON'T use your uncle's brother, who has been practicing real estate law for 20 years, just to save money on your lawyer. Securities and corporate lawyers practice in a highly-regulated field and possess a deep understanding of applicable law. You do not want your lawyer missing an issue that will end up being costly to you in the long run just because he charged you less in the beginning! Budget for success from the outset. This is your most important investment in your company.
Rule #3: DON’T Use the Internet in Place of Competent Advisors
Sure, you should do your own independent research and inform yourself of what the professionals you have retained (i.e. accountants, attorneys, investment professionals and other advisors,) are doing for your business. This is even a “DO” that we discuss later in this article. Ask informed questions and run ideas based on internet research by these professionals, but you should never replace what these service providers do for you with what you find on the internet. You can always find a sample cash flow statement or contract online, but those sample documents are missing the knowledge of issues and regulations that has taken professionals years of education and experience to develop to the level of expertise where they can personalize their work to the requirements of your business. Say you find a sample document on the internet and think that all you need to do is fill in the blanks to customize it for your company, you are likely to inadvertently miss issues that are directly pertinent to your business that could lead to timely and costly problems later on. You may even be missing other forms, licenses or contracts that are necessary for you to operate your business in the U.S. as well as the state(s) and/or municipality/ies in which you are operating. The internet should always be a supplemental resource, and never a replacement for a professional. In line with Rule #2, budgeting for and hiring professionals will save your company from a great deal of potential issues in the long run.
Rule #4: Finding Your Finder- DON’T Use Someone Who Isn’t Registered
DON'T use an unregistered finder to help you find investment. It is very easy to ask around within your network, particularly those in the corporate world, for the connection to your golden ticket to your round of financing in exchange for commission. Be aware that there are rules and regulations in the United States designed to protect both companies and investors from fraudulent behavior. One of the protections makes it a requirement (with limited exceptions) that one engaging in activities of a “finder” of investment for a company be licensed to do so. While this requirement cannot prevent all fraud, it does help the regulators know that the registered finder is qualified to engage in these “investment finding” activities between company and investor. If you think you may be getting into, what we call, a “gray area”, where it is somewhat unclear whether the person you are engaging with is acting like an unregistered finder, then stay away! Just like using the wrong attorney in Rule #2, using an unregistered person to market your offering may seem like the more cost-effective way now, but could end up being a lot more costly in the long run!
Rule #5: Learn the Rules of the Game- DON’T Forget that Negotiation Is (At least) Two-Sided
DON’T treat the people you meet along the way like they owe you. The famous ‘Israeli Chutzpah’ can definitely be of help when you are reaching out to potential investors, partners or advisors, but you may want to tone it down in certain situations. Understanding the cultural frameworks and ground rules of communication before jumping in will improve your chances of succeeding at raising funds, establishing relationships with customers and forming partnerships.
Let’s take the very common and direct Israeli statement “I think you are wrong” as an example. Disputes are part of most business interactions and negotiations, and a statement like the above might be acceptable in typical business dealings in Israel. However, it is likely to prompt a different response when communicating with American partners. In this case, acknowledging the other party's arguments beforehand may help you get your point across easier.
Being aware of subtle cultural differences, for instance, process and planning orientated approach (strategic long-term planning, careful process design and review, ahead of time) vs. short time planning, more flexible, “getting things done last minute”, will help you to set expectations and better manage communication processes, which as we know, are the keys to success.
And now for the “Positive Commandments”, or the Do’s:
Rule #6: DO Build Relationships
DO build a strong network. As you’ve probably learned, you never know who the person you are speaking to knows. It may be that your current meeting will pave the path for a future investment, partnership, collaboration or even a friendship. One of the features that the most successful entrepreneurs have in common is a strong network that they have built over the years. Entrepreneurs from across the globe are flocking to the United States looking to raise funding and find partners and customers. Everybody is looking for something. You have a chance to add value and help others, if instead of pitching your idea to everyone, you start by listening. See where you can contribute. Additionally, be mindful of people’s time. Whenever you request someone's time, he or she is committing a resource to your request, so make it worthwhile. Similar to this concept, business development entails cultivating long-term partnerships and relationships. Eventually, chances are that your investors, partners and early customers will be part of your network.
Rule #7: DO Your Own Due Diligence
While the advisors you hire will play a crucial role in helping you navigate the U.S. market, DO your own due diligence so you can ask the right questions and work collaboratively with all of your service providers. Be an informed client without being a know-it-all. You are an entrepreneur and/or CEO, so you are supposed to be the ‘big picture’ visionary for the company, but also try to understand the ‘small picture’ foundational aspects of running and growing a successful business in the U.S. that you have outsourced to your advisors, accountant, lawyers and investment professionals. There is no need to be an expert, that’s what the experts are there for, but being an informed client will help your deals move forward more smoothly.
It is worth noting that before you even get to the point where you are working with service providers, DO your due diligence on every potential service provider, employee and partner you intend to hire before signing any agreements with them- even if they come as a recommendation from a colleague. Make sure everyone you hire and partner with has strong credibility in the industry. Speak to them and make sure your personalities and outlooks jive. For example, you can hire a great accountant with years of experience, but you do not share the same outlook and he or she does not believe in your vision, and that could lead to strain even if the work is getting done.
Rule #8: DO Lighten Your Regulatory Burden
DO take advantage of the benefits offered to qualifying foreign entities raising capital/going public in the United States. For example, depending on your business contacts and shareholder base in the United States (or lack thereof), you may qualify as a “Foreign Private Issuer”, or “FPI”- a status which grants foreign entities the benefit of relaxed compliance requirements with federal securities laws. You may also qualify for “Emerging Growth Company”, or “EGC”- status, a term first defined in the Jumpstart Our Business Start-ups Act of 2012. Like FPIs, qualified ECGs also enjoy lightened regulatory requirements. And yes, you can be both. If you qualify for either of these categories, it can save you time, money and stress! Note that these benefits do not eliminate compliance with U.S. securities laws, they merely provide qualifying companies with less burdensome requirements. Speak with your securities attorney to discuss what you may be eligible for and what forms and filings are required.
(Side Note: On the flipside, there are some types of capital raises that are only available to U.S./North American-based companies. If you are ineligible to do a certain type of capital raise, there are often ways to do so, like moving your principal place of business to the United States, however, this would disqualify you from taking advantage of the benefits of being an FPI. There are many factors that go into these decisions, and your lawyer can advise you on what is the best approach for your particular company.)
Rule #9: You are Not Alone- DO Highlight Competition!
Invest in comprehensive competitive analysis and DO find your competitors. From an investor’s perspective, even though it may seem appealing at first sight, a situation in which there is no competition usually means:
● You are onto something, and it is going to be huge. Your idea is solving a key problem in the market and is on its way to becoming a unicorn. (less likely)
● You have not done your homework well enough. You are not aware of the competitive landscape as you should be. In this case, do not be surprised to find that the competition that appeared absent is actually there. (more likely)
● Someone has already tried to develop a similar idea but it did not work or was not worth the hassle. (Search for companies that offered similar solutions in the past)
To avoid surprises, approach competitive analysis like you would approach problem validation. Devote the resources, spend the time and know what you are up against. Being aware of your competitors and creating a competitive landscape will allow you to develop a unique value proposition, create better positioning and build confidence with prospective investors. In this case, forewarned is forearmed. When speaking to investors, always inform them of the competition and then differentiate yourself. This shows investors that you are in a proven market worth investing in while highlighting that your product is innovative and can be reasonably expected to yield high returns for them.
Rule #10: DO Exit Right
DO consider the various types of exits that may be right for you before defaulting to the one that seems popular in your home market. For example, if you see many companies in your home market getting acquired, but your long-term company goals are access to capital and greater liquidity so you can continue to fund development of technologies associated with your original product, and you also want to market your product offerings to the broader public, then an IPO should be a consideration. If you cannot bear the costs of an IPO, are looking to expand into new markets and have reasons that your company’s material information cannot be disclosed to the public and those factors outweigh the benefits of liquidity and publicity for you, then going public may not be the best route. You should have an exit plan early while still being adaptable. The bottom line is, avoid following the crowd toward one type of exit just because it is a popular strategy in your home market. Speak to your attorney and advisors to go over what is the best exit strategy for your company given your business plan and short and long-term company goals. Market conditions and industry outlook may change, necessitating a shift in strategy, but nonetheless, start out with a sound exit strategy, which will help you roadmap your business plan.
Crossing the United States “business border” can be both exciting and challenging for you and your company. Using the “Rules” highlighted above can help you navigate the cultural, regulatory and general business differences between Israel and the United States. In other words, these rules are designed to assist you with how to effectively venture from the ‘Land of Milk and Honey’ to a ‘Land of Corporate Opportunity and Investor Money’. Internalize and follow these “Ten Commandments”, and you will be well equipped to maximize your deal-making and relationship-building potential in the United States in the various business scenarios you will face.
Legal advice disclaimer: This article is not a substitute for professional legal advice and should not be relied upon as such. This article does not create an attorney-client relationship. Please consult your attorney with questions regarding your particular matter.
About the Authors:
Dr. Maria Blekher is a startup value accelerator, advisor, and behavioral scientist who leverages her unique background in consumer psychology and research to help startups validate, fine tune their value proposition and accelerate into markets. She is also the Founding Director of YU Innovation Lab, and a Clinical Associate Professor, teaching at the Sy Syms School of Business at Yeshiva University, NYC.
She can be reached at Maria.firstname.lastname@example.org
Robyn M. Herman, Esq. is Of Counsel to the New York office of Hunter Taubman Fischer and Li, a boutique securities law firm, where she leads the Israel Practice Group. In this capacity, Robyn created and implemented the "Bridge to the US Markets" program for companies seeking to access the US Capital Markets. The Bridge program provides overseas clients with the proper tools and resources necessary to navigate the vast legal and regulatory landscape in order to transact business in the US. Robyn is also an entrepreneur, and for ten years prior to practicing law, she independently consulted numerous business ventures, helping them launch and grow by drafting and assisting with the implementation of investor-ready business plans, proposals and marketing plans. Throughout, Robyn has built a strong network in the emerging company, IPO and corporate legal community. She can be reached at email@example.com