Obtaining international funding can be a key growth step for many small business owners. It can mean reaching the next level of your business by expanding into foreign markets, diversifying your funding or collaborating with a wider range of investors.
Despite the positives of overseas funding, there are a few significant risks you should be aware of before you start your financing journey. For example, working with foreign investors can make your business susceptible to idea theft, which can land you in a costly international patent dispute. Here’s what to know for a successful funding experience with overseas investors.
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Overseas funding, also known as international funding, foreign assistance or overseas financing, is when a business seeks funding sources from outside its country of residence.
“Companies may seek overseas funding for a number of reasons,” said Devin Miller, founder of Miller IP Law. Miller cited “the foreign country being a main market for their product, the country having investors with expertise in the area the company is developing a product [and] the company having a working relationship with a foreign investor” as examples.
Funding is often a make-or-break factor in a small business’s success, with CB Insights reporting approximately 38 percent of startups fail because they run out of money. The process to apply for funding is complicated, especially in the United States. There are many strict regulations and requirements from financial institutions that make it difficult for small companies to receive adequate funding. As such, global funding has proven to be a popular and generally successful option, with foreign companies having invested $6.49 trillion in American companies, according to data from the U.S. Bureau of Economic Analysis.
Despite its popularity, small businesses must enter the world of international investing with caution. Idea theft, or copycatting, is a common issue for startups seeking funding both internationally and domestically.
“Typically, when a company is seeking an investment from any investor, be it foreign or domestic, the company must divulge details regarding its product,” said Miller. “Because the company must divulge this information, it opens up the company to be copycatted by the investor.”
Miller said the major risk with overseas funding is that when the investor is located in another country, your legal options under foreign policies may be more complicated or different from what they would be if the investor were located in the United States. That can limit your ability to protect your product from copycatting.
You should also be wary of finder’s fees and costs. When seeking international investors, it’s common for a business to use a “finder,” someone who helps it locate potential investors willing to provide a loan. It is customary in the U.S. for finders to impose a fee of less than 10 percent on their clients, usually employing the Lehman Formula to determine the amount. However, in foreign countries, the customs or expected rates may be different, so you should be vigilant that the finder is not imposing an exorbitant fee, such as one exceeding 10 percent.
Idea theft, a lack of legal recourse, and exorbitant finder’s fees and costs are the risks of soliciting overseas funding.
If you’re determined to seek international investors, there are a few precautions you should take to avoid having your business idea stolen.
“The best way for companies to protect themselves is to do their homework on the foreign investors,” said Miller. “Determine if the investor has invested before, and if they have, talk with the previous company they invested in. Getting to know the investor and their reputation is one of the best ways to avoid a copycat taking your product.”
Additionally, business owners should follow these best practices:
The most important aspect of finding international investors is establishing your company as a sound and smart investment, and this takes time and careful planning. You must prove to investors that your company is both worth investing in and a safe option that won’t cost them money.
Here are the steps you should take to find an international investor:
An angel investor can help fund your business in exchange for equity. If you’re interested in overseas funding, check out the European Business Angels Network, which offers training, networking and pitching opportunities for entrepreneurs.
If you’ve struggled to find domestic funding sources, overseas funding is a fair but risky alternative. Consider the potential of idea theft and the potential lack of recourse available to you in other countries before soliciting international investors. If you still feel good about using foreign funding, then go for it. And if not, you can always take advantage of the best business loans available stateside.
Max Freedman contributed to this article. Source interview was conducted for a previous version of this article.