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Start Your Business Startup Funding

What Are the Downsides to Overseas Funding?

image for Kerkez / Getty Images
Kerkez / Getty Images
  • Overseas funding is when a company seeks financing from sources outside their own country.
  • It can be a good option for businesses that have trouble finding domestic funding or that want to expand globally, but companies should be cautious when pitching their ideas.
  • Avoid divulging too much information about your product to potential investors, and know your legal options in the country you are seeking funding from.

Seeking international funding can be a key step for many small businesses. 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 journey. Overseas funding can make your business susceptible to idea theft or copycatting, which can land you in a costly international patent dispute.

Overseas funding, also known as international funding, foreign assistance or overseas financing, is when a company seeks funding from outside their country of residence.

"Companies may seek overseas funding for a number of reasons," said Devin Miller, patent and trademark lawyer and founder, CEO, and managing partner of Miller IP Law. "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, or the company having a working relationship with a foreign investor."

Funding is often a make-or-break factor in a small business's success, with over 29% of startups failing because they run out of money, and 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 over $4 trillion into American companies.

 

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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 a different country, your legal options under the foreign policy may be more complicated or different from what they would be if the investor was located in the United States, which 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 is common for businesses to use a "finder," who helps them 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% 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 exorbitant fees – the fee should never exceed 10%.

If you are determined to seek international investors, there are a few precautions you should take to avoid having your 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."

  1. Only divulge what is necessary. When you meet with investors, be careful about how much information is revealed regarding your product or idea, including your idea development process. Only provide what is absolutely necessary and relevant to the investors' decision.

  2. Proactively seek legal protection. Before you seek out investors, legally protect your product as much as possible. Apply for copyrights or provisional patents, and make sure that they are valid in the country where you are seeking funding.

  3. Do your research on legal recourse. Another way to protect yourself and your idea is to make sure you have a strong knowledge of your legal options should you need to resort to them, said Miller. Look at how the country has handled previous similar cases. Do they look to protect the investor or the product? Are they more interested in developing foreign relationships or internal economic development?

  4. Use strategic marketing. Identify your ideas as your own as early as possible through your marketing, and ensure you have documentation that can back that. Make sure you highlight what your product is, what makes it unique, and connect it to your personal story. This will make it more difficult for others to co-opt your idea and will provide the opportunity for your audience to flag potential copycatters.

  5. Remember to renew your patents and copyrights. To make sure your idea or product is continually protected, renew your patents. Registered rights expire if you fail to pay on time.

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. [Read related article: How to Use Angel Investor Funding for Your Business]

  1. Create a strong business plan. Whether you are looking for investors or not, it is imperative that your company has a detailed and well-thought-out business plan. A strong business plan can put investors at ease, and allow them to see how you intend to use their money and where you want to take the business in the future. [Read related article: The Do's and Don'ts of Writing a Great Business Plan]

  2. Establish credibility. Next, you should work on establishing credibility in the eyes of a foreign investor. Keep in mind that overseas investors may not have the knowledge of what makes you credible to American companies. For example, if you have a financial company based in Brooklyn, that might signal youth and innovation to domestic investors but only confuse foreign investors as to why you are not on Wall Street.

  3. Talk to local banks. As soon as you have determined where you will focus your search for investors, visit local banks. Foreign investors are generally actively involved with their bankers, and as such, a good relationship with bank account managers will take you far. Introduce yourself and convince the bankers that having their investor clients invest in you is a good idea, for everyone involved.

  4. Join key groups. This tip pertains to all traditional networking: Find an international organization or groups that make sense for you and your business, and then join them. Look for NGOs, industry-specific groups, professional associations, or local chambers of commerce, and regularly attend meetings and other functions. This will further establish your business as a credible, trustworthy investment.
Kiely Kuligowski

Kiely is a staff writer based in New York City. She worked as a marketing copywriter after graduating with her bachelor’s in English from Miami University (OH) and is now embracing her hipster side as a new resident of Brooklyn. You can reach her on Twitter or by email.