In a Remote-First World, Do We Still Need Domestic VCs?
By: Chris Neumann
Tags: Angel Investors, Fundraising, Seed Investment, Canada, Venture Capital

There are plenty of misconceptions when it comes to startup financing. The role that geography plays in investment decisions is particularly misunderstood. I thought it would be helpful to share a framework to think about how location — and specifically proximity — impacts venture capital.

Consider the following (overly simplistic) model of a startup’s early journey:

Each of these stages describes a distinct phase of a tech startup’s commercial journey from inception to early growth. If we consider the typical sources of (equity) funding available to companies at each of these stages, it looks something like this:

Now, if we consider physical proximity of these sources of capital relative to the startup, we end up with this:

Let’s dive into each of these stages with a focus on investor proximity:

Idea Stage

The earliest sources of funding for a startup are typically “network local,” meaning that they are from people within a founder’s personal or professional networks. These individuals invest in a company because they have deep knowledge about the founders (friends, family, past colleagues, etc.) and/or the problem they’re trying to solve (e.g. industry experts). Counter-intuitively, location plays very little role at the earliest stage of investment, due to the emphasis on relationships.

Prototype / MVP Stage

Once founders step outside of their networks to raise capital, physical proximity is a dominating factor. At the prototype/MVP stage, investors are still making a significant leap of faith but without the benefit of a prior relationship with the founder. As such, their investment decisions frequently include factors that might only be appreciated within a local context (schools, academic advisors, past employers, etc.).

A growing number of angels and Pre-Seed investors have recently shown a willingness to invest outside of their preferred geography, however, the majority have continued to focus primarily on their local ecosystems (even when investing over Zoom).

Initial Traction

Once a company has initial traction (users/customers, revenue, POCs, etc.), founders can begin to access sources of capital that are further away. At this point, they can point to early evidence that the company might be onto something.

These additional sources of capital typically remain within the startup’s home country. Seed investors look at early traction through a local/national lens in much the same way that angel and Pre-Seed investors apply local context to resumes. For example, a startup that has a POC with Canadian Tire might impress a Canadian Seed VC, but to an American or European investor it’s less compelling. The numbers aren’t big enough to stand on their own, so the local understanding is important. International investors, by contrast, will rightly ask the question “but will it work here?”

Repeatable Revenue

Once the revenue becomes more predictable, founders can expand beyond national borders and start tapping into regional investors. A U.K. startup with growing revenue can now confidently pitch European VCs, but absent U.S. traction is unlikely to gain interest from Silicon Valley. Similarly, Canadian startups are in a strong position to go south, but are unlikely to find traction with Asian investors.

It’s worth noting that there may still be geographic hesitation at this stage, particularly if the traction remains entirely within one country. A Canadian company with 100 customers in Canada but none in the U.S. is likely to face skepticism from Silicon Valley investors. Similarly, investors considering a U.K. healthtech company with incredible revenue but that has only sold into NHS will face valid questions as to whether their solution is specific to the U.K. healthcare system.

Market Expansion

As a company demonstrates its scalability across geographies and/or sectors, global sources of capital begin to unlock. Potential investors are able to analyze revenue from a variety of sources, each with meaningful history and metrics. Most growth stage investors cast very wide nets in terms of the countries that they’re willing to invest in, but competition for those investment dollars is on a global scale.