Don’t kill your startup by heading to the United States too early: Palo Alto lawyer

Too many Australian startups are relocating to the United States early in the false belief capital will come easily, says a Silicon Valley-based private equity and venture capital lawyer.

DLA Piper partner Paul Chen told StartupSmart the ability to demonstrate traction and track record didn’t disappear in the more ample capital markets of the United States.

“To access investors here, you still need a very strong value proposition,” Chen says. “Companies that don’t have even seed capital will have a very difficult time in the US unless they just happen to have a very, very special idea.”

Even the founders of Australian companies that have raised seed capital should be aware of the different scales of the investment opportunities in the US.

“To get to series A round here, you’ll need to have a business plan that can use up $3 million to $7 million (USD), “Chen says. “Venture capital funds and other investors expect a proven product and for you to be ready to use that money to scale very quickly.”

For companies planning to set up in the States, Chen recommends what he calls a “flip-up”, where the founders create a US holding company in Delaware.

This move makes the original Australian company a subsidiary of the new US entity, but founders should be wary of migrating their whole team and intellectual property.

“You do need a centralised decision-making team in the United States, but we advocate startups or technology companies leave some of their management and IP in Australia,” Chen says. “Otherwise you could create tax issues in both countries.”

Australian founders seeking investors or access to the US market do not need to be American citizens but will need a US working visa.

“Generally speaking work visas aren’t too hard to get, especially if you can explain you’re starting a company as they’re a bit more accommodating to those with technical skills,” Chen says.

He adds many Australians he has worked with have been wary about meeting every US law perfectly in a country that Chen describes as significantly more litigious than Australia.

“Although that’s important, that’s not the best place to focus your attention. Focus on your value proposition and how you plan to scale up.”

Chen is speaking with Steven Salsberg, chairman of Global Access Advisors, at an event in Melbourne this evening.