What Are the Downsides of Overseas Funding?

What is overseas funding?

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.

The downsides of overseas funding

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.

How to avoid having your product idea stolen by international investors

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:

1. Divulge only what’s necessary. When you meet with investors, be careful about how much information you reveal regarding your product or idea, including your idea development process. Provide only what is absolutely necessary and relevant to the investors’ decision.
2. Proactively seek legal protection. Before you solicit investors, legally protect your product as much as possible. Apply for copyrights or provisional patents, and make sure they’re valid in the country where you’re looking for funding.
3. Do 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 similar cases. Does it look to protect the investor or the product? Is it 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 your assertions. Make sure you highlight what your product is and 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.

>>Read Next: Bootstrapping or Equity Funding: Which Is Better for Your Business?

How to find an international investor

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: 

1. Create a strong business plan. Whether or not you’re looking for investors, it’s imperative that your company has a detailed and well-thought-out business plan. In this case, 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 company in the future. [Use our free business plan template to get started.]
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, New York, that might signal youth and innovation to domestic investors but may cause foreign investors to wonder why you’re not located on Wall Street.
3. Talk to local banks. As soon as you’ve determined where you will focus your international 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 professional networking: Find international organizations or groups that make sense for you and your business, and then join them. Look for nongovernmental organizations, 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 and introduce you to potential investors.

Overseas funding is a potential capital source, but be careful

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.