A tale of two investment strategies: comparing the US and the UK VC environments

Following her secondment in the US, Velyana Borisova draws from her first-hand experience and looks at the key differences and opportunities for investors on both sides of the Atlantic. Please get in touch with her directly or anyone from our tech team if you would like to take the discussion further.

Can you outline the key differences in investor attitudes and expectations between the US and the UK?

Although the VC market remains under considerable stress on both sides of the Atlantic due to various socio-political factors leading to economic instability, the key differences I have noticed in terms of investors' attitude, are that in the US, investors still appear to have a more optimistic outlook and a higher risk tolerance. In practice this translates into US investors investing larger amounts (relevant to the UK) and seemingly making quicker decisions with less due diligence on the company receiving the investment (although appropriate due diligence is still undertaken it is more targeted in nature). The result is that target companies are better capitalised in the US and investment rounds happen much faster than rounds in the UK, both of which offer a huge competitive advantage for the target company and the source of capital. For example, over $44.5B was invested in US startups in Q1 2024, whilst UK startups raised only $3.9B in Q1 2024.¹ 

US investors also appear more aggressive in their negotiations and more assertive with their terms – this may be a factor of a well-oiled and experienced ecosystem and also dictated by the larger size of the investment rounds, something which the UK is following closely. 

The expectations following an investment round also differ between the UK and the US. The US market accounts for 50% of the world's demand in many sectors and so frictions and barriers from cross-border expansion is reduced significantly when building laying foundations for rapid expansion – much more so than in the UK or across the multiple jurisdictions of Europe. In return, US investors are looking for a quicker realisation of their investment, which is easier for startups to achieve given the larger size of the US economy.  

The US has several major VC hubs - the Bay Area, New York City and Greater Boston driving almost half of the total investment in the country in 2022, with Miami and Austin forming as two new additional hubs and coming up the ranks². Looking at matters more globally, the US is home to seven of the global top 10 tech hubs for VC investment in 2024³.  Whilst in the UK, much of the VC investment activity and ecosystem are concentrated in the Golden Triangle (London, Oxford, and Cambridge). With such greater pool of funds and market locations to tap into, the difference in attitude and expectations between investors make sense. One of the findings from the British Business Bank's "UK Venture Capital Financial Returns 2023" report supports this view and shows that returns from the best performing UK funds are not as high as those of the top US funds, partly because as a more developed market, the US benefits from larger funds⁴.  As a result, this leads to better funded companies who are able to scale up quicker with more exit opportunities producing higher returns, and in turn, more capital allocated to VC funds by institutional investors⁵.  

What are some of the distinguishing regulatory or legal factors in the VC space between the two jurisdictions? 

Historically, across many areas, the US has had a much more relaxed regulatory framework than we are used to in the UK, and generally in Europe, defending the idea that economic growth and innovation are achieved by having a "small government" and a large private sector allowed to run and adjust itself according to market trends⁶. However, in recent years we have seen a slight shift in attitude and the US has experienced a growing wave of regulatory activity at federal and state level, these include:

• antitrust legislation
• more stringent enforcement by the Federal Trade Commission and Department of Justice
• restrictions on AI
• data privacy and more

One recent change in the US, which did not steer a similar response in terms of policy-making in the UK, is the Inflation Reduction Act 2022 ('IRA') which is one of three major investment bills passed since 2021 which aims to inject more than $2 trillion in the US economy⁷.  The impact of IRA on the VC space is much debated and it was at the centre of discussions at this year's LSX World Congress in London, but the hope is that it will result in the formation of hundreds of new climate tech startups whilst it may have a more negative impact on the investment landscape for biotech companies. 

In the US, early-stage investments generally follow the model documents produced by the National Venture Capital Association ('NVCA') with nearly 85% of charters filed with the State of Delaware in 2022 based on the NVCA's model charter⁸.  In the UK, we follow the model documents produced by the British Venture Capital Association ('BVCA'). Both sets aim to standardise early-stage equity rounds and contain similar concepts. 

Some key differences to flag are:

• In the UK, existing shareholders receive statutory pre-emption rights on a new issue of shares (although often modified to some extent in the investment documents). Whilst, in some US states, existing shareholders are not granted pre-emption rights automatically, so the investment documentation usually provides for such rights. 
• In the US, restrictive covenants imposed on founders such as non-compete and non-solicitation are less common than in the UK. This is because there are greater issues around their enforceability in some US states. 
• The NVCA investment documents used in the US do not contain bad or good leaver provisions relating to founder vesting which are present in the UK's BVCA investment documents. Instead, founder vesting in the US is usually set out in a restricted stock purchase agreement (or stock restriction agreement) entered into between the company and a founder, and once a founder is terminated or resigns, they keep all their vested shares and there is no clawback of shares as we often see in the UK if a founder is considered a bad leaver. Also, voting rights are typically retained if a founder leaves. 

What are some of the cultural or market nuances to be aware of when seeking funding in the UK vs. US?

My observations, based on personal experience, are that founders seeking investment in the US should be prepared for greater competition across all industries due to the larger size of the US economy and a slightly more forward attitude from investors as to how investment monies should be deployed and founders' decision making. US investors are very focused on scaling up at a quicker rate so, if a company's development does not go according to plan, they are more likely to take control and implement drastic changes to steer the company on a path that will guarantee a return with other sentiments in building a company taking a back seat.