Negotiating cross-border investments: Insights from a seasoned investor

Today, there are great opportunities in the cross-border investment world. While early-stage funding continues to fall globally, some markets continue to thrive. Last year, foreign investment in the Latin American region rose by 51%. That number will likely grow this year as constraints on U.S. investment in China cause VCs to look for countries closer to home.

Unfortunately, not all of those investments happen under ideal circumstances. Many VCs now take 30% to 40% of startups’ equity in early-stage rounds. If you’re desperate to raise funding, it’s easy to get locked into these unfavorable terms, perhaps giving away more of your company than you had initially anticipated.

Getting ideal terms is even more complicated in cross-border investing, which is why you need to understand what you’ll be negotiating to navigate that market successfully.

LatAm founder challenges

While Latin American investments present a greater risk to investors in specific ways due to political and economic instability, they also typically offer a higher return profile due to increased market growth, low operation costs, and high demand for new technologies.

For LatAm startups, investments from foreign VCs present an opportunity to bring in experienced advisers and contributors who can help the company expand to new markets. However, there are a lot of complications to cross-border investment term negotiations in the form of negative VC perception of LatAm startups, as well as geographic distance and regulatory challenges.

Again, the perception that Latin American startups come with higher risks can put them at a disadvantage when negotiating with VCs. Investors are likely to look for higher returns to compensate for the added risk, which means they may also want to take a more significant portion of capital. And those risks can also contribute to an overall lower valuation for startups.

There’s also a substantial challenge of geographic distance. It might be harder for you to connect with your VCs for advice and assistance navigating the market when you’re dealing with different time zones, languages, cultural experiences, and market ecosystems every day. This situation can be frustrating, particularly for startups working on increasing their global visibility.

I remember one LatAm startup founder I worked with whose investors were all based in Los Angeles and lacked experience in LatAm investments. That made it much harder for the founder to connect effectively with their investors due to the language barrier, time difference, and, most importantly, the investors’ lack of understanding about market dynamics impacting Latin American companies. For instance, this month, Mexico’s lower house passed a bill to revamp national stock exchanges to boost trading and make it easier for companies to go public. The bill creates opportunities for startups that an experienced LatAm investor would easily be able to help them take advantage of, whereas a less experienced investor might not.