At Hustle Fund, we get a lot of applications from startups who are serving customers in a different geography from where the business is based.

Like a UK-based startup that serves U.S. customers, for example.

I got curious about these opportunities from an investor perspective: what risks do these startups face, what risks should investors be aware of, and what needs to go right to make this work?

Other companies have done this successfully

There are some massive brands that have launched outside the U.S., acquired a U.S. audience, and went on to have outrageous exits.

Canva comes to mind. Spotify. HelloFresh. Atlassian. Wix. Waze. Typeform. Monday.

So yes, there are some huge opportunities to be found. Let's talk first about the red flags, then get into the green ones.

Regulatory and tax risk

Every country has its own unique set of regulations. Companies that aren’t in compliance could face huge financial and legal troubles (and fees).

Startups need to be well educated around industry-specific regulations (IE crypto, healthcare, finance, etc), and governmental regulations. There are also tax regulations to consider.

Oh, and these regulations are always changing. So that’s fun.

Ensuring compliance in the country that you live in is hard enough. When you're navigating them from half a world away, it gets even more complex.

If you're thinking of investing in a company that plans to do business internationally, make sure the team has considered these challenges.

Do they have a compliance team and tax accountant who can help them navigate these waters? If not, red flag.

Serving customers

Customer acquisition 101: you need to deeply understand your customers in order to serve them.

What problems are they facing? How do these problems show up day-to-day? What makes them happy? What makes them excited? What makes them anxious? Where do they spend their time? What trends are they following? What tools do they use?

When you’re not living alongside your customers, understanding them deeply becomes a big hurdle. And if you don’t understand them, you will not acquire them.

So… does the startup you're evaluating have advisors, operators, or consultants based in the same area as the target customer? If not, red flag.

Risks to you as an investor

As a foreign investor, you may have to deal with things like corporate governance, securities laws, and foreign ownership restrictions that put your investment at risk.

To protect yourself, consider working with local partners who understand regulation and compliance in that market. Conduct deep due diligence. And consider the investment instrument (a SAFE or convertible note will provide the most flexibility).

You have all the fun.

Funding challenges

Many U.S.-based VCs are hesitant to invest in foreign startups. For many, this is a missed opportunity, but that’s a different story.

If the startup you're evaluating will need to continue to raise outside capital, they may struggle to do so from U.S.-based VCs.

Pursuing an exit could also be challenging, unless the startup has deep connections to potential acquirers.

When the Red Flag Turns Green

There are cases when investing in a startup that's serving a customer base in a different market could work in your favor.

Regulatory support

Regulations and compliance is a big risk for all startups — local and foreign alike. Does the startup you’re evaluating have someone on the team who knows these topics inside out?

If so, lower the red flag.

U.S.-based support

If the startup has advisors, investors, and/or operators based in the U.S. (or whatever country they're penetrating), many of these concerns could be null.

These people can help with customer discovery, reviewing content with an eye on cultural differences, cultivating partnerships with local brands, and developing relationships with local investors.

Home Field Advantage

Building in a different market could come with a certain number of advantages. For example:

• lower labor costs
• lower overhead costs
• strong technical talent
• government incentives like grants and tax programs
• lower cost of living for founders

So don't write off these startups just because they're based elsewhere. Instead, dig deeper with these questions:

1. Does this startup understand U.S. regulations?
2. Is their U.S. scaling strategy specific and realistic?
3. Have they considered ways to protect their investors from regulatory and legal risks?
4. Do they have deep ties to their customer base through things like partnerships or local teammates?

The Bottom Line

Here's the tea: A non-U.S. startup targeting the U.S. market isn't always a big red flag. But it does require you to dig deeper.

In my opinion, that digging is often worth the trouble, since companies that can thrive in foreign market clearly know how to expand and scale.

The exit, if it comes, could be outrageous​.

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