Silicon Valley 🤓 secret weapon is called 🤝 "trust"

When an entire ecosystem trusts investors and founders, things become easier for everyone. Either chasing or deploying capital becomes natural.

Startups 🚀are not like any other company, as I discussed in my previous article. Founders are very ambitious people and get into businesses that can scale the world market. Venture capitalists decide to bet on their vision and sometimes work hand-in-hand with perseverant founders for years. Building a big company in ten years is challenging. Still, entrepreneurs who make startups in Silicon Valley have an entire system that trusts and pushes them toward success. When I talk about the "system," I'm referring to a large group of people and organizations: 

• 🏛the national government

• 💰their investors

• 📈 the market

• 🎖all the talented people who joined their teams.

The regulation of Silicon Valley companies is the result of seventy years of business in the area. Maybe more, I couldn't say. These companies share a standard legal structure designed to help the system trust the fact founders can create big successful companies. 

For example, all Silicon Valley startups are incorporated as Delaware C-Corps, even if they usually don't operate in that state. Their main office and part of the core team are in the Bay Area. So why Delaware? First of all, a Delaware C-Corp has fewer limitations compared to a California (see, for example, the number of board members). Then the Delaware Court of Chancery works very efficiently with the enterprise. That provides investors with better assurance that any potential legal disputes can be solved in a matter of weeks or months, not in years. If the company doesn't operate in Delaware, then the state does not have to pay state corporate income tax to Delaware.

Nearly 1.4 million legal entities incorporated in Delaware as of 2018. 67.2% of all Fortune 500 companies are incorporated in Delaware [Annual Report Statistics].

Hundred of thousands of companies get created 🍾every year, so the process is fast and inexpensive—like $500 to create a new corporation.

Delaware’s laws and policies make it easy for businesses to incorporate, avoid liability, and retain privacy.

🤫Confidentiality is essential in startups' life, and any data is a fundamental asset of the company. No startups want its financial data freely available to anyone—if that is not part of its storytelling strategy—, and that's weird because some countries don't understand that. 

I come from Italy, so for me, it is pretty natural to compare startup standards between the Bay Area and my country. I'm sure that many other countries have similar traits when we talk about startups. Pretty often national models to create companies—startups—differ too much from Silicon Valley custom and practice. That makes it hard for a US investor to deploy capital to that country.

San Francisco's way of making things happen in the startup world is the best possible we have today. Investors all around the globe trust the system and the local system trust founders. Silicon Valley is not a static environment. It changes and tries to improve year after year. Making the fundraising process more straightforward and trying to be more and more founder-friendly is paramount to make things happen.

For example, if you take a look at Y Combinator Series A term sheet(*) template, it's one page long:

It may be surprising to see everything covered in a single page. This wasn’t always the case, but became common over the last decade as some investors decided to make their term sheets more user friendly by shortening the legalese as if to say, “We aren’t going to get bogged down in the minutiae. We’re going to make this easy, friendly, standard and fast.”

(*) For those of you who are pretty new to this space, a "term sheet" is a non-binding summary of terms preliminary to a priced round investment in the startup—like a Series A. A VC firm gives a term sheet to a startup in case it intends to lead the investment round. Discussing a term sheet usually requires the founder tens of hours with a corporate lawyer to get to the final version of the document.

Ecosystems outside Silicon Valley often manage everything very differently. In 🍕 Italy, for example:

• Most data concerning financial statements of private companies are public, and anyone can access them paying a small fee

• Lean investments through convertible securities—Convertible Notes or Y Combinator SAFEs—are inapplicable in an investment round

• An expensive and time-consuming notarization process is required to finalize any investment

• Investments require handwritten—e.g., wet ink—signatures or formal notarial process

• Legal liabilities are pretty big—a trial can take ten years to get to a conclusion 🙊

Now I'm not a lawyer, so please check everything with your professionals, but what I pointed out is enough to understand that get a US investor in an Italian round is pretty hard for now. There are exceptions—like Accel in BruBrum last round—, but I guess the nation must change before VC’s money can flow from US investors toward startups in my country.

The most difficult of all changes is a cultural and systemic one. It's called 🧸trust.

The more a country can be trusted, and at the same time, it gives trust back to its citizens, the more things will change rapidly. Less is more! Trust brings to simplification of the system's regulations, and that opens a bunch of opportunities.

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This article covers many different concepts—like convertible notes or YC SAFEs—that you could have heard of, but probably are not completely clear. Well, don’t worry! We are going to cover all of them in future posts.

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