Picture this: you have been building your start-up for years, pitching, pivoting, and hustling to turn an idea into something real. You have worked late nights, survived endless meetings, and convinced the first few clients that your product matters.

Now, finally, you are at a tipping point. Investors are interested, and you are faced with a choice that could define the next chapter of your business.

Option A is simple: one million pounds from a local venture capital firm. Option B is a cheque for the equivalent of one million pounds, but from a foreign investor, somewhere across the globe.

On paper, the sums look identical, but any founder will tell you that the origin of the money can make a huge difference. It is not just about the currency or the numbers. It is about trust, networks, understanding, and a subtle kind of confidence that is hard to quantify but easy to feel when a deal is being negotiated.

Research from emlyon business school wanted to confirm whether foreign investment truly had a different impact than local VC funding.

Peter Wirtz, Professor of Corporate Governance at emlyon business school, and his team examined over 600 investor-start-up pairings across Europe over a 20-year period. “We wanted to move beyond anecdote and see whether the origin of capital really affects how start-ups are valued,” Wirtz explains. “What we found is that investors do not just bring money – they bring a set of assumptions, confidence, and networks that shape the deal from day one.”

Start-Ups Lose Value When Venture Capital Comes Solely From Abroad

The study found that start-ups relying exclusively on foreign venture capital can end up with lower valuations. Foreign investors face unfamiliar risks: regulations that differ from their home market, local competition they do not fully understand, and cultural or institutional norms that are opaque to outsiders.

“To compensate for these uncertainties, foreign investors often negotiate lower valuations,” Wirtz says. “It’s a kind of built-in insurance. Even before the cheque is signed, the numbers reflect caution.”

Domestic investors, by contrast, have a natural advantage. They are comfortable with the market, familiar with the regulatory framework, and connected to the networks that make deals happen. This confidence often translates into higher valuations for start-ups. “Local investors know the terrain,” Wirtz notes. “That familiarity allows them to invest decisively, and it shows in the valuation they assign.”

Not All Foreign Money Is Bad Money

It might sound like start-up founders should stay local when looking for financial backing but the researchers are quick to point out that foreign investment is not inherently negative. Their research shows that countries with strong legal frameworks and competitive start-up ecosystems can mitigate the valuation discount that foreign investors tend to impose.

Institutional safeguards and clear regulations reassure investors and reduce perceived risks. Where these structures exist, foreign capital can be just as effective as local funding-and in some cases, bring additional benefits such as international connections and market credibility.

“Local venture capitalists are confident because they understand market dynamics, regulations, and cultural nuances,” Wirtz explains. “That familiarity is what allows them to make bolder bets. It highlights that money alone isn’t enough-context matters.”

Capital Alone Is Not Enough

The study also challenges the idea that more money automatically equals more value. Institutional strength, legal certainty, and robust ecosystems are more important than sheer market liquidity.

Countries with plenty of capital but weak protections may still see start-ups undervalued by foreign investors. Investors are willing to pay more for businesses that exist in environments where rules are clear and contracts are enforceable. “Even a large cheque can carry hidden costs if the ecosystem isn’t solid,” Wirtz says.

Why This Matters for Founders, Investors, and Policymakers

For founders, these insights are critical. Foreign VCs can bring expertise, international connections, and credibility, but that may come at a valuation cost. Local investors can offer not just money but an endorsement of the start-up’s place within the ecosystem. Understanding the trade-offs between foreign and domestic funding is essential for founders who want to maximise the value of their business.

Investors too should take note, as the study highlights the importance of building local knowledge. “Building networks, understanding local markets, and navigating regulations effectively isn’t just bureaucracy-it materially affects the value of a deal,” Wirtz says. Those who take the time to integrate into local ecosystems can achieve better outcomes.

Policymakers also have a role to play. By strengthening legal protections, improving regulatory clarity, and supporting competitive start-up ecosystems, governments can make foreign investment more valuable. Building a solid ecosystem increases the impact of every euro, pound, or dollar invested.

Money may be king, but the kingdom matters. Foreign capital can fuel growth and open doors, but it may come with hidden costs if the ecosystem is not robust. Local investors pay more for comfort and confidence, which often translates into higher valuations.

When deciding which offer to take, founders should consider more than just the size of the cheque. The source of the funds is just as important as the amount. “Like currencies in different countries, the real value of investment depends on context,” Wirtz concludes. Choosing the right investor is not only about funding growth, but about maximising the value of everything that has been built.

By, Peter Remon

Interested in this topic? You might also like this…