Venture Capital Firms in Europe vs. America: The under Performers

Article excerpt

In the July/August 2010 issue of IBJ, these co-authors described the "caste system" and other secrets of venture capital (VC) firms in America. In this article, they summarize their interviews with VCs in Europe. While firms in Europe and America share similarities, the authors note that there are important differences that may explain why European VC firms perform poorly in comparison to those in America.

VENTURE CAPITAL FIRMS IN EUROPE

Venture capital activity varies greatly across Europe. As one prominent fund of funds manager with investments in more than 50 VC funds across Europe put it to us:

The UK is far ahead of the rest. Holland and Scandinavian countries are next. There is not so much VC activity in Germany and Switzerland. France has some, but its law requiring pension funds to invest a certain percent in VC firms is controversial and perhaps counter-productive. There is very little VC activity in Italy, Spain and Portugal.

Available data for the total VC funds disbursed in 2005 (US $, billions) are as follows:1 U.S. (27), UK (10), Scandinavia (2.2), Holland and Belgium (1.4), Germany (8), France (6), Italy (2), Spain (0.7), Portugal (.003), and the total for Europe (32).

Despite the considerable variation across Europe, VCs there have more in common with each other than with VCs in America.2 Based on our interviews with firms in Europe and the limited research evidence available, this article highlights the key differences in VC activity between Europe and the United States.

As the authors who reported the figures for VC activity in Europe point out: 3

The venture capital industry started in the U. S. and spread slowly around the globe... the venture capital markets both in Europe and the U. S. grew rapidly in 1999 and 2000. Yet, while the U. S. VC markets experienced a rapid decline in 2001/2002, the European markets remained comparatively strong and actually overtook the U. S. in terms of total funding activity in 2004 and 2005.

We note that the above summary is not an apples-to-apples comparison, because in Europe the term "venture capital" often refers not only to early and later-stage investments as in America, but may include buyouts as well.4 An apples-to-apples comparison suggests that the level of early-stage financing in Europe has been roughly a quarter of that in the United States.5 To avoid any confusion, we will use the term "venture capital" in this article to refer to early and later-stage investments only, excluding buyouts.

Even with this narrower definition, it is clear that both public and private interest in venture capital and the volume of VC activity in Europe has been increasing in recent years. However, the performance of European VC funds lags far behind that of their American counterparts. For example, calculations by Venture Economics indicate that from the beginning of the VC industry in Europe in the early 1980s until 2007, the average European VC fund had an annual return of minus 4 percent versus 16 percent for the average U. S. VC fund.6

Why have increasing amounts of money been poured into European VC funds despite their dismal performance? The short answer? Because European VC firms are striving to emulate the success of their American counterparts in creating new wealth, and European governments are keen to duplicate American VC success in creating new industries and new jobs.

Why then have European VC funds performed so poorly relative to their American counterparts? One reason, beyond the scope of this short article, is that government intervention in venture capital markets is flawed in conception or in execution, or both. An authoritative analysis of why public efforts to boost entrepreneurship and venture capital have failed, and what governments can do about it, is the subject of Josh Lerner's new book, Boulevard of Broken Dreams.7

Other reasons for the difference in performance between VC firms in Europe vs. …