The British Private Equity and Venture Capital Association (BVCA) just published a report dispelling many of the stereotypes and myths about the performance of Europe’s VCs. The conventional wisdom has been that Europe’s risk-adverse nature and difficult IPO environment has constrained the potential and success of Europe’s venture and startup communities. As the report points out, we often here the “Where is the European Facebook” argument all the time from across the pond without data to back it up, namely concrete data on how Europe’s VC sector has actually performed vs the US over time. Fortunately, the BVCA in conjunction with the London School of Economics have conducted a in-depth study of the situation, which examined 35,798 companies (34% in Europe and 66% in the States) receiving VC funding between 1980 (1995 in Europe) and 2011. The main findings of the study challenge three of the biggest myths head-on:
Myth #1: “The likelihood of a successful VC exit is lower in Europe than in the US”
In order to evaluate this, the report used successful exit through an IPO or a trade sale as its gauge of success. While the report does confirm that US venture investments have been more successful overall, with 38.8% achieving a successful exit over the entire period in the US compared to 25.3% in Europe, this difference is mainly driven by the timing and year of the investments, industry, and life-cycle stage of the company. When these factors are controlled for, the probability of success, particularly when looking at IPO exits, is virtually the same in the US and Europe. However trade exits are the one area where Europe clearly under-performs vs the US as the probability of a successful trade exit is 8% lower in Europe. The study doesn’t provide rationale as to why this is, but as this is a key potential exit strategy for the venture community, it would be interesting to understand how this difference could be narrowed.
Myth #2: “Some vaguely understood determinants of success are tilted in favor of the US and against Europe”
The report findings are clear that both in the US and Europe, experienced VCs and entrepreneurs dramatically increase the chance of a successful exit. Thus, the difference in performance results between Europe and the US is essentially due to the fact that Europe’s venture sector developed later than the US’s and Europe’s smaller pool of repeat entrepreneurs. As the report’s conclusions highlight, this is something Europe’s venture and entrepreneurial community have been actively working to resolve in recent years. It’s also something that, assuming the current momentum continues, will naturally be resolved as time passes.
Myth #3: “There is a chronic stigma around failure which harms European entrepreneurs”
This is probably one of the most common memes about Europe and it’s overall appetite for entrepreneurship. In order to assess whether it’s true or not, the researchers took a look at the the fraction of VC-backed firms with one or more founders who founded a VC-backed venture in the past that did not have a successful exit (IPO or Trade Sale). What they found was that the percentage of ‘failure entrepreneurs’ who were getting financing was actually higher in Europe and the US. Again, the rationale behind this was not provided, but I think its probably safe to assume that having raised funding previously gives these ‘failure entrepreneurs’ a much better network within the venture community and makes them more adept at interacting and dealing with potential investors (pitching, negotiating, etc.)
The researchers did take a look as well to see if there were significant differences between European countries on the above factors and the answer was basically no. They did, however, find that the UK tends to do a bit better vs the median country in Europe in terms of success while Germany and Belenux a big worse, although Germany does do quite well when only examining IPOs.
When reporting on this study, the FT spoke with the CEO of France’s BlaBlaCar, Nicolas Brusson who’s raised two rounds of funding with French and UK VCs. Brusson says that the findings of the report definitely reflect his experience. He adds:
“Now we have access to the experience of people who have done it two to three times already and I think 10-15 years ago it was not the case in Europe.”
The FT also, rightly, points out that the European venture market is still much smaller than the US as in 2011, there were 343 active VCs investing $22.7bn, compared with 92 and investing $4.1bn in Europe. While the findings of the study are definitely encouraging, but this is a glaring difference that has to be narrowed if Europe wants to further improve the scale and performance of venture performance.