What are the most common misperceptions of the European venture capital market? The British Private Equity & Venture Capital Association (BVCA), in association with Dow Jones, has published a report on Monday which treats this question, by examining the determinants of successful exits in European venture capital transactions and compare them to US transactions.
There is a widely held view among institutional investors and policy-makers that Europe is lagging behind the US in respect to the financing of entrepreneurship. Many of these attitudes were formed in the immediate aftermath of the dot.com bubble but have persisted over the course of a decade, despite some significant successes within the European entrepreneurial communities.
This new study – written by Dr. Ulf Axelson and Milan Martinovic of London School of Economics and utilising data provided by Dow Jones VentureSource, the leading global venture capital research database – uses empirical evidence to challenge some of the more enduring myths and illustrates that European venture capital and entrepreneurship is in far ruder health than often portrayed.
Contrary to perceived wisdom, the report found no evidence of a stigma of failure for entrepreneurs in Europe. Their main points were the following:
US venture capital firms are more likely to hold successful exits than European VC houses.
US and European VC houses have roughly the same likelihood of an IPO exit (though Europe underperforms the US in trade sales).
US VC success is down to insurmountable differences between the US and Europe.
Venture success has the same determinants in both Europe and the US, with experience of both venture capitalists and entrepreneurs a key factor. The larger pool of repeat entrepreneurs in the US, combined with the relative immaturity of the European VC sector, explains the difference in performance between the US and Europe.
There exists a stigma surrounding business failure in Europe, which harms entrepreneurship and the ability of start-ups to raise funding.
There is no evidence of a stigma surrounding failure. A previously unsuccessful entrepreneur has at least as high a chance of getting financing for a new venture in Europe as in the US.
Agreeing with the findings, Richard Anton, a partner at Amadeus Capital Partners and BVCA chairman, said: “The European venture capital industry has changed dramatically over the last decade yet unfavourable perceptions, formed in the fallout of the dot.com bubble, continue to influence opinions within the investment community and beyond. Such attitudes have unfairly hampered European high-growth companies which in turn poses a serious threat to the future of both entrepreneurship and the economy across the Continent. The sooner we can dispel the myths that unnecessarily hinder venture capital, the sooner venture capital can help power the next generation of world-beating companies.”
Contrary to the stereotype, there is no difference in the success rates of European and US deals. Venture success has the same determinants in both Europe and US, and more experienced entrepreneurs and venture capitalists are associated with higher probabilities of exit. The fact that serial entrepreneurs are less common in Europe explains the difference in performance.
Scott Button, CEO of UK tech-start-up Unruly Media, agreed: “The European start-up ecosystem is a weird place. You’re always hearing how much more difficult it is to find co-founders, get funded, or exit successfully than it is in the valley. For sure, none of this is easy, but it’s never struck me that it’s really any harder in, say, Shoreditch than it is in Mountain View. This research explains why. It’s not. Much of the received wisdom about entrepreneurial success and the conditions for that success is unfounded myth.”