Despite the ongoing dampened perception of European venture capital, the last 24 months have been no less than striking for the industry. The following data suggests that, after 20 years playing catch up to US, European VC has finally reached an inflection point, with better deal performance for the first time in history.
Fred Wilson recently posted a thought-provoking blog entry underscoring the challenges for U.S. venture-backed start-ups in reaching exits greater than $100 million, concluding that only five to 10 per cent of them actually make the cut. Given that the U.S. is considered the gold standard for venture returns, and with a debate currently roaring on Europe’s reputation as an also-ran in the VC arena, one would think that European VCs and start-ups would have a much worse success rate. Well, think again. I set out to find out the truth of the matter and was in for a surprise.
What struck me first was the lack of easily available data on the performance of European venture capital investments, assuming that what matters most to investors are the multiples of cash they have invested rather than raw exit size. After an extensive search—using data gleaned from the European Venture Capital Association (EVCA), Dow Jones VentureSource and our own internal fund data at Earlybird—I found the results mind-boggling. It seems that the performance of European startups far exceeds their reputation. Here’s what I discovered (for details skip to the presentation):
(1) For the first time in history, U.S. VC is being outperformed by European VC. How is that you might ask? Proportionally Europe is now producing higher exit multiples than the US and, although average exit values are 25 per cent smaller, lower entry valuations (roughly $5.5 million in Europe versus $16 million in the U.S.) and higher capital efficiency in Europe are overcompensating for disadvantages in exit value.
(2) Europe has seen some $15 billion in venture-backed liquidity events over the past 24 months. This represents half of the $30 billion in U.S. venture-backed liquidity events during the same period, yet with only one fifth of the venture funding. This means that fatter checks are being written to investors than ever before in Europe.
(3) Since 2005 there have been an impressive 14 venture-backed exits of European start-ups larger than $1 billion—among them Luxembourg’s Skype, Swedish open source company mySQL, British sports betting platform Betfair and German online mortgage broker Interhyp, which delivered the fund I joined, Earlybird, a x52 multiple.
(4) European VC-backed pre-and post-IPO performance also now matches or exceeds that of U.S. counterparts, while a higher share of European VC funds demonstrate top U.S. quartile performance.
Post-bubble, a European resurgence
Why are European exit multiples outperforming those in the U.S.? One reason is the quiet resurgence of European venture capital over the past seven years. In the wake of the dot.com crash, U.S. investors had essentially written off European VC. The market was still flooded with capital and nearly everyone, including limited partners, ran for the woods. But starting in 2004-2005, the market saw a slow but steady turnaround, with a renewed surge in VC-backed exits and a jump in both the quality and quantity of the entrepreneurial pool in Europe (See slide show).
A fundamental shift in supply and demand had also taken place in the venture economy. The number of VCs shrank dramatically and existing funds lowered their commitments to the sector, resulting in a dramatic dearth of capital. Only the most experienced VCs in Europe were left standing, and it was a buyer’s market, so start-ups could be funded with relatively low investment amounts. With the supply limited, only the very best startups received venture funding. While this makes it more challenging for startups, we are seeing top-notch companies emerge. Add this to a mature seed funding/angel ecosystem, and you’ve got European early-stage companies that are scaling faster and accruing more value sooner than ever before.
While this has helped avoid excess froth and frenzy in Europe, the downside is that some excellent entrepreneurs don’t get funded. This is probably why we read stories almost daily from disillusioned entrepreneurs who have bolted to Silicon Valley, or those praising U.S. VCs for funding them and lambasting European VCs for passing up on the Great Opportunity. Yet hardly anyone has spoken about the 2,661 European entrepreneurs who received venture-backed funding from European VCs alone in 2010 – this vastly outnumbers the ca. 194 Europeans who migrated to the US to receive first time funding from a US VC during that same timeframe.
Hiding their light under a bushel
Clearly the message that venture capital is alive and well in Europe hasn’t gotten out.
European entrepreneurs and VCs, for one, are notoriously shy about promoting themselves. And the differentiated LPs now entering into European venture funds, such as Adams Street, Morgan Stanley, HabourVest et al. are extremely discreet in disclosing which funds they choose. Profound negative bias in official venture performance statistics in Europe has also clouded the picture. Unlike the U.S., where endowments oblige most GPs to publish financial performance data, almost none of the top-performing European funds publish their financial data in any of the leading databases; moreover, there is almost no reported performance of post-bubble European vintages. Making matters worse, although only 10 per cent of funds in Europe are considered active following the bubble burst, the bulk of fund managers that are still listed in the Thomson Venture database are no longer active (i.e., have not raised funds since 2005). As a result, the most-cited venture statistics for Europe largely refer to the non-contributing long tail of VCs. No wonder European VC performance looks miserable from the outside!
The reality is, there are great venture opportunities in Europe, even if not all deals are making headlines. See for example Mike Butcher’s recent magnum opus on European VC; he describes the situation far more succinctly than I could.
I have not even touched upon the emerging class of entrepreneurs in Central and Eastern Europe that are now starting to churn out exceptional technology companies. But let’s stick for now to Western Europe, taking Germany as an example. Over the past 24 months, Germany–with an economy that is equal to 25 per cent of the U.S. GDP–has produced the highest number of venture-backed exits in Europe ($4.4 billion). Yet the country has only four independent VC funds of investment-grade size (Wellington, Target Partners, Holtzbrinck Ventures and Earlybird), compared to 227 funds in the U.S. Looking at this environment, Germany has some of the most attractive venture fundamentals in the world at the moment.
Comparing venture hubs across the globe is a little like comparing apples and oranges. Yet, the one comparable that investors care most about is the multiples of cash invested. There are differing philosophies on how to achieve them, including the amount of capital required to reach an exit beyond $100 million. In Silicon Valley, besides a few cool heads who recommend modest cash injections for early stage start-ups, it is generally assumed that the more cash in, the bigger and faster the exit. But if you look beyond the big five in the U.S. (Zynga, Facebook, LinkedIn, Twitter or Groupon) and instead filter the hype out of the data, you’ll see that European VCs and startups are more than holding their own.
View more presentations from Jason Whitmire Jason Whitmire (@earlybirdjason), a former tech exec and entrepreneur-turned VC at Earlybird Venture Capital. Read more about Whitmire at his early-stage blog http://blog.earlybird.com/jason_whitmire.
 TechCrunch, “The Great European VC Debate – Timid, risk averse, bad? Or just misunderstood?” July 15, 2011
 Earlybird Venture Capital, “Turning Venture Capital Data into Wisdom” (presentation), July 27, 2011
 Bird’s-Eye View, “European Ex-Pats: Beware of Smoking Your Own Dope!” July 20, 2011
 TechCrunch, “Loic Needs To Get His Head Out Of His Silicon Valley,” July 7, 2011
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