Venture Capital Performance : A Comparative Study of Investment Practices in Europe and the USA

European venture capital (VC) funds have historically underperformed their US counterparts. This has resulted in reduced investment into European VC by the traditional institutional investors. This book investigates the factors that give rise to the performance difference. It is based on the author’s research at the Adam Smith Business School, University of Glasgow which involved a qualitative study of some 64 VC firms in the UK, continental Europe and the US, supplemented by 40 interviews with other stakeholders, including limited partner investors, corporate venturers, entrepreneurs and advisors. Readers will gain an in-depth understanding of the various structural, operational and wider environmental factors that impact on the performance difference between UK/European and US VC funds. The study is unique in that it provides, for the first time, a holistic and extensive analysis of the entire investment process from sourcing deals to exiting deals specifically contrasting Europe and the US in terms of the variables pertaining to the investment process and the impact on the fund performance. Factors impacting on the performance differential are structural, resulting from characteristics of the funds themselves, operational such as the investment practices of the VC firms which manage the funds and environmental such as culture and attitude to risk and the wider ecosystem in which the funds operate. These factors are set out clearly for the reader. The characteristics of the better performing funds in Europe and the US are also investigated. The book is aimed at academics who are researching venture capital fund performance and investment practices and also at practitioners, advisors and policymakers who want to learn about best VC investment practices. Whilst the book is focused on European and US VC investing, the best practices are also pertinent for VC firms and funds setting up in other geographies, particularly in emerging markets. To this end, best practice guidelines based on the research are included. Venture Capital Performance Contents Figures Tables Foreword Preface Acknowledgements 1 Introduction Setting the scene Venture capital and its investors Performance of venture capital funds in Europe and US Consequences of low VC returns in Europe Prior research on the gap in performance between UK/Europe and US VC fund returns Gaps in understanding about the performance difference Research questions and methodology Qualitative approach Theoretical framework Contribution of the research to scholarship and to practice Structure of the book 2 The European/US gap in venture capital fund performance Fund performance data – sources, definitions and critiques Prior academic studies on the performance differential More recent industry evidence on the performance gap 3 The factors that impact on venture capital fund performance Introduction to research into variables that impact on fund performance Structural factors Operational factors Wider environmental factors Studies of the performance gap between European and US VC funds 4 Theoretical considerations Structural features of venture capital funds Operational areas Wider environmental influences 5 Research aims and methodology Research gap Research questions Philosophical stance Engaged scholarship Methodology Sampling strategy Interview process Thematic coding procedure Questionnaire 6 Structural differences Introduction Sector focus Stage focus Geographic focus Partners and their backgrounds Partners’ responsibility for deals Use of venture partners Advisory boards Conclusion 7 Operational differences Introduction Investment strategy Deal sourcing Due diligence Investment approval process Investment terms Syndication Monitoring and portfolio reviews Adding value Exiting from investments Conclusion 8 Wider environmental differences Introduction Cultural differences Fragmented markets Ecosystem Scaling issues Technology clusters Lack of experienced CEOs and serial entrepreneurs The impact of luck on investment success Conclusion 9 Characteristics of firms with better performing funds Introduction Previous research on top performing VC funds Comparison of firms with top performing funds with firms with non-top performing funds Consistent top performance Firms with outlier performance Differences between top performing firms in Europe and US Characteristics of more recent European VC firms Conclusion 10 Summary and conclusions Introduction Research questions and methodology Contribution to literature Summary of research findings Theoretical contribution Practical implications and sharing of best VC investment practices Guidelines for best practice VC investing Structural (Chapter 6) Operational (Chapter 7) Wider environmental (Chapter 8) Limitations of study Proposed future research work Bibliography Appendix 1: VC interview aide-memoire Appendix 2: Questionnaire on the importance of certain factors to investment success Index "European venture capital (VC) funds have historically underperformed their US counterparts. This has resulted in reduced investment into European VC by the traditional institutional investors. This book investigates the factors that give rise to the performance difference. It is based on the author's research at the Adam Smith Business School, University of Glasgow which involved a qualitative study of some 64 VC firms in UK, continental Europe and USA supplemented by 40 interviews with other stakeholders, including limited partner investors, corporate venturers, entrepreneurs and advisors. Readers will gain an in-depth understanding of the various structural, operational and wider environmental factors that impact on the performance difference between UK / European and US VC funds. The study is unique in that it provides, for the first time, a holistic and extensive analysis of the entire investment process from sourcing deals to exiting deals specifically contrasting Europe and the US in terms of the variables pertaining to the investment process and the impact on the fund performance. Factors impacting on the performance differential are structural resulting from characteristics of the funds themselves, operational such as the investment practices of the VC firms which manage the funds and environmental such as culture and attitude to risk and the wider ecosystem in which the funds operate. These factors are set out clearly for the reader. The characteristics of the better performing funds in Europe and US are also investigated. The book is aimed at academics who are researching venture capital fund performance and investment practices and also at practitioners, advisors and policy makers who want to learn about best VC investment practices. Whilst the book is focused on European and US VC investing the best practices are also pertinent for VC firms and funds setting up in other geographies, particularly in emerging markets. To this end best practice guidelines based on the research are included"-- Provided by publisher