The timing of US-based venture capital (VC) firm Highway 12 Ventures’ announcement picked up by news provider Wall Street Journal it would concentrate on selling its portfolio companies rather than try fundraising was serendipitous for Germany-based peer Earlybird.
However, rather than schadenfreude – German for taking pleasure at another’s misfortune – Earlybird through chance had been releasing a report saying why European VCs would outperform US peers.
There’s a nice, long slideshow from Earlybird here, with critical questions from news provider Techcrunch here.
The truism in venture investing is that successful firms remain successful across different fund vintages, and vice versa, but there are not that many of the good ones; about a dozen in Europe (ie looking at the names behind the 63 exits of at least five times money invested Earlybird lists) and about 20 in the US.
Earlybird, therefore, makes valid points in its presentation that with the reduction in the number of underperforming VC firms and an increase in entrepreneurial demand for capital conditions are ripe for strong multiples of money invested and even a few very successful ones. With less dross to clutter the numbers, returns overall might even reach positive territory, ie VCs deliver more money back to investors after fees than they draw down.
Naturally, statistics are unreliable and might fail to take account of this – Earlybird calls the industry association’s figures "misleading" because so few report them.
But given the potential personal rewards for being successful as a general partner and the quality of lifestyle there will always be new partnerships being created to cloud the numbers.
And the enormous weight of rubbish sitting in VCs’ funds remains and continues to grow. For example, using analysis by Harvard’s Josh Lerner and UK non-profit organisation Nesta in their report Atlantic Drift, the average (mean) VC fund backed between 10 and 16 deals between 1990 and 2005 and six to 8.5 between 2006 and 2009.
There were about 860 funds raised between 2006 and 2009 in the US, which tends to back more portfolio companies than their European peers (European VCs raised between a high of 121 funds in 2007 to a low of 55 in 2009). Exits (flotations or takeovers), meanwhile, ticked along at between a third and a tenth of the investment rate in Europe and the US.
The swollen numbers of portfolio companies remains about an estimated 20,000, maybe more, versus the 60-odd 5x exits in Europe.
If Earlybird truly wanted to get people to think again about venture investing in Europe it could do worse than provide an examination of why the proportions of success against failure are not better for the majority rather than the few even after all the time and careful portfolio selection?
The analysis might bring the conclusion that the business is difficult and encourage a sense of collaboration with other types of investors whose different approaches can also reap returns, whether by angels or corporate venturing units.
It is in this spirit that angels, VCs, corporate venturers, universities, government officials and entrepreneurs met up at Nesta’s office in London last week to exchange views and start to piece together a more collaborative and promising future for Europe’s brightest start-ups.