Why European VC returns are better than you think

Removing sampling biases reveals greater parity between US and European venture capital performance than is often expected, according to a report from eFront.

“US venture capital is miles ahead, but Europe? Forget it.”

That was the view of one London-based family office Private Equity International spoke to in March. Their less-than-glowing perception of European venture capital is not uncommon, with these funds often compared unfavourably to their US peers, according to the latest FrontLine report from investment software company eFront.

However, traditional methods of comparing the performance of European and US venture funds may not be entirely fair, the report said. It cited sampling biases such as measuring the performance of euro-dominated vehicles in US dollars and comparing mature US funds that went through particularly favourable conditions in the 1990s with younger European funds that did not.

All-time US VC funds, including vintages as old as 1991, generated a 1.58x pooled TVPI when measured in dollars, versus 1.29x for European VC, according to the report. The relative performance improved when measuring in euros, with US funds generating a 1.57x TVPI and European funds climbing to 1.32x.

Once sampling bias over maturity is eliminated – by comparing identical vintages from the 1998-2015 period – the performance of US and European funds was broadly similar, delivering a 1.34x and 1.27x pooled TVPI respectively in dollar terms. European funds actually outperformed the US in their home currency, returning a 1.31x pooled TVPI, compared with 1.29x across the pond.

“Sometimes, one measure of performance hides another,” Thibaut de Laval, chief strategy and marketing officer at eFront, said in a statement.

“This goes to show that while European VC may lack some of the blockbuster success stories seen across the pond – the likes of Facebook, Airbnb and Uber – the performance of venture funds overall has been very positive, and in line with US performance. Institutional investors who ignore European VC may well be missing out.”

The report coincides with the launch of six new venture capital funds of funds by the European Commission and the European Investment Fund. The vehicles – first announced in 2015 as part of the Commission’s Capital Markets Union action plan – will contribute €2.1 billion to a selection of VC funds, focused on at least four European countries each.