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Home Finance Venture capital in Europe: a new study shows that 45% of VC investments fail or do not secure high returns
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Venture capital in Europe: a new study shows that 45% of VC investments fail or do not secure high returns

by Jessica Weisman-Pitts
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Venture capital (VC) is a critical source of funding for start-ups, particularly those that are just starting and have not yet generated significant revenue. Apart from providing funding to get a business off the ground or to the next level, VC firms are also important for start-ups as they can be a source of expertise and guidance, and also bring validation and credibility to start-ups, particularly when the funding comes from a reputable VC.

To better understand VC investment practices and decision making, we set up an alliance of scholars from European business schools and universities[i]. Collectively we surveyed 885 VC investors across Europe (they do represent almost half of the VC activity on the continent) to learn more about their investment selection and structuring, valuation, value adding activities and exit strategies and outcomes and syndication behaviour. Most of the responses came from VCs in France (20%), Germany (13%), Spain and Sweden (each 10%), Belgium (9%), and the UK (7%).

We found that overall, European VCs receive on average 851 investment proposals per year, of which only 6% lead to investments. While VCs expect to earn about 30% IRR (Internal Rate of Return) on their investments, the average return is 13% per year. And in terms of the average ownership stakes that VCs attempt to secure with their investments, we found that 63% of the European VC investors target relatively small stakes, of between 10% and 20% when negotiating deals.

The management team is the number one criterion

The most important factor by far is in the selection of the management team. Indeed, although VCs consider technology highly important when selecting investee companies, and this is expected for investors in highly innovative ventures, they primarily base their investment decisions on the management team. 93% of the respondents from the study highlight the team as an important factor ­and 73% consider them the most important when selecting investments. But conversely, the management team is also the most important factor by which ventures fail, according to 60% of the VCs.

When asked what other factors make an investment successful, 72% of VC investors stated that the offering, that is, the product, service, or technology, also has a huge impact. After that, timing is put forward as the next important factor (56%), followed by industry conditions (43%), and the business model (39%). Interestingly, simple good luck is considered to contribute to successful investments by a third of the VC investors.

Support to portfolio companies

VCs actively support their portfolio companies. They help raising follow-on funds and provide strategic guidance in 83% of their portfolio companies and they have board seats in 75% of them. 72% help their ventures with connections to potential customers, partners, etc., while 69% of the VCs provide support in exit processes.

Financial returns, but not always…

VC investors expect to get a 30% annual return on their investment when selling or exiting the ventures. 40% of investments are exited through merger and acquisition and 7% through an initial public offering. However, investing in young ventures is risky. 22% of all investments result in failures. We also found that 45% of European (VC) investments fail or do not secure returns above 2x the investment, with 28% of the investments exceeding expectations, and 9% earning more than 10x the invested capital. Together, this leads to an average annual return of only 3%, with no VC reporting annual returns higher than 20%.

Not all VC funds have purely financial objectives. However. Corporate VC funds, for example, report that 76% of their investments contributed to the discovery of new technologies. Governmental investors, in particular, care most about attracting private co-investors, high levels of job creation and innovation.

 

[i] Audencia Business School, Vlerick Business School, London Business School, Politecnico di Milano School of Management, Stockholm School of Economics, Universidad Complutense de Madrid, Université du Luxembourg, and Ghent University.

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