Venturing into practice

Venturing into practice

Keith Arundale Venture Capital funds Aspire 19
PwC Colin Mason's PhD student
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Whilst working in his former career at PwC, Keith Arundale became intrigued with the apparent inferior performance of European venture capital funds compared to their counterparts in the USA. His responsibilities at PwC included reporting on the firm’s annual performance measurement survey conducted for the British Private Equity & Venture Capital Association (BVCA), the professional association representing private equity and venture capital in the UK ( Both the BVCA’s and Invest Europe’s (the European association for private equity and venture capital) data consistently revealed an overall underperformance of venture capital funds in Europe compared to the USA. For example, the latest available performance data published for 2013 by Invest Europe sourced by Thomson Reuters showed that the 10 year returns for European VC funds were just 0.84% for Europe compared to 5.03%% achieved by US VC funds.

The historic relatively poorer performance of UK and continental European VC funds has had significant economic implications, notably reduced allocations of finance to the VC component of the European private equity asset class by the traditional institutional investors, resulting in a shortage of funds going forward for investment into young, innovative, potentially high-growth European companies. Indeed, according to Invest Europe, overall funds raised for European venture of €5.3bn in 2015 were 36% less than in 2007. Venture capital helps companies grow quickly and successfully and is regarded as a key component both in the development of an entrepreneurial economy and in the innovation process. This has necessitated government institutions, principally the European Investment Fund, to fill this funding shortfall. Continued support from the EIF for UK venture funds may be in question following the Brexit decision.

When Keith decided to undertake a PhD under the supervision of Professor Colin Mason in the Adam Smith Business School his research topic was obvious: to investigate the difference in performance between European and US VC funds. Unlike previous largely quantitative studies involving regression analysis of large datasets, he conducted a series of in-depth interviews with venture capitalists from 64 different VC firms from both sides of the Atlantic, including a fascinating period interviewing VCs in Silicon Valley, California. Keith’s work, whilst entirely independent and self- financed, had the support and encouragement of members of the BVCA’s VC Committee. He supplemented his VC interviews with 40 further interviews with people ancillary to the industry, including limited partner investors, entrepreneurs, VC- related individuals, advisors to the sector and corporate venture capital firms and contrasted the non-practitioner comments with those of the VC’s (perhaps the first time that such a comparison has been done for a relatively large qualitative sample).

So what explains this performance difference? Are US VC firms simply better at investing in these potential high return investments? Recent more quantitative  studies  have  not fully explained the performance gap between European and US VC funds, attributing some of the difference to serendipity and “unmeasured or unmeasurable” factors. It is these unknown factors which Keith’s study attempts to reveal. Establishing a unique dataset from a thematic analysis of the transcribed interviews. Keith’s study found structural and operational differences and contrasts in the approach to investing between US and European funds. These included the following:

  • US funds (average size $282m) were considerably larger than UK ($168m) and continental European ($128m) funds.
  • US firms have around one more partner in total than European firms. They also have proportionately more partners with operational and, to a lesser extent, entrepreneurial backgrounds. US firms tend to have the team working together on a deal more than European firms.
  • US VCs use a “theme” approach to identify future areas for potential investment.
  • More US VCs do most of their due diligence in house. European VCs are more likely to use external experts for technology, financial, IP and legal due diligence.
  • More US VCs wait for the best exit and are proactive inachieving an exit than European VCs.
  • More US VCs have “entrepreneurially friendly” terms in their term sheets.
  • Whilst most US VCs reach investment decisions unanimously or by consensus, a senior partner could force a decision in some US VCs.
  • More US VCs pursue a home run investment strategy than European VCs.

The non-practitioner interviews revealed a difference in culture between US and European VC firms with regard to a more risk- taking, entrepreneurial, thinking “big” (in terms of seeking multi- billion dollar outlier exits such as eBay and Facebook), and an open and sharing approach in the US which contrasted with a more protectionist, egotistical, status-driven, hierarchical focus in Europe. Silicon Valley was specifically highlighted with its unique open, networked ecosystem. The difficulty of scaling by investee businesses in Europe, largely due to a relative shortage of funds, was cited by a number of interviewees. Other areas included the superior brand strength of US VC firms, particularly those in Silicon Valley, which aids quality deal flow and optimal exits often through relationships with big corporates. There can also be a tendency in Europe to exit from investments too early, possibly because of pressure from institutional investors to demonstrate returns.

These findings were shared with representatives of the BVCA’s VC Committee who largely accepted the findings commenting that; “This is a fundamental piece of work; none of us has done this before and it reaffirms what (we) probably already thought but with data behind it” The BVCA is currently considering the implications of Keith’s findings. It is hoped to communicate to institutional investors that the UK / European VC environment is improving and, as UK VC firms adopt more best practices (some of which are based on those of US VC firms as highlighted in Keiths research), the performance of UK / European VC funds should continue to improve encouraging increased  institutional  funding for the sector. It is notable that a number of new VC firms that have been formed in the past decade have indeed adopted more of a US Silicon Valley  style of investing. Practical recommendations and best practices will be shared with the VC community.

Alongside his PhD which Keith is pursuing on a part-time basis he also teaches private equity and venture capital to undergraduate and postgraduate students at the ICMA Centre, Henley Business School, University of Reading where he is a Visiting Fellow, and runs executive training courses in the sector. He will be submitting his thesis in the final quarter of 2017.