New Report: ‘Practices of European Venture Capitalists’

London Business School associate professors Luisa Alemany and Gary Dushnitsky have joined with top academics from Audencia, Politecnico di Milano, Stockholm School of Economics, Vlerick Business School, Ghent University, University of Luxembourg, and Universidad Complutense de Madrid to produce a new report, ‘Practices of European Venture Capitalists’.

The report finds that fewer than 10 per cent of the deals that venture capitalists (VCs) see result in investment, and only seven per cent of start-ups achieve an Initial Public Offering (IPO).

The report draws on responses from 885 European VCs whose portfolios have an average fund size of €100m, with 60 per cent focused on early-stage investments and 75 per cent independent, or non-corporate, government, or family office investors. Twenty per cent of respondents were based in France, 13 per cent in Germany, 10 per cent for both Spain and Sweden, Belgium (nine per cent), and the UK (seven per cent).

The researchers believe the report will be of profound importance to the European VC market, both for investors and entrepreneurs. In order to create more European winners - entrepreneurs, venture and capital investors - a more active investment approach needs to be taken they say.

VC investors were asked numerous questions about their investment journey, from investment to exit, including the reasons as to why they invest in firms in the first place, the process of doing so, and what makes an investment successful.

The report discovered that European venture capitalists receive on average 851 investment proposals per year, of which only six per cent lead to investments. While VCs expect to earn about thirty per cent IRR (Internal Rate of Return) on their investments, the average return they effectively realise is only thirteen per cent per year.

The researchers found that VC investors view the management team’s ability as the most important factor influencing their investment decisions. In fact, seventy-two per cent of European VC firms consider a competent management team the most critical driver behind investment success. This is plausible as the vast majority of the VCs agree that the management team is the most important determinant of a venture’s success, but also of its failure.

When asked what other factors make an investment successful, seventy-two per cent of VC investors stated that the offering - the product, service, or technology - has a huge impact. Timing is also put forward as an important factor (fifty-six per cent) followed by industry conditions (forty-three per cent), and the business model (thirty-nine per cent). Interestingly, good luck is considered to contribute to successful investments by a third of the VCs.

Forty-five per cent of European VCs investments fail or do not secure returns above 2x the investment. The report also found that twenty-eight per cent of the investments exceed expectations, and nine per cent earned above 10x invested capital.

Commenting on the report, Luisa Alemany, Associate Professor of Management Practice in Strategy and Entrepreneurship; Academic Director, Institute of Entrepreneurship and Private Capital, said: “One of the most fascinating findings for me is that even if the data was collected when there was a lot of liquidity in the markets and the term sheets were considered to be “founder friendly”, the liquidation preference participating (when the investor recovers her money and then participates pro-rata of the proceedings) is used in the majority of the term sheets (57 per cent). This clause, also known as “double-dipping”, is seen in tough markets like those of today. However, our survey reflects that it is used more often than what we thought. Even more impressive, in the healthcare industry, the frequency of use of this clause goes up to 72 per cent.”