Books
My new book “Venture Capital Performance: A Comparative Study of Investment Practices in Europe and the USA” was published by Routledge (Taylor & Francis Group) in December 2019. For publication details see: https://www.routledge.com/Venture-Capital-Performance-A-Comparative-Study-of-Investment-Practices/Arundale/p/book/9780367331610
The book is based on my research into venture capital fund performance and VC investment practices in UK/Europe and USA. European VC funds have historically underperformed their US counterparts. This has resulted in reduced investment into European VC by the traditional institutional investors. The book investigates the factors that give rise to the performance difference. My research at the Adam Smith Business School, University of Glasgow involved a qualitative study of some 64 VC firms in UK, continental Europe and USA supplemented by 40 interviews with other stakeholders, including limited partner investors, corporate venturers, entrepreneurs and advisors.
Readers will gain an in-depth understanding of the various structural, operational and wider environmental factors that impact on the performance difference between UK / European and US VC funds. The study is unique in that it provides, for the first time, a holistic and extensive analysis of the entire investment process from sourcing deals to exiting deals specifically contrasting Europe and the US in terms of the variables pertaining to the investment process and the impact on fund performance. Factors impacting on the performance differential are structural resulting from characteristics of the funds themselves, operational such as the investment practices of the VC firms which manage the funds and environmental such as culture and attitude to risk and the wider ecosystem in which the funds operate. These factors are set out clearly for the reader. The characteristics of the better performing funds in Europe and US are also investigated.
The book is aimed at academics who are researching venture capital fund performance and investment practices and also at practitioners, advisors and policy makers who want to learn about best VC investment practices. Whilst the book is focused on European and US VC investing the best practices are also pertinent for VC firms and funds setting up in other geographies, particularly in emerging markets. To this end best practice guidelines based on the research are included.
For a discount of 20% on the book’s cover price see: Flyer monograph
“This book makes a highly original contribution to the field of entrepreneurial finance, providing the most authoritative and complete comparative study of VC investment practices and fund performance in Europe and the USA yet undertaken”: Professor Colin Mason, Adam Smith Business School, University of Glasgow.
CHAPTER 1: INTRODUCTION
European venture capital (VC) funds have historically underperformed their US counterparts, although returns are now improving. This has resulted in reduced investment into European VC by the traditional institutional investors and reliance on government agencies to support funds. Previous studies into the performance gap have not fully explained the reasons for the difference in performance between European and US VC funds. This study is unique in that it reviews the entire investment process from sourcing deals to exiting deals specifically contrasting Europe and the US in terms of the variables pertaining to the investment process and the impact on the fund performance gap. The qualitative research that is the focus of this study into factors that could potentially be responsible for the performance differential is introduced. Factors can be structural in terms of the size and stage and sector focus of VC firms, operational in terms of the investment practices of VC firms, or pertaining to the wider environments in which the firms and funds operate. The research questions into the performance gap are outlined and the contribution of the research to scholarship and practice introduced. If European VC firms adopt more of the best practices of US VC firms then performance of European venture could be further improved.
CHAPTER 2: THE EUROPEAN / US GAP IN VENTURE CAPITAL FUND PERFORMANCE
European venture capital funds have consistently underperformed their counterparts in US. This chapter includes an overview of the historic and more recent data on the performance of European and US VC funds to demonstrate the existence of the performance gap. Sources of performance data and a critique of the data providers is included. Prior academic studies on performance are described and recent industry evidence on the performance differential is discussed.
CHAPTER 3: THE FACTORS THAT IMPACT ON VENTURE CAPITAL FUND PERFORMANCE
This chapter includes a comprehensive summary of the existing literature on the structural, operational and wider environmental factors that can impact on venture capital fund performance. Structural factors include the size, stage, sector and geographical focus of VC funds, the backgrounds of investment executives, their responsibility for deals and the use of venture partners and advisory boards. Operational factors include the risk approach to investing, identifying themes for investing including disruption, sourcing of deals, due diligence and investment approval, investment terms, syndication, monitoring and adding value and exiting from deals. Wider environmental factors include culture, fragmentation of markets, capital inflow, technology ecosystems and even luck. The latter part of the chapter includes an analysis of the relatively few existing studies that have specifically considered explanations for the difference in performance between European and US VC funds which is the focus of the current research.
CHAPTER 4: THEORETICAL CONSIDERATIONS
Chapter 4 reviews the various theoretical frameworks that may impact on the variables affecting venture capital fund performance, principally in the context of the VC / entrepreneur relationship. A number of theoretical perspectives have been applied to VC investing in prior research. Some theories dominate, notably agency theory, real options theory and prisoner’s dilemma theory. The current study is investigating many different variables that affect the VC investment process, and consequently fund performance, and therefore a multi-theoretical framework for the current research is proposed. The framework combines a theoretical and practical approach. The performance variables discussed in Chapter 3 are linked to appropriate theories in this chapter.
CHAPTER 5: RESEARCH AIMS AND METHODOLOGY
Prior explanations for the performance gap between European and US VC funds are incomplete. The performance difference is therefore in need of further, and more in-depth, investigation of the entire investment process from sourcing deals to exiting deals, specifically contrasting Europe and the US in the context of the variables pertaining to the investment process and the impact on the fund performance gap. The aim of this chapter is to describe the research methodology adopted to explore the difference in performance between European and US VC funds. Given the exploratory nature of the research question and the diversity of venture capital firms in Europe and US, with different stage and sector foci, an extensive qualitative methodology was adopted. In-depth interviews with VCs in Europe and US were conducted. Additional interviews with other stakeholders, including limited partner investors, entrepreneurs, advisors and corporate VCs, helped to triangulate the findings. A total of 110 interviews were conducted with VCs and other stakeholders making this the most extensive qualitative investigation into VC fund performance and investment practices in Europe and US to date. The interviews were semi-structured, allowing for unexpected but relevant topics to emerge. Thematic analysis using manual coding identified emerging themes.
CHAPTER 6: STRUCTURAL DIFFERENCES
Chapter 6 documents the findings of the interviews with VC firms and with the other stakeholders into the structural aspects of VC firms, namely the size, stage and sector focus of VC funds, the backgrounds of the investment partners, the responsibility of partners for deals and the use by VC firms of venture partners and advisory boards. US VC firms had proportionately more partners with operational and, to a lesser extent, entrepreneurial backgrounds. European VC firms had a greater proportion of partners with a financial, investment or consultancy background. Two partners working together on deals was more prevalent in US firms. There was evidence of US VCs clubbing together with relatively small investments in very early, seed stage investments in order to “test the water” and not to miss out on potential outlier investments. The specific sector focus exhibited by particularly the newer UK VCs is also noteworthy. There are no significant differences between European and US VC firms in the use of venture partners and advisory boards, although venture partners were more common in the US firms and their backgrounds and roles more diverse than in European firms.
CHAPTER 7: OPERATIONAL DIFFERENCES
The study reveals a number of differences in the operational characteristics of US VCs compared with their European counterparts. US VCs have a higher risk approach to investing which can lead to outlier returns for VC funds as a whole. US VCs, particularly the West Coast based VCs, have entrepreneurially friendly terms in their term sheets as opposed to the investor friendly terms found with European VCs and with some East Coast based VCs. This demonstrates US VCs’ focus on the upside of investment growth and the European focus on downside protection. US VCs put considerable resource into researching and developing innovative new areas for investment. With their greater resources US VCs are able to carry out most of their due diligence in house, which is also a reflection of the greater knowledge of technical and market aspects of deals by US VCs due to their backgrounds and their networks. US VCs exhibited a more collaborative approach to syndication than European VCs. US VCs adopted a metrics based approach to monitoring their portfolio companies’ performance and waited for the best exits whereas European VCs tend to exit early, possibly on account of fund raising pressures.
CHAPTER 8: WIDER ENVIRONMENTAL DIFFERENCES
The findings from the study of the wider environmental aspects in which VC firms operate include the lower propensity for risk of European VCs and not “thinking big enough” with their investments. The difficulty in scaling up companies in Europe was viewed by several interviewees as perhaps the key difference between the UK and US environments. There is a greater willingness to share contacts, talents and information in the US, particularly in the unique environment of Silicon Valley, compared with a more proprietary system in Europe. The fragmented markets existing across Europe can be compared to the uniform federal structure in the US which permits the more effective scaling of VC backed businesses. The US also benefits from a more open, sharing culture compared to a more proprietary culture in Europe. The relative lack of CEOs and serial entrepreneurs in Europe is compared to the more plentiful supply of experienced CEOs and serial entrepreneurs in the US to run innovative, VC backed high growth technology businesses. Luck may even play a role in VC investing with both European and US investments.
CHAPTER 9: CHARACTERISTICS OF FIRMS WITH BETTER PERFORMING FUNDS
Whilst not part of the main study the findings reported on in this chapter reveal important differences in the characteristics of VC funds in Europe and US, both between the top performing funds and the lesser performing funds in both regions and between the top performing funds in Europe as compared with the US. Only US VCs had funds which exhibited outlier performance in terms of achieving a return of greater than 50% IRR. Better performing firms in both Europe and US use a home run, high risk, “1 in 10” approach to making investments and engage a theme based approach to spotting new investment trends. Newer UK firms, those formed in the last 10 years, exhibited many of the characteristics of the better performing US funds with the exception of the theme approach to investing which was more prevalent amongst US firms.
CHAPTER 10: SUMMARY AND CONCLUSIONS
This concluding chapter summarises the principal findings of the research as reported in detail in Chapters 6 to 8 and the characteristics of better performing funds in Europe and US as discussed in Chapter 9. Readers may therefore obtain a quick understanding of the research and its main findings, together with implications for policy and practice, from this chapter. The chapter is organised as follows. First, the research questions are stated and the methodology revisited, followed by the contribution of the research to the literature. This is followed by the main findings related to the research questions and the theoretical contribution. A discussion of the practical implications to the VC sector and policy makers follows, including the need to disseminate the best practices of US VC firms to UK and continental Europe in order for VC fund performance in Europe to potentially further improve. The best practices are also pertinent for VC firms and funds setting up in other geographies, particularly in emerging markets. Best practice guidelines based on the research, in each of the structural, operational and wider environmental areas impacting on VC firms and funds, are included. Finally, the limitations of the study and suggestions for future research are discussed.
Book review
My thanks to Shaun Beaney of the ICAEW Corporate Finance Faculty for his review of my book “Venture Capital Performance” in the July/August 2020 issue of “Corporate Financier” magazine, see: California Dreaming – Corporate Financier Jul-Aug 2020
As Shaun comments “China is racing up the VC rankings. Europe – with London as its most successful hub – produces some deep R&D and technological know-how. But the West Coast is still king when it comes to turning digital ideas, expertise and funding into high-growth companies”. “Venture capital performance: A comparative study of investment practices in Europe and the USA” explains America’s success.
My other published books and guides on private equity & venture capital and business planning include:
- Raising Venture Capital Finance in Europe (2007), Kogan Page
- A Guide to Private Equity (2010), BVCA
- Successful University Spinouts (2004), Euromoney Books
- Private Equity & Venture Capital: Riding the COVID-19 crisis by Keith Arundale and Colin Mason published in 2020 in the on-line book “A new world post-COVID-19: Lessons for business, the finance industry and policy makers”, co-edited by Billio M and Varotto S, Venezia Edizioni Ca’Foscari-Digital Publishing available via this link
- Venture Capital (2020) In: Bitoni A, Harris P, Fleisher CS and Binderkrantz, AK (eds) The Palgrave Encyclopedia of Interest Groups, Lobbying and Public Affairs. Palgrave Macmillan
