The Secret Behind European VC Funds Outperforming US Counterparts
October 31st, 2023
In recent times, there have been discussions around the performance of European venture capital relative to its American counterpart. Private market data from Cambridge Associates has shown that European venture capital has outperformed American venture capital in recent history.
Over the last 20 years, 10 years, and 5 years, Europe has led in net annual returns by 0.31%, 1.92%, and 6.24%, respectively. This revelation has surprised many in the venture world, and there have been three main sentiments expressed in response to it.
The first sentiment is that European VCs are painfully risk-averse. Venture capital in Europe has often been criticized for being risk-averse in an intrinsically high-risk asset class.
The second sentiment expressed is that American VCs have a lot more cash. Dry powder, which refers to the amount of capital available for investment, is a controversial topic.
The third sentiment expressed is when did the U.S. lose its lead? Despite its impressive status and reputation, U.S. venture capital hasn't led on returns since the dotcom boom. Data published by Cambridge Associates has shown Europe's lead since at least 2019.
While the above sentiments express disbelief, they also illustrate exactly how Europe has managed to capture the lead. Risk aversion hurts founders, not VC returns. European investors have focused more on the quality of investments, which has resulted in better returns. More capital is good for founders, not VC performance.
The influence of cheap capital on VC has led to less corruption of the asset class in Europe than in the U.S. VC stopped being data-curious. The focus on relationships and hype has resulted in the venture capital industry running on anecdotes rather than evidence.
It is interesting to note that while European venture capital has outperformed American venture capital, Europe has not been immune to embarrassing startup failures. However, examples of European startup failures are much harder to come by, which speaks to the greater caution exercised by European investors.
The ZIRP-era VC's rise and fall is a classic example of why abundance does not necessarily lead to better outcomes for venture capital. As the industry shifts its focus towards real performance and data-driven approaches, it is intriguing to observe how the venture capital landscape will evolve both in Europe and the US.