New data shows that, once biases are eliminated, European venture capital has consistently matched the performance of US funds over the past 20 years.
European venture capital funds are often compared unfavourably to their US peers, but the latest analysis from eFront shows that this consensus has been reached through a biased analysis of data, and European VC funds have matched the performance of US funds over the past 20 years.
According to eFront’s data, the all-time pooled IRR US venture funds is nearly 10 percentage points higher than for European ones at 14.35 per cent versus 4.95 per cent in US dollars. However in euros, once sample biases are corrected, Western European venture funds generated a pooled IRR of 4.61 per cent, compared with 3.93 per cent for US funds, and performance of European and US funds was broadly similar across all metrics (see chart).
This has important implications for investors’ asset allocations – in particular as many in the past have concluded too fast that they should disregard European venture capital.
Thibaut de Laval, Chief Strategy and Marketing Officer at eFront, says: “Sometimes, one measure of performance hides another. A case in point is European venture capital funds, which are often compared unfavourably to their US peers. Once currency and sample biases are corrected, the conclusion is that venture capital funds in western developed markets perform very similarly. This goes to show that while European VC may lack some of the blockbuster success stories seen across the pond – the likes of Facebook, Airbnb and Uber – the performance of venture funds overall has been very positive, and in line with US performance. Institutional investors who ignore European VC may well be missing out.”
The discrepancy in previously reported performance figures comes from currency and sample biases. Reporting data in US dollars introduces a bias affecting the comparison of US and European venture capital. By switching the currency of reference to euros, the performance of European venture capital improves.
In addition, fully realised US venture capital funds benefited from particularly favourable conditions in the 1990s. European venture capital did not experience such a boost, as the sector was still nascent at this point. A more rigorous approach would therefore focus on the identical vintage years of 1998-2015.
Once these biases are eliminated, the vast majority of performance differences between US and European funds disappear. For fund investors, this is positive: they have an expanded investment universe, richer and more diversified, providing a relatively homogeneous level of performance on a pooled average basis.
