Policy Innovation Blog

Atlantic Drift

Stian Westlake - 02.06.2011

UK and US VC performance have been converging - but it's not all plain sailing

Yesterday evening we launched Atlantic Drift, a new report based on a 12-month partnership with Josh Lerner of Harvard Business School.

It's an unusually thorough analysis of US and UK venture capital performance yet, based on a large new database that we've pulled together of fund returns, history and characteristics.

We've known for a long time that US VCs are world leaders. What this research shows is that the performance gap between UK and US VC funds, which in 1990s was huge (33% IRR vs 13% IRR) shrunk to almost nothing for funds raised between 1998-2005.

However, this wasn't because UK funds got better - it was driven by US funds getting worse in the dot-com bubble and its aftermath (0% IRR vs -1% IRR). The real question for the UK industry is what will happen to returns of funds raised after 2005, and to the US/UK gap. There's some cause to believe that US funds will come out of the new tech boom better. Not only are they predictably well represented in the social media blockbusters such as Facebook and LinkedIn, they're also invested in many of the likely European winners - ASOS, Lovefilm, Betfair, Wonga... Only time will tell how much the rising tech tides lifts UK and EU investors.

The research also has interesting messages for UK public-backed VC funds. Over most of the period, these underperform private funds significantly (as NESTA and the BVCA's previous research with Gordon Murray and Paul Nightingale suggested). But in funds nearer the 2005 vintage, the performance gap seems to close - perhaps reflecting the fact that the rules for these funds are increasingly flexible, allowing follow-on investment and discarding requirements for regional focus.

The new database also gives us lots more to play with - there are many analyses that we can do that in the interests of time and space we haven't (e.g., analysis of the impact of syndicate partners on returns), but we're keen to work with other to do them.

Atlantic Drift, by Josh Lerner, Yannis Pierrakis, Albert Bravo Biosca and Liam Collins is available to download here, or email information@nesta.org.uk to request a hard copy.