Economic growth

Taking one to know one? Experience, education and the performance of VC investors in Europe and the US

Liam Collins - 16.03.2012

The performance of the European venture capital industry has historically been worse than that of the industry in the US. While there are many reasons for this, one contentious factor that is often touted is that investors on this side of the Atlantic are less well able to find and nurture those businesses that have the potential to achieve high growth.

Last year, in an interview with Techcrunch, Nick Halstead, a Reading based entrepreneur (who snubbed European investors in favour of some US-based ones) depicted European-based venture capitalists as being less attractive partners to seek investment from than their US counterparts. This sparked a debate on the site on what type of background makes a good venture capitalist and how the backgrounds of those operating in Europe compare to those operating elsewhere, especially in the US.

Halstead's criticism of European VCs surrounded them setting up deals that were too cumbersome and restrictive for the entrepreneur and of trying to "kill you on terms".  In response, some European VCs came back with the defence that term sheets on both sides of the Atlantic tend to be very similar and that the better terms in the US were a symptom of a bubble inflating there. Fred Destin, an investor with experience on both sides of the Atlantic then weighed in largely on the side of Halstead. While stating he is a big supporter of the European market, he agreed with the entrepreneur saying European VCs were hard to get to, unresponsive, too slow, use overly cumbersome term sheets, risk averse and overly focused on financials and revenue generation lacking sufficient knowledge of product or tech. In short, he states that "many folks in Euro VC are just in the wrong industry".

These points, and in particular Destin's final one led us to ask how important is VC experience in determining performance, are there particular attributes or types of experience that make an individual suited to VC investing, and do we see more of these attributes in US venture capitalists? We were particularly curious as to whether experience as an entrepreneur had a significant effect on investors' success and if there were differences in the proportion of investors inside and outside of the US that had this type of experience?

Research conducted by NESTA last year showed that while historically US venture capital had outperformed the market in the UK, this gap had considerably narrowed in recent years. This narrowing was however mostly due to the poor performance of VC worldwide which left the question, would this gap begin to grow again as the industry as a whole picks up? Looking further into the historical underperformance, the same research shed some light on what the reasons for this gap were. Variables such as specialisation, fund size, fund structure, sector preference etc., were all measured but once these had been accounted for, a large amount of the underperformance remained unexplained indicating that the experience and education of individual investors may play a significant part in determining performance.

Unfortunately for the second question in relation to what makes a good investor, the academic literature doesn't necessarily clear things up. Dimov found that VC firms with more investors with entrepreneurial experience (defined as having founded a company) had fewer bankruptcies in their portfolio. They also found humanities and science education led to more big exits but also to more bankruptcies whereas conversely more consulting experience led to fewer bankruptcies but also fewer big exits. On MBAs, they found that they are associated with fewer bankruptcies but had no effect on likelihood of achieving big exits. Walske and Zacharakis find that venture capital, senior management and consulting experience aids venture capital success, entrepreneurial experience (defined as having founded a for-profit firm) impedes it. Zurutskie finds that having previous experience as a VC improves performance as does having been an executive at a start-up. She also finds that the more individuals with industry specific knowledge or consulting experience you have the better you do whereas those funds with more investors with MBA qualifications perform worse.

While there may be some debate about what types of experience or education are most desirable in a VC investor we thought it might be interesting to see if there were any obvious differences between the background of investors operating in the US and those in the UK. While some of the debate has focused on a US versus Europe debate we felt that, given the heterogeneity of the European market, a comparison with the UK might be more meaningful. We collected the background details of 44 investors of the most high profile US early stage VCs and compared them to those of 41 investors of those most high profile UK firms that do early stage investing to see if there were any noticeable differences.

While there are many caveats to the data, most notably to what level the two samples are comparable across industry focus and stage (efforts were made to ensure that each investor is actively involved in early stage investing but in some cases this could not be verified), both of which would play a role in the types of backgrounds suitable investors would have, our results do present some interesting differences. Also it must be noted that these are the top tier firms and that differences across the investor backgrounds in these are therefore not necessarily representative of the differences in the market in general.

On the entrepreneurship front we find quite comparable proportions of investors had been founders of companies with slightly more founders in the US sample. Once the variable changes to working in a start-up business the UK actually has a slight advantage. The results suggest that if there is a difference in the entrepreneurial experience of investors in US and European funds it is not obvious from the samples we compare.

Other interesting results from the findings are that, as expected, the market is dominated by men. MBAs are more prevalent among US VCs. Mixed results are found in relation to STEM qualifications with more US investors having a STEM degree but a higher proportion of UK investors having a STEM postgraduate qualification (of course in some instances they will have both). A higher proportion of UK investors had worked in the venture capital market before joining their current firm, perhaps indicating more movement between firms in the UK or more experienced investors in our UK sample. And finally the proportion of US investors that have more than 500 connections on LinkedIn is significantly higher at 78% to the UK proportion of 50%. This last finding alludes to another common explanation as to US VC's superior performance; that they operate in a more connected ecosystem. The full set of results are presented here