Is venture capital in Europe a bit like the mouse that roared?
That could be one conclusion drawn from a July 25 report written by Earlybird Venture Capital’s Managing Partner Hendrik Brandis and Partner Jason Whitmire.
When the two published their 40-page report, “Turning Venture Capital into Wisdom: Why returns in Europe are now outpacing the U.S,” they received more than a few hoorays on one side of the Atlantic Ocean, but a few hisses on the other.
Though just one-fifth the size of the U.S. VC industry, European investors have enjoyed $15 billion in successful exits over the past 24 months, half of the $30 billion earned in U.S. VC-based exits with disclosed figures, according to the report.
“In fact, we think it will be double or triple that over the next two years,” Whitmire told VCJ in a telephone interview from his office in Munich, Germany.
“A scarcity of capital in Europe and improving deal terms over the life cycle has led to stronger overall returns, or better performance than the U.S.,” Whitmire adds. “Right now, Europe at the macro level is a good place to put money into, especially because access to funds here are not restricted as the top 20 funds in the U.S. are.”
In other words, Europe is the place to be for U.S. LPs.
Whitmire says he checked with a number of limited partners from both continents on the best way to compare the industry yardsticks.
“The multiple of cash invested was the one comparable that they cared most about,” he says, “not absolute returns.”
“European VCs that have survived the past few years are a pretty savvy bunch, and we see more early stage funds that aren’t afraid to swing for the fences,” Whitmire says. “We’re arguing that the experiences over the last decade on both sides of the table are making the venture ecosystem more efficient.”
In addition, he says that European VCs can live with lower exit valuations because they invest at lower entry valuations with less money.
Some critics have responded to the report by saying that U.S.-based VCs offer much higher returns, and point to such recent successful exit as LinkedIn Corp.’s $9 billion IPO May 19 as a reason why U.S. LPs want to keep their cash close to home.
David Cowan, a partner at Bessemer Venture Partners, debated the merits of the report on his blog and in a Twitter discussion with Whitmire. Cowan, who said the report makes bold generalizations and is unbalanced, pointed out that it limits the data to 2009 and 2010, during the aftermath of the U.S.-centered financial crisis.
“Every VC cycle is characterized by long periods of investment punctuated by bursts of liquidity,” wrote Cowan, who pointed out that the U.S. industry is on the cusp of seeing “monster IPOs” from VC-backed Zynga Game Network and Groupon that will eclipse the European figures.
“I only hope that when Europe does make a comeback, [Whitmire] will still invite me to co-invest with Earlybird,” Cowan wrote.
Brandis and Whitmire say critics miss the point.
“We’re not saying the European VC industry is outpacing the U.S. VC industry in terms of sheer returns, but that the overall performance is outpacing the U.S.,” he says. “We think that’s what’s relevant to LPs that we spoke to. It’s not about size, it’s about multiples.”