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New study gives hope of better returns on risk capital in Europe

A fund’s strategy, structure and operational models have a significant impact on returns.

Published

Media release 9 June 2006

According to statistics published over the past few years, the average returns on start-up and growth-stage venture-capital funds have been clearly lower in Europe than in North America. However, a recent study reveals that the observed differences in returns between the continents can be explained by the different structure and operational models of funds. This means that the expected returns from European and North American venture-capital funds with identical structures and operational models are equal.

“Investors can gain as good a return on their investments in Europe as in America. The prevalent pessimism in the markets towards European growth-stage venture-capital investments is without foundation,” says Tom Lindström, author of the report.

The study furthermore shows that instead of the location of the fund, investors should pay more attention to its other characteristics.

A fund’s strategy, structure and operational models have a significant impact on returns

The study reveals that the most important factors affecting the returns from venture-capital funds are the fund’s structure, that is, whether it is independent or financed by a large company, and the customer focus of the portfolio companies, as well as the fund’s cooperation with other funds. Funds with large companies as investors provided better returns than independent funds. Likewise, joint investments by different funds and investments in business-to-business companies improved the expected returns.

These factors explain the reasons for the differences in returns in Europe and North America. For instance, the volume of joint investments by funds had an effect of 6 per cent and that of funds financed by large companies 4 per cent.

In addition, the poor returns by European funds investing in America and the lower volume of investments in IT, high technology and business-to-business companies decreased the average returns from European venture-capital funds.

The current study, written as a Master of Science thesis, is part of a Venture-Capital development project initiated by Sitra.

“This study on risk capital funds stems from issues raised by pension insurance companies. The project aims at studying the differences in returns between different funds, the number and quality of investment targets and the advantages of different operational models,” says Heikki Ojanperä, Director, Sitra Industry Ventures.

Further information

Tom Lindström, M.Sc. (Tech.)
lindstrom.tom@bcg.com
Tel. +358 50 401 8482

Professor Markku Maula
markku.maula@hut.fi
Tel. +358 40 556 0677

Heikki Ojanperä
Director, Sitra Industry Ventures
heikki.ojanpera@sitra.fi
Tel. +358 50 537 9169

The study (pdf) »

Published