There is a widely held perception that Europe is lagging behind the US with respect to the financing of entrepreneurship, but a new report reveals that European technology ventures are as likely to result in a successful IPO as those in the US.
The research, conducted by the London School of Economics on behalf of the British Private Equity and Venture Capital Association (BVCA), covers 35,000 companies that received VC investments between 1980 and 2011.
While US venture capital has been substantially more successful on aggregate – 38.8 percent had a successful exit over the entire period in the US compared to 25.3 percent in Europe – much of the difference in success rates is due to differences in the timing of investments.
When comparing success rates of investments done in the same year, the estimated difference in probability of success between the US and Europe goes down from 16.6 percent to 9.1 percent.
If success is defined purely as exiting through an IPO, the difference between the US and Europe within the same year disappears completely. The entire difference is due to a lower probability of trade sales – Europe has about an eight percentage point lower probability of exit via trade sales than the US.
“Time and again we hear the industry denigrated as lagging behind our cousins in the US. How often do we hear the despairing cry of ‘where is the European Facebook’ without hearing a counterbalancing recognition of the many successful European companies that have flourished as a result of venture investment?” said Richard Anton, partner at Amadeus Capital.
“What impacts venture in Europe directly impacts the businesses that rely on the early stage high-risk investment that venture is best placed to provide. That is the sad irony – the myths we cling to harm our chances to grow the businesses that will dispel those very myths.”
The report finds that previously successful serial entrepreneurs tend to perform better both in Europe and the US, which helps to explain the difference in success rates between the two regions, as serial entrepreneurs in Europe account for less than half of those in the US.
Experience of the venture capitalists was also found to be strongly related to success, which is good news for Europe since VC experience in Europe has gone up in the last couple of years.
The news comes after the UK government announced in September that it is working with the London Stock Exchange on a new set of IPO regulations, designed to encourage internet and technology companies to float in the UK.
The government's proposals include reducing the minimum percentage of shares required to be in public hands or “free float” from 25% to as low as 10% – following in the footsteps of the US government's Jumpstart Our Business Start-ups (JOBS) Act, which was passed earlier this year.
However, a survey by financial adviser Grant Thornton in November revealed that fewer than one in ten private equity professionals saw an IPO as a credible option for technology companies in the next 12 months, with 93 percent saying that a trade sale was the most likely exit.