Is European VC really out-performing the US, or is this wishful thinking?

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There’s been a lot of debate about the role of VC backing for startups in Europe recently, not least because we’ve been pushing the issue to try and provoke a response from European VCs who – with notable exceptions of course – tend not to come out fighting quite as much as their US peers. The majority of European VCs tend to blog less, tweet less and, as a result much of the debate about VC comes from disgruntled European entrepreneurs. But now one really has come out fighting.

German VC firm Earlybird has produced a long slide presentation and written notes – written by Hendrik Brandis and Jason Whitmire – that argues that although the European venture industry is a quarter of the size of the U.S. market, proportionally speaking it is outperforming the US VC industry in returns. As a result, Limited Partners (LIPs) – the funds that invest in VCs – should start sitting up and taking notice. It has to be said of course that as VCs across the globe battle for funding, it is in their interests to come out swinging from their corner to fight for these funds. But let’s hear them out.

Earlybird argues that European VCs are achieving some of the best multiple exits in the world, and that it’s not just the old tired example Skype which is driving this. It also argues that because there are less VCs in Europe, it’s more of a buyers market, capable of better returns as a result (we’ll leaving the fuming entrepreneurs aside for a moment).

Here are the slides:

However, it’s a rather rosy view of European VC, so we took Whitmore to task for some of the assertions in the slides.


On slide #4 there is a slide showing the amount invested and returns. But it is unclear if the two are linked. In other words, are those the returns for that amount invested? Or is Earlybird saying concurrently that amount was invested while that amount was returned. If it’s the latter, this slide is irrelevant. Funding has been down over the last 24 months, as we’ve reported, so of course the comparison will be dramatic. Our guess is many of those returns are NOT from companies founded over the last 24 months.

Whitmore: No they are NOT linked, this is the money going into the industry and money coming out of the industry in a specific year. We believe the slide therefore is very relevant.


Slide number five looks impressive until you read the description. It says “proportionately europe is producing higher exit multiples than the US,” actual exit values are 25% lower. Again, given the pull back in funding, this feels like manipulation and it certainly doesn’t back up the email that Europe has surpassed the US. That’s like saying Israel has surpassed China because the per capital numbers are stronger. Of course they are stronger. china has more than $1 billion people. Capital efficiency matters, but entry level valuations do not since investors will have a liquidation preference.

Whitmore: With respect to multiples Europe has surpassed the US, you will not find any data anywhere contradicting this. This is the core of our message, i.e., if you look at it from the LP (i.e., investor in any given VC fund) perspective, the absolute size of the industry does not matter, only the multiples (performance) in specific funds matter. And in the title of slide slide we say “individual fund performance has surpassed the US” – we are NOT referring to absolute industry size, which what you have inadvertently mis-interpreted. So the hypothesis that the relationship is so dramatic because funding has been down is not proven here (even in Germany, where we have had an average of $400m invested for the last 7 years).


Slide #6 – same issue as Slide #4. It’s unclear that the amount invested directly correlates to exits seen. Also that is showing sheer *number* of exits over $100 million calling those homeruns. That’s not a home run in silicon valley. If you looked at actual *dollar value* US has to dwarf. Consider linkedin alone. It’s a $10 billion company. We doubt two years of European exits add up to $10 billion. And even if it did, Facebook, Zynga, Groupon, many of the largest companies in the US are holding off on going public. Are those factored in at all? Clearly not, or they wouldn’t be sending an absurd note saying Europe is outpacing the US in returns.

Whitmore: We do not share these arguments, i.e., it is still impressive to see that Europe has a higher SHARE of exits of $100m in the venture industry, this is a fair analysis. The above argues that the outliers are in the US ($ multi-billion exits) which is true), but the average exit value in the US is only slightly higher (20%) so it does not make a huge difference. So these examples do not change the picture, not to mention that Groupon, Zynga are not exited yet and are not factored into the data (but Google is factored in). Also, if the last 2 years of European exits already add up to $15 billion, we think the next two years will be double to triple this given the points made in slide 30 (i.e., most post-bubble European VC portfolios with great companies are only now at the inflection point to start major exits).


Slide #7 makes no sense. it’s a smaller industry. saying a higher percentage are “top quartile” is asinine as a concept and a comparison. It’s still a fraction of the US number overall. That doesn’t mean country on country returns are better, which appears to be what Earlybird is trying to argue.

Whitmore: The absolute numbers do not count if looked from an LP (investor in VC funds) perspective, i.e., the RELATIVE numbers are what matter.


Slide #8 says “forget the charts” – this is contradictory.

Whitmore: This was meant to illustrate the aforementioned results by looking at the actual great exited companies (without the need for charts) – you are right this point can be made more clearly.


Slide #9 , see the Linkedin point. ALL of these $1 b+ exits add up to about 1.7x LinkedIns. That doesn’t count ANYONE else exiting in the valley.

Whitmore: Again the focus here is on European performance and exit multiples, not to compare [with the US].


Slide #10 is interesting and probably the strongest point, but it bears noting most of the US’ strongest companies of the last decade haven’t gone out yet, which has been pretty well documented. This could become irrelevant in a year. and given the preceding slides, we’d want to see the underlying data.

Whitmore: Good point, and we can send you the underlying data.


Slide #12 makes our point about slide #4 and #6. Earlybird is measuring returns now which were made from MUCH higher amounts of capital against concurrent funding numbers that have since declined.

Whitmore: We are saying that supply has declined (which you confirm) and demand has increased in deal performance, in which case the aggregate amount of capital entering the market is not as relevant.


Slide #15 makes our point about why slide #7 is spurious reasoning.

Whitmore: We are more focused on looking at the is data through the eyes of VC investors (LPs), who are mainly interested in top quartile results.


The remaining slides argue why a paucity of venture capital in Europe mean only the best deals get funded at low prices. Again, valuation doesn’t actually correlate to returns – amount invested is the input. Also, that’s a great argument for why to be bullish on Europe but has nothing to do with a comparison against the US.

Whitmore: Good point, however valuation does matter (as well as money in) and both are currently more favorable in Europe because lower amounts of funding and lower valuations.


Slide #26 – again these are pegging everything to $100 million exits. That’s not a homerun in the valley. The reason amount invested is larger is because most investors would be aiming to build a bigger company. If you looked at $1 b companies the comparison would fall away because Europe has only had a dozen $1 b exits in two years.

Whitmore: These are pegged to $100m PLUS (so not just $100m exits), but at the end of the day even exit valuation does not matter, only exit multiples matter (from the LP perspective). So if you invest $50m at a $1Bn valuation and you have at 10Bn exit, the investor only has a 5x return, so multiples are the only thing that matters in the VC industry, and you are looking only at the absolute numbers. We argue that European venture capital we can live with significantly lower exit valuations and still make better multiples, as we invest at lower entry valuations at less money.


Germany has had $4.4 b in exits in the last 24 months. Again that’s half Linkedin. Great for germany but it doesn’t prove Europe is out performing the bay area in any respect

Whitmore: Importantly, we are not arguing that the European and German venture industry is outpacing the US, we are arguing that the PERFORMANCE is outpacing the US, and this is what is relevant for LPs / investors into venture capital. We are not challenging the fact that the US VC industry is MUCH larger than Europe. We are only talking about MULTIPLES and PERFORMANCE from the LP perspective, and this is what is relevant for LPs / investors into venture capital. This is very much different from the “we have LinkedIn and you don’t” perspective.