Has Europe Been Catching Up? An Industry Level Analysis of Venture Capital Success Over 1985-2009

Abstract

After nearly two decades of U.S. leadership in the 1980s and 1990s, are Europe’s venture capital markets in the 2000s finally catching up regarding the provision of financing and successful exits, or is the performance gap as wide as ever? Are we amidst overall dismal performance of the venture capital experience without any encouraging news? We attempt to answer these questions by tracking down over 40,000 venture capital-backed firms of six industries in 13 European countries and the U.S., and determine which type of exit – if any – each particular firm’s investors have chosen between 1985 and 2009. Our empirical findings suggest that: (i) in terms of the number of venture capital-backed firms successfully going public, European venture capitalists have closed the gap with respect to the U.S., albeit as a result of a worse initial public offering performance overall; (ii) Europe continues to lag behind the U.S. by means of mergers and acquisitions, and in successful exits of seed/start-up and early stage firms; (iii) average investment and R&D are important determinants of venture capital success, but only have a positive impact after 2000; (iv) not only the supply but also the demand-side of venture capital plays a substantial role as countries with higher entrepreneurial activity perform better than countries with a lower TEA score; and (v) idiosyncratic differences across industries seem to be more relevant than country-specific characteristics in explaining differences in performance.

Keywords: Venture capital, private equity, entrepreneurial activity, performance gap

JEL Classification: G24, G3