Structural differences in EU vs UK vs US

Cliff notes

  • Average VC fund size in the USA is $282m, while UK funds average at $168m and EU funds at $128m.
  • We examine the structural differences between VC markets in the USA, UK and EU to identify why US funds have historically outperformed all others.
  • Startups must understand the structural difference between VC markets to build a thorough fundraising strategy
By Bhavik Kumar
Dec 2018

Historically, the performance of American venture capital funds has far exceeded the performance of UK and European funds. As reported in June 2016 by ICAEW, the average US VC fund returned on average 10.3% over 10 years, while UK funds returned 4.6%. The differentiating structural factors between USA, UK and Europe include: Size of funds, cultural differences, investment strategy, sourcing strategy, difference in due diligence and more. We explore the structural and operational factors which could explain the difference in performance between the funds. These factors will have deep ramifications for fundraising strategy.


Fund Size:


Firstly, US funds are known to be comparatively larger in size with regards to the UK and European funds. The average US fund size is estimated to be around $282 million in comparison to the UK which has an average fund size of $168 million. Whereas, the European average fund size is estimated to be around $128 million. Although research has shown larger fund size does not mean better performance, average fund size gives as a huge indication of the ease of access to capital. For founders, fundraising strategy will align to fund size. In most cases, startups must show the potential exit of their company will be 3x the size of the fund.


The Challenge: Always Raising Money + Relying on Government Money


The performance difference has led to difficulties for UK and European VC’s to raise new funds from non governmental sources. Remarkably, funds raised from government agencies for allocation to European VC’s in 2015 accounted for 20.6% of the total funds raised for VC’s according to Invest Europe Research. Government investment into VC funds usually comes from the European Investment Fund which we believe backed 45% of funds raised by European VC’s in 2015. Similarly, UK VC firms are known to spend a disproportionate amount of time spent on raising money for their next fund, as opposed to conducting the business of investment.



Stage of Investing: Not Enough Growth Stage Capital


US VC market has the full range of expertise to invest at all stages, particularly at the growth stage. As a result, market conditions ensure help for firms to grow from a very early stage and support to bring them to the top. In comparison, 60% of UK and European funds are focused on seed funding. There is a significant lack of Series A focused funds. The single biggest risk for UK and European startups is that Only 1 in 5 companies receive further financing from the same investors. European VC’s do not have the finances available to follow on with their initial investments. Primarily the challenge for European and UK VC’s is the scale of funds. The US has approximately 8x as much growth stage capital available in comparison to UK and European VC’s, which are concentrated on early stage capital. The impact is startups will often, turn to American markets to raise growth rounds, post series A rounds.



Investment Strategy


Moreover, another structural difference is investment strategy. US VC funds generally tends to adopt a home run investment strategy. In practice this strategy means a 1 in 10 approach whereby 1 investment out of 10 will return the whole size of the fund. This has been brought about due to the competitiveness of American VC markets and the lack of a middle ground of investing. American VC firms will typically aim for 60% internal rate of return. American VC firms also have a well thought out and deeply researched investment thesis meaning firms are very specific about what they looking for. In contrast the high risk appetite of a 1 in 10 approach in the USA is not mirrored in the UK and Europe. There is a weaker top down investment thesis approach. American VC firms place greater emphasis on the companies ability to establish product-market fit as opposed to revenue. In comparison European and UK funds place a greater emphasis on the finance and profitability of the company.


Deal Sourcing


Moreover, another major structural difference between the US, UK and EU is deal sourcing. The ability to source primarily relies on the brand strength of a VC fund. The American VC markets has better recognised brands than others, as a result, they are able to use a more frontline approach to lead the market due to strong networks and track records. The inflicting result of this is that they can use their strong brands for incoming deal flow in comparison to the UK and EU that have much weaker brands, meaning that they have to take a more proactive approach when it comes to sourcing due to their poor network and track records. The increased competition in the American market means VC funds must rely extensively on frontline conversations and networks to understand what is happening in the market at any given time.





In addition, another significant structural difference between the US, UK and EU venture capital firms is ‘Exits’. US venture capitals have strong relations with corporates for exits. As a result, they are able to wait for a more optimal time for exit. On the other hand, both EU and UK venture capitals have inadequate relations with corporate. Consequently, this reflects into bad exits and leading to a hopeless position in which they can only take offers that only have money for them. This perfectly leads onto the next point on differences in cultures.




There are bound to be cultural differences due to a number of different reasons. Talking on the previous point, have difference in ‘exits’ is a clear indication what the culture is in different countries. We saw that venture capital firms within the US wait for the right exit. This clearly indicates that they have a more risk orientated culture as they willing to venture into companies and wait them to grow in comparison to the EU and UK that are unable to emulate the same process due to factors such as; fund size, stage focus, investment strategy and sourcing all constitute in shaping the culture. In other words, the US has a cultural which is highly optimistic whereas the EU and UK have a more sceptical cultural and have to constantly think twice before they do anything. Lastly, another structural difference is technology cluster. The formation of Silicon Valley in the US, the easy access to capital, legal and regulated systems has helped entrepreneurs. Whereas, a fragmented market structure has made it extremely difficult for EU and UK venture capitals to create. In the USA, the partners of VC funds are usually former successful entrepreneurs, where as in the UK and Europe, partners tend to come from either operations, consulting or finance. The cultural difference in senior management of VC firms is noticeable.


In conclusion, it is clearly evident that the US are dominating the US and EU in all aspects. Every difference we have discussed, the US have been clear out and out winners. Multi-national ventures in the US are an evidence in themselves. It is clear that the US is the ideal destination for any start-up due to risk orientated culture that will help them to grow as their expertise can help them grow from a more premature state to a more sustainable and established state. However, many firms fail to break through in the US market. As an alternative, the EU and UK should focus on trying to gain expertise that help home grown firms to mature.

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