Transatlantic return gap shrinks as US VC returns dwindle


The performance gap between venture capital funds in the UK and in the US has narrowed due to shrinking levels of return achieved by US funds.

According to a report by the UK innovation-focused institution the National Endowment for Science, Technology and the Arts (NESTA), the shrinking performance gap between the two industries is down to worsening US fund performance, as opposed to improved UK fund performance.

Before the dot-com bubble in the early 2000s, US venture funds posted average IRRs 20 percentage points higher than UK funds, around 33 per cent compared to 13 per cent. Since then, the gap has narrowed, due almost entirely to a drop in US average IRRs.

The report claims that the remaining disparity between US and UK fund performance persists even in the case of funds with similar characteristics. UK funds investing in US companies often exhibited US-style returns from those investments, hinting at a lack of quality venture investment opportunities in the UK.

Although the performance gap between public and private funds in the UK has also narrowed, NESTA has recommended that UK regulators take a light touch with venture initiatives, cautioning against over-engineering the approach of initiatives aimed at catalysing entrepreneurship, and to avoid limiting the flexibility of investors and start-ups.

The report also found that gap in returns between good and badly-performing funds in a country was wider than any geographic disparities, identifying past performance, management experience, appropriateness of fund size and whether the fund invests in early rounds as the key indicators of performance.

According to report co-author Josh Lerner, of Harvard Business School, the bidding frenzy for social media companies may give US venture a shot in the arm, and propel IRRs closer to their pre-dot com heyday.

He said, “Whilst our data shows a convergence in performance of US and UK venture capital funds over the last few years, this could be short-lived. Once again, US funds seem better positioned to take advantage of the emerging social media boom — fuelled by recent exits of LinkedIn and Skype – which threatens to widen the gap once more, leaving the UK sector behind.”

The full report, ‘Atlantic Drift’, can be found here.

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