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Arundale, Keith (2018) Exploring the Difference in Performance Between UK/European Venture Capital Funds and US Venture Capital Funds

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Arundale, Keith (2018) Exploring the Difference in Performance Between UK/European Venture Capital Funds and US Venture Capital Funds Arundale, Keith (2018) Exploring the difference in performance between UK/European venture capital funds and US venture capital funds. PhD thesis. https://theses.gla.ac.uk/30827/ Copyright and moral rights for this work are retained by the author A copy can be downloaded for personal non-commercial research or study, without prior permission or charge This work cannot be reproduced or quoted extensively from without first obtaining permission in writing from the author The content must not be changed in any way or sold commercially in any format or medium without the formal permission of the author When referring to this work, full bibliographic details including the author, title, awarding institution and date of the thesis must be given Enlighten: Theses https://theses.gla.ac.uk/ [email protected] Exploring the difference in performance between UK/European venture capital funds and US venture capital funds Keith Arundale Submitted in fulfilment of the requirements of the Degree of Doctor of Philosophy Adam Smith Business School, College of Social Sciences University of Glasgow September, 2018 ABSTRACT Investment returns of European venture capital (VC) funds have consistently underperformed US VC funds. This has led to reduced allocations of funds raised for European venture from traditional institutional investors and consequently less finance available for investment into high-growth entrepreneurial companies in Europe. The aim of this study is to investigate the factors that may give rise to a performance difference between European and US VC funds in the attempt to explain the reasons for the gap in performance. Potential factors are structural resulting from characteristics of the funds themselves, operational such as the investment practices of the VC firms which manage the funds and wider environmental such as culture and attitude to risk and the wider ecosystem in which the funds operate. The characteristics of the better performing funds in Europe and US are also investigated. Previous studies offer incomplete explanations on the reasons for the difference in performance. Studies have focused on the UK in comparison to US and have not included continental European funds. There are no studies that have reviewed the entire investment process from sourcing deals to exiting deals, specifically contrasting Europe and the US in the context of the variables pertaining to the investment process and the impact on the fund performance gap. Previous studies have been largely quantitative in approach and influences that cannot be quantified, such as the cultural dimension, are therefore not captured in the analyses. The study engages a critical realist philosophy and embraces an engaged scholarship, qualitative approach with some 64 semi-structured interviews with separate VC firms in UK, continental Europe and USA and 40 interviews with other stakeholders from those geographies who are related to the VC industry, including limited partner investors, entrepreneurs and advisors. Key findings of the research are that US VC firms have proportionately more partners with operational and entrepreneurial backgrounds than do European firms, they use a theme approach to identify future areas for investment, pursue a “home run” investment strategy, do most of their due diligence in house, have entrepreneurially friendly terms in their term sheets and are more proactive in achieving optimal exits for their investments than European VCs. The research has had impact in that the findings have been shared and discussed with the UK professional VC association. 2 Summary Contents ABSTRACT .................................................................................................................... 2 LIST OF TABLES ........................................................................................................... 10 LIST OF FIGURES ......................................................................................................... 11 ACKNOWLEDGEMENTS ............................................................................................... 12 AUTHOR’S DECLARATION ........................................................................................... 14 PUBLICATIONS ........................................................................................................... 15 CONFERENCE PAPERS ................................................................................................. 15 CHAPTER 1: INTRODUCTION ....................................................................................... 16 CHAPTER 2: LITERATURE REVIEW ................................................................................ 31 CHAPTER 3: METHODOLOGY .................................................................................... 106 CHAPTER 4: STRUCTURAL DIFFERENCES .................................................................... 130 CHAPTER 5: OPERATIONAL DIFFERENCES .................................................................. 158 CHAPTER 6: WIDER ENVIRONMENTAL DIFFERENCES.................................................. 216 CHAPTER 7: CHARACTERISTICS OF FIRMS WITH BETTER PERFORMING FUNDS ..................................................................................................................... 238 CHAPTER 8: CONCLUSION ......................................................................................... 257 LIST OF REFERENCES ................................................................................................. 286 APPENDICES ............................................................................................................. 312 3 Detailed Contents ABSTRACT .................................................................................................................... 2 LIST OF TABLES ........................................................................................................... 10 LIST OF FIGURES ......................................................................................................... 11 ACKNOWLEDGEMENTS ............................................................................................... 12 AUTHOR’S DECLARATION ........................................................................................... 14 PUBLICATIONS ........................................................................................................... 15 CONFERENCE PAPERS ................................................................................................. 15 CHAPTER 1: INTRODUCTION ....................................................................................... 16 1.1 Venture capital and its investors ................................................................................. 16 1.2 Performance of venture capital funds in Europe and US ............................................ 17 1.3 Consequences of low VC returns in Europe ................................................................. 18 1.4 Prior research on the gap in performance between UK/Europe and US VC fund returns ................................................................................................................................ 21 1.5 Gap in research and understanding about the performance difference ..................... 22 1.6 Research questions and methodology ......................................................................... 23 1.7 Theoretical framework ................................................................................................ 26 1.8 Contribution of the research to scholarship and to practice ....................................... 28 1.9 Structure of dissertation .............................................................................................. 29 CHAPTER 2: LITERATURE REVIEW ................................................................................ 31 2.1 Introduction ................................................................................................................. 31 2.2 Evidence of difference in performance ....................................................................... 31 2.2.1 Fund performance data – sources, definitions and critiques ............................... 31 2.2.2 Prior academic studies on performance ............................................................... 34 2.2.3 Recent and current industry evidence on the performance differential .............. 37 2.3 Introduction to research into variables that impact on fund performance ................ 41 2.4 Structural factors ......................................................................................................... 47 2.4.1 Fund size ............................................................................................................... 47 2.4.2 Age of VC firms ...................................................................................................... 48 2.4.3 Backgrounds and experience of VC firm partners ................................................ 49 2.4.4 Investment stage, sector classification and geographic focus .............................. 51 2.4.5 Specialisation ........................................................................................................ 51 2.5 Operational factors ...................................................................................................... 52 2.5.1 Investment strategy .............................................................................................. 53 2.5.2 Theme approach ..................................................................................................
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