A dozen of early stage VCs met at an "Emerging VC Managers" event in the UK earlier this month with notable investor Dick Kramlich, also co-founder of NEA, to discuss parallels between the proliferation of new funds in Europe today and Silicon Valley's VC scene in the 1980s.
For the event, analyzed one of our datasets on the state of Europe’s emerging funds – firms addressing the market for capital arising from the explosion of new startups in the region – and came across some interesting findings...
We defined an 'emerging VC' as a firm that made its first investment in a European startup in or after May 2009. This group includes traditional venture capital funds as well as accelerators, incubators and government funds (but not investments by individuals). In our analysis, an "established VC" is a firm that made an investment in a European startup before May 2009.
We looked at the differences between these groups in terms of the investments they made in the last five years. This dataset included approximately 1,700 emerging European VCs and 1,300 established European VCs. Here's an overview of what we found:
The tendency to re-invest
Part of the common 'sales pitch’ for an established VC is that their emerging counterparts don’t – or can’t – make follow-on investments.
According to the dataset, this is not exactly true: Emerging funds make more than one investment in a company 18% of the time while established VCs do so 27% of the time.
Emerging managers seem to invest across more European countries, and in some cases, are the only type of manager to invest in particular countries, such as Eastern European countries.
The ratio of emerging VC firms to established ones making investments in Western European countries is about the same – for instance, in the UK, the ratio is 48% to 52% in favour of established funds.
Size of investments
Our dataset showed that emerging VCs make more, smaller investments. This seems intuitive, however, perhaps the take-away message for startups is: If you’re looking for investment under $750,000 you’re 4x as likely to get it from an emerging manager.
But what about returns?
It’s difficult to look at returns over such a short time period. As a proxy, we created something a 'follow-on investment ratio' – which we defined as the size of a follow-on investment round divided by the size of the previous round.
It's still an imperfect metric, but we think our follow-on investment ratio approximates the write-up value which VCs report to their LPs.
[caption id="" align="aligncenter" width="741"] Mean follow-on investment ratio over year of initial investment. Emerging VCs in green; Established in blue.[/caption]
When bucketing our data by year of initial investment, emerging VCs (in green) demonstrate a better follow-on investment ratios on average in the last five years.
There is an adage that says that venture investing is about getting in early and at small valuations – perhaps what we see above is testament to this and further evidence that Europe’s newest VC funds are the ones to keep a close eye on.
Featured image credit: Teresa Kasprzycka / Shutterstock