The Economist reports: “Venture capital in Europe has delivered returns of just 2.1% a year since 1990, according to Thomson Reuters, making it perhaps the worst investment class outside Japan (American VC managed around 13%).”
The article suggests that overfunding by European governments has driven down returns, but indicates this didn’t occur until after 2007, which would not account for near-zero returns stretching back to 1990. A more precise argument would speculate that a recent increase in government handouts might make a bad situation worse.
The Economist argues: “Nearly 40% of all the funds pumped into European VC last year came from state-backed sources, up from just 14% in 2007. … The public cash slushing around VC-land may in fact be repelling private money. … Several studies of public VC schemes have found that for every dollar the public sector puts in, the private sector pulls one out. … Ho-hum entrepreneurs whose firms only launch because of government backing (and dud firms that would have folded long ago without it) drive down average returns. Meanwhile, funds relying on private capital have to pay more to outbid government-backed rivals.”
The Economist concludes: “Europe has never been able to muster … the same quantity … of venture capital (VC) as Silicon Valley. That is frustrating to its politicians, who see venture capitalists as job-creating innovation machines. … But investors who put up such capital in other parts of the world … are not especially eager to funnel money to startups … in Europe.”
Anemic European venture returns provide further evidence that properly trained talent and risk-underwriting equity are the binding constraints to economic growth in high-wage economies today.