US venture capital funds have historically outperformed UK funds. This report looks at the magnitude of the performance gap and the reasons behind it.

Key findings:

• The performance gap between US and UK funds has significantly narrowed. (However, this is mainly because of declining returns in the US rather than increasing returns in the UK.)
• The historic gap has mainly been caused by the wider environment in which UK funds and the companies they finance.
• Selecting the right fund manager is more important than choosing a particular country.
• The strongest predictors of VC returns performance are: whether the fund managers’ prior funds had outperformed the market benchmark; whether the fund invests in early rounds; whether the fund managers have relatively more prior experience; and whether the fund is optimally sized.
• UK government-backed funds have historically underperformed their private counterparts, but the gap has narrowed recently, suggesting that governments have become savvier when designing new VC schemes.

The importance of a vibrant venture capital industry in supporting growth is widely recognised, and consequently governments across the world have sought to promote the industry. But the development of the VC industry in the UK (and in many other countries) has been hampered by the low returns it delivers to its investors.

Understanding how the UK venture capital market compares to more successful ones, particularly the US market, is the first step towards improving the performance of the UK VC industry.

This report uses a novel database that combines data on VC fund performance and their investments in the US and UK for 791 funds raised between 1990 and 2005. Therefore, it not only reports differences in aggregate performance across countries, but in addition it compares like-for-like funds, with the same focus, vintage year and experience, but located on opposite shores of the Atlantic.

Authors
Josh Lerner, Yannis Pierrakis, Liam Collins and Albert Bravo Biosca