PARIS (Reuters Breakingviews) - Europe’s venture capitalists sometimes joke that they’re glorified civil servants, since government agencies are still the largest contributors to many funds. Returns have historically been humdrum compared with U.S. peers, who also raised about five times more capital than Europe’s $10 billion haul in 2018.
The transatlantic deficit may be closing, however, as optimistic private valuations of U.S. VC-backed companies come unstuck. Shares in Uber Technologies, Slack Technologies and Peloton Interactive are down 25% on average since listing this year. WeWork parent The We Company didn’t even get that far.
Data presented at last week’s Venture Capital Forum in Paris by the European Investment Fund, one of the public backers of the bloc’s VCs, implies there may be a systematic overvaluation problem in America. U.S. “ICT unicorns”, or VC-backed companies in the information and communication technology sector worth $1 billion or more, have historically been valued at roughly 5.5 times the amount of venture money invested by the time they reached that milestone. But when their backers managed to cash out the multiple shrunk to about 4.5, according to the data set used by the EIF which stretches back over a decade.
In Europe, the opposite is true: the bloc’s star ICT companies were worth almost 5 times invested capital at the time of reaching unicorn status, and their backers went on to realise a 5.5 times multiple. The takeaway is that European private tech valuations are closer to reality than those stateside.
Or at least that’s the hope of many attendees at Venture Capital Forum. The theory is that America’s historic strength - tons of cash - is now a weakness, since startups are bloated and overvalued. In Europe, by contrast, there’s less money chasing each promising opportunity, which bodes well for returns.
Old World tech investors still face unique challenges, including slow GDP growth and a patchwork of 30-odd economies with different rules and languages. That’s partly why major venture money has historically steered clear. But the data suggests those obstacles are surmountable: European and U.S. VC returns have both been around 15% to 20% in recent years, according to data presented by Amadeus Capital Partners’ Anne Glover at the forum. In the mid-1990s, there was a 20 percentage point gap. The U.S. tech implosion is an opportunity for European VC.
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