Almost one in five European start-ups backed by venture capital firms go bust, according to a new study.
The report by leading European business schools found 22 per cent of investments end in failure and 45 per cent do not secure returns above two-times the investment. However, on a more positive note, 28 per cent of start-ups exceed expectations and almost one in ten produce ten-fold returns.
The report discovered European venture capitalists receive on average 851 investment proposals per year, of which only six per cent lead to investments. While they expect to earn about 30 per cent internal rate of return (IRR) on these investments, the average return they effectively realise is only 13 per cent per year.
What makes a VC investment successful?
A total of 885 European VC investors were asked questions about what makes them invest in certain firms and what makes an investment successful.
The report found 72 per cent of VC investors view the management team’s ability as the most important factor influencing their investment decisions. “This confirms the view that European VCs, to a high extent, select their investments based on the jockey rather than the horse,” Benjamin Le Pendeven, associate professor at Audencia Business School and project leader of the research project, said.
In terms of post-investment success, the investors stated that the offering, such as the product, service or technology has a huge impact. After that, timing, industry conditions, business model and, interestingly, good luck contributes to a start-up’s success.
In terms of value-add offerings by VCs, 83 per cent stated they support their portfolio companies with raising follow-on financing and by providing strategic guidance. A further 75 per cent take seats on the board of directors, 72 per cent help their ventures with connections to potential customers and partners, while 69 per cent provide support in exit processes.
The most common exit route for the VCs is through sales, amounting to 40 per cent of the investments made, while 22 are failures and 7 per cent are IPOs.