What is Wrong with European Venture Capital?

Highland Capital Partners, the US VC behind such companies as Ask Jeeves and Lycos, is opening up an office in Europe, but not in London as is the norm, but in Geneva.This isn’t a sign that non-UK firms are shunning London– according to a piece in the FT, Geneva was chosen because it’s a more attractive place to live for Fergal Mullen, a general partner at Highland who will be heading up the new office – but it does tap into something I’ve heard about US firms coming to Europe.

At two of the last conferences I’ve attended I’ve heard the same problem raised by the same person: it is not that non-European LPs don’t like European venture capital, it is that they don’t want to invest in European venture capital firms. LPs are now apparently asking their US venture fund managers to set-up shop in Europe – they would rather put their money into a European fund run by a US firm than one run by a European house.

Is this true? The evidence seems a bit shaky, but if anyone has any of their own, be it empirical or anecdotal, please feel free to share.

Empirically speaking, it’s a tough call to say whether it’s true or not. It’s no real secret that European venture has struggled to raise money in the past (and when I write “Europe” I’m excluding Israel). LPs have traditionally treated venture on this side of the Atlantic as an unloved step-child – you know it’s there, but you don’t really want anything to do with it. There’s the occasional success story when a firm manages to raise a decent amount of money – such as Abingworth (which has a US office) or Sofinnova Partners – but the accepted wisdom has tended to be that it’s an uphill struggle

However, venture capital in Europe had a pretty good 2006, raising EUR17bn, its second highest amount ever. By way of contrast, in the US the figure was EUR21bn, which is not that much higher. While the stats reveal the source all private equity funds raised in 2006 (28.8% from the US), they don’t break it down into venture and buyouts. My guess is that the overwhelming bulk of money raised last year by European VCs flowed from the pockets of European LPs, but your views would be welcome on exactly how non-European investors feel about European venture capital and European VC firms.