Less than 10% of the deals that VCs see result in an investment, only 7% of startups IPO and VCs based in less mature markets see better returns. They're just some of the findings in a new — and very comprehensive — report on the practices of European VCs.
It’s been compiled by a group of researchers from European business schools and universities, and is based on responses from 885 European VCs.
Their firms have an average fund size of €100m, 60% are focused on early-stage investments and 75% are independent (ie. not corporate, government or family office investors). 20% of respondents are based in France, 13% in Germany, and 10% each in Spain and Sweden.
Here are some of the findings that caught our eye.
Just 6% of startup pitches to VCs result in investment
VCs receive an average of 851 investment proposals a year. Only 6% of proposals received get investment.
To break that down further: VCs meet on average 37% of founders that pitch to them. 20% of deals they see end up at their investment committee, and 12% go through due diligence. 8% of founders seeking funding are offered term sheets, and 6% ultimately do a deal with the VC.
Want to increase your likelihood of landing funding? Pitch to the public sector: founders are more likely to close a deal with a government VC than an independent VC.
Only 7% of startup exits are via IPO
Most startups (40%) exit via trade sales. Just 7% list on public markets.
Northern European startups are the most likely to IPO (9%), while central and eastern European startups are the least likely (5%).
45% of investments fail
45% of investments fail, or don’t achieve more than a 2x return on investment.
25% of investments make a 2-5x return. Only 9% of deals return 10x or above on invested capital.
Government VCs have higher failure rates (33%) and lower exit multiples than other kinds of VCs. They aren’t, however, as focused on financial returns as some other kinds of investors. 78% of government VCs say their investments have achieved a key objective — creating jobs — and 77% have led to economic growth in a specific region or sector.
Dive into VC and meet the people holding the purse strings.
VC funds based in less mature markets have better returns
VCs based in less mature markets — which the report considers to be Italy, Norway, Portugal, Poland and most other eastern European markets — are the most likely to get a 10x return on investment (13%). They are also the most likely to get a 0-2x return on investment, however (27%).
The average net IRR (internal rate of return) for European VCs that raise funds is 13% (averaged out across three funds). The highest average IRR was for VCs in the lowest-maturity European markets.
83% of VCs help their portfolio companies raise follow-on financing
The report also confirmed that when VCs say they provide support to portfolio companies, they’re doing the same thing as basically everyone.
85% of independent VCs help their portfolio companies raise follow-on financing and provide strategic guidance. Early-stage VCs do the most work on follow-on funding (85%).
76% of independent VCs ask for a seat on the board.
96% of VCs think the management team is a key factor in a startup’s success
A third of VCs also think that good luck is an important factor, while 56% say that timing plays a big role in whether a startup makes it.
Just 12% of VCs think that investors’ contributions play a meaningful role in the success of a startup, and just 22% think that the board of directors is especially important.