The performance gap between UK and US venture capital funds has narrowed in recent years, according to a new report from the National Endowment for Science, Technology and the Arts (NESTA).
The report, entitled Atlantic Drift: Venture capital performance in the UK and the US, noted that though UK funds historically underperformed US funds, the gap in fund returns narrowed from over 20% between 1990 and 1997, to just 1% between 1998-2008.
However, this is predominately due to underperforming US funds since the dotcom bubble, according to the report, which says: “Returns in the UK did not grow as fast as they did in the US in the run-up to the dotcom bubble, and as a result the UK was proportionately less affected by the dotcom crash that followed.”
The report looks at reasons behind the historical underperformance of UK VC funds as compared to US funds, finding that:
- The best performing funds are those of between $85-365m
- Investing in ICT generated the highest historical returns
- Funds located in investor hubs, no matter what the country, perform better than those elsewhere
- Investing in earlier rounds is beneficial.
Author Josh Lerner also noted that the UK investment environment may be negatively impacting the performance of UK VC funds, with UK funds performing better when investing in the US, and US funds performing worse when investing in the UK than if they had invested on home ground.
“To point fingers at the venture capitalists is in some sense misleading,” Lerner cautioned at the report’s launch. “Venture capital activity doesn’t exist in a vacuum.”
“The UK underperformance can only be the result of some unmeasured fund characteristics of the environment in which the funds operated,” said the report, which named the number of opportunities available and the barriers to their development, the ambition and ability of entrepreneurs, and the background of investors as examples of these characteristics.