European VC cycle turning

It is fashionable to bash the European venture capital industry at the moment – but to my mind there is mounting evidence that the cycle is turning.

In previous posts on this subject (Big European Exits and Euro Venture finally holding its own) I have shared evidence that on the exit side Europe is looking good.

Data on the returns that funds are making and funds raised are now starting to tell a similar story.

In 2006 the rolling one year IRR for European venture was better than for buyout for the first time in a little while.  Over the long run it is 5, 10, and 15 year IRRs that count, but one year rolling IRRs are a lead indicator of where things are heading, so long as we can keep delivering the returns.

After returns the other big indicator of the health of the venture industry is funds raised, and things are starting to look good there as well.  According to data in the FT this morning at $4.7bn venture funds raised in Europe last year were in line with their ten year average level (and well above that if you take out the blowout years of 2000 and 2001).

Those are the hard stats.  On a personal level things are feeling good as well.  Our portfolio companies are cutting good business, and the exit climate is more favourable than it has been for years.  Happy times.

This all makes me a strong believer that the cycle is turning, but we are clearly not in the midst of a heady upswing.  From that perspective these quotes which my partner Simon Cook dug out from a book published in 1992 are interesting:

“Venture capital has changed forever, and when the shake out is over, it won’t return to the good old days”
“Venture and risk capital have become increasingly less available to deserving startup and growth companies”
“Returns … do not match the 20% to 50% range the investors have come to expect”

My point here is that fortune favours the brave, and that investing in the VC asset class in 1992 and the years after turned out to be a smart thing to do.  It feels like the same is true again now.

This is a theme that I obviously have a bit of vested interest in
promoting, but I believe this stuff with a passion.  That said I always say “Never underestimate the power of what people want to believe” – and I hope I’m not just drinking my own Kool-Aid!

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  • when i was in a fund of fund … I learned from academic researches that 1-Y IRR is not really usefull. I think yuor phrase “Never underestimate the power of what people want to believe” is really applying to it. 1-Y IRR is too correlated to market valuation and fundraising cycles.

    But I agree on the global picture without any vested interest in it.

  • when i was in a fund of fund … I learned from academic researches that 1-Y IRR is not really usefull. I think yuor phrase “Never underestimate the power of what people want to believe” is really applying to it. 1-Y IRR is too correlated to market valuation and fundraising cycles.

    But I agree on the global picture without any vested interest in it.