Determinants of Venture Capital Performance: Europe and the United States

This paper presents a study of contractual determinants of success in venture financing, by comparing the conditions in a mature venture capital market (United States) with those in a relatively new market for venture financing (Europe). Using data collected in an identical way, we look at the choices around the exit decision, and internal rates of returns calculated from reported valuations as two measures of the performance of venture-backed projects. Our data show that US venture capital firms show a significantly higher performance on average than their European counterparts, both in terms of type of exit and of rate of return. We argue that this performance gap may be attributable in parts to differences in the contractual relationship between venture capitalists and start-up entrepreneurs. First, venture capitalists in the United States assert more often contingent control rights, indicated both by the use of convertibles and decisions to replace the entre-preneur. Second, our findings are consistent with the hypothesis that US VCs have a better capacity to screen projects and to ensure their success in the early stages than European VCs.