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Determinants of Venture Capital Performance: Europe and the United States

Author

Listed:
  • Ulrich Hege

    () (GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - HEC Paris - Ecole des Hautes Etudes Commerciales - CNRS - Centre National de la Recherche Scientifique)

  • Frédéric Palomino

    (Department of Finance - Tilburg University [Netherlands])

  • Armin Schwienbacher

    (UvA - University of Amsterdam [Amsterdam])

Abstract

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 signi cantly 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 entrepreneur. 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.

Suggested Citation

  • Ulrich Hege & Frédéric Palomino & Armin Schwienbacher, 2011. "Determinants of Venture Capital Performance: Europe and the United States," Working Papers hal-00591245, HAL.
  • Handle: RePEc:hal:wpaper:hal-00591245
    Note: View the original document on HAL open archive server: https://hal-hec.archives-ouvertes.fr/hal-00591245
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    Citations

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    Cited by:

    1. Dirk Bergemann & Ulrigh Hege, 2005. "The Financing of Innovation: Learning and Stopping," RAND Journal of Economics, The RAND Corporation, vol. 36(4), pages 719-752, Winter.
    2. Douglas Cumming & Sofia Johan, 2006. "Provincial preferences in private equity," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 20(4), pages 369-398, December.
    3. Da Rin, Marco & Hege, Ulrich & Llobet, Gerard & Walz, Uwe, 2005. "The law and finance of venture capital financing in Europe: findings from the RICAFE research project," MPRA Paper 39552, University Library of Munich, Germany.
    4. Andy Cosh & Douglas Cumming & Alan Hughes, 2009. "Outside Enterpreneurial Capital," Economic Journal, Royal Economic Society, vol. 119(540), pages 1494-1533, October.
    5. Kaplan, Steven & Martel, Frederic & Strömberg, Per Johan, 2003. "How Do Legal Differences and Learning Affect Financial Contracts?," CEPR Discussion Papers 4161, C.E.P.R. Discussion Papers.
    6. Douglas Cumming & Uwe Walz, 2010. "Private equity returns and disclosure around the world," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 41(4), pages 727-754, May.
    7. van Pottelsberghe de la Potterie, Bruno & Romain, Astrid, 2004. "The Determinants of Venture Capital: Additional Evidence," Discussion Paper Series 1: Economic Studies 2004,19, Deutsche Bundesbank.
    8. Magnus Henrekson & Tino Sanandaji, 2018. "Stock option taxation: a missing piece in European innovation policy?," Small Business Economics, Springer, vol. 51(2), pages 411-424, August.
    9. Christian Schröder, 2009. "Financial System and Innovations-Determinants of Early Stage Venture Capital in Europe," Schumpeter Discussion Papers sdp09004, Universitätsbibliothek Wuppertal, University Library.
    10. Portmann, David & Mlambo, Chipo, 2010. "Private equity and venture capital in South Africa: A comparison of project financing decisions," MPRA Paper 42892, University Library of Munich, Germany, revised 16 Nov 2012.
    11. Romain, Astrid & Pottelsberghe de la Potterie, Bruno van, 2003. "The Determinants of Venture Capital: A Panel Data Analysis of 16 OECD Countries," IIR Working Paper 03-25, Institute of Innovation Research, Hitotsubashi University.
    12. Lossen, Ulrich, 2006. "The Performance of Private Equity Funds: Does Diversification Matter?," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 192, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    13. repec:zbw:cfswop:wp200417 is not listed on IDEAS
    14. John Armour & Douglas Cumming, 2004. "The Legal Road To Replicating Silicon Valley," Working Papers wp281, Centre for Business Research, University of Cambridge.
    15. Douglas Cumming & Daniel Schmidt & Uwe Walz, 2004. "Legality and Venture Governance Around the World," CFS Working Paper Series 2004/17, Center for Financial Studies.
    16. Rainer Lauterbach & Isabell Welpe & Jan Fertig, 2007. "Performance differentiation: cutting losses and maximizing profits of private equity and venture capital investments," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 21(1), pages 45-67, March.

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