Abstract
This chapter applies data envelopment analysis (DEA) and uses the basic and cross-efficiency models to evaluate the performance of European venture capital firms. DEA is a non-parametric technique that measures the relative efficiency of decision-making units such as VC firms on the basis of observed data, and produces an efficiency score as a single number between 0 and 1.00. Its main benefit is that it identifies the best-performing VC firm and determines the relative efficiencies of a set of similar VC firms. The power of DEA lies in its ability to deal with several inputs and outputs while not imposing a precise relation between input and output variables. With the ever-increasing number of VC firms, DEA can be used as an alternative appraisal method for ranking their efficiency. One can rank VC firms by efficiency score and compare the results among European countries where VC firms are popular. DEA can be used as an alternative selection tool to assist pension funds, institutional investors, and high net-worth individuals in selecting efficient VC firms. It can complement traditional measures and can present a more complete picture of VC performance appraisal by providing reliable results. As the DEA method slowly becomes accepted and used by more academics, money managers, and institutional investors, its functional ability can improve the process of selecting efficient and high-performing VC firms.
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