24 - Total loss risk in European versus U.S.-based venture capital investments

Abstract

This chapter provides evidence that there are systematic differences regarding the total loss risk for European and U.S.-American venture capital (VC) and private equity investments. It measures the risk of total losses for a set of investments twofold, namely, the probability of one failure to the total number of investments in a given fund portfolio, and the fraction of capital lost in one failure to the total capital injected in all deals of a fund portfolio, which is termed as the total-loss–capital ratio. It uses a unique dataset and analyzes 1011 matched private equity and VC investments in Europe and the U.S. during the period of 1979 through 2003 in regards to total losses. This dataset is used to test three hypotheses in detail concentrating on the investment experience of the fund management, syndication of a stake with other investors, and the focus of the investor on venture capital. After analyzing the total dataset for these hypotheses, the commonalities as well as differences in regards to total losses for U.S.- versus European-based deals are investigated. The results show that more experienced European investment firms prefer a lower probability of failure at the expense of a higher total-loss–capital ratio. The more experienced European firms, because of their cultural differences, are more focused on the avoidance of a failure than on the amount of capital lost.