Venture capital funds proliferated outside the US over the past decade, but few of them can match funds based in the industry’s home for performance.
Eight of the 10 best-performing firms are located in the US, according to a ranking compiled by Oliver Gottschalg, who teaches at HEC Business School Paris. Healthcare-focused The Column Group is the top-performing venture capital firm for the second year in a row, according to the annual study which Dow Jones has published since 2010.
Only two European firms make the top 10: Scottish Equity Partners headquartered in Glasgow and Northzone, in London, which are respectively sixth and eighth.
Both firms also appeared in last year’s top 10. Scottish Equity Partners, which has backed businesses such as Skyscanner and Matchesfashion, raised its last fund in 2016, attracting £260m from investors. Northzone raised $500m for its largest-ever fund in November last year.
The dominance of US firms in the ranking is partly explained by the size of the market – US deal activity is three times greater than in Europe. In the first half of this year, European venture capital funds invested €18.5bn in 2,494 businesses in Europe, while US funds ploughed $69.1bn into 5,058 companies, according to data from PitchBook.
The HEC ranking is based on data from Preqin. Gottschalg only looks at the performance of firms that raised at least $350m over two or more funds between 2006 and 2015.
His research covers 83 venture capital firms, which raised a total of $85bn in the period. According to Preqin, this corresponds to roughly 20% of total comparable venture capital fundraising. The research excluded small firms (see Methodology box below).
Technology and life-sciences companies appeared prominently among the investments of firms in the top 10. Boston-based Third Rock Ventures, which invests in biotechnology start-ups, occupies the number two spot.
In third and fourth place were Spark Capital, which lined up $1.35bn split between two funds last year, and Chicago-based Arch Venture Partners, which raised $1.46bn to finance its new biotech development this year.
Despite concerns as the coronavirus pandemic took hold in March, venture capital remained robust through the first half of this year. Private companies around the world raised $112bn in venture capital through 6,379 deals in the first six months of 2020, according to Preqin. The total was down only 2% from the first half of last year, The Wall Street Journal recently reported.
HEC ranking methodology
HEC ranks venture capital firms by the aggregate performance of their funds. To eliminate small firms and those with inconsistent performance, it only considered companies that raised at least two funds worth a combined $350m between 2006 and 2015. Only firms that made full performance information available were included.
Funds raised after 2015 were ignored as their performance is still too unreliable to be judged at this point. Oliver Gottschalg assessed internal rates of return, cash-only return multiples and TVPI, which considers accounting values of ongoing investments. These were then weighted according to the age of funds, because data from older funds is typically more reliable.
A score of one means a firm has an aggregate performance one standard deviation above the average, or better than roughly 85% of all firms.
A score of two means performance is twice as high as a firm that scores one. A VC firm with the average performance has (by design) an aggregate performance score of zero, he said.
Source: Private Equity News
