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UK venture capital firms get similar returns to US counterparts

Edmund Heaphy
Finance and news reporter
Suranga Chandratillake, a general partner at London's Balderton Capital, one of Europe's leading venture capital firms. Photo: John Phillips/Getty Images for TechCrunch

Long thought to lag behind their US peers, venture capital firms in the UK actually produce comparable returns, according to new research from the British Business Bank.

According to the bank’s analysis, UK-based venture capital firms outperformed their US counterparts between 2002 and 2006 — and have had only slightly lower returns since 2007.

Previous research has often suggested that the gap between venture capital firms in the US and UK was large, and growing.

Catherine Lewis La Torre, the CEO of British Patient Capital, the bank’s venture capital arm, said on Thursday that the “encouraging” data ran “contrary to the received wisdom” about the respective performance of firms in each country.

Since 2017, UK venture capital firms have had an investment multiple of 1.54 on average. Known as total value paid-in (TVPI), the same metric, which measures the total value created, was 1.88 in the US.

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But because TVPI is a ratio, it does not take into account the actual monetary value of the funds, where the disparity is enormous.

In 2018, US-based companies received more than $130bn (£100bn) from venture capital firms. UK-based companies received just £2.49bn, according to data from Pitchbook.

And while TVPI is considered an important metric, some investors say that it is the number of high-performing funds that deliver outsize returns that is more significant.

The UK also lags behind in that regard. The bank, which is state-funded, noted that returns from UK venture capital firms were only comparable if “a small number of top US funds that outperform significantly” were excluded.

UK venture capital firms have also been criticised for placing big bets on companies that have already proved their mettle, rather than investing in early stage start-ups that need the money more.

Through British Patient Capital, the bank now operates a £2.5bn fund that it plans to invest in UK venture capital firms. In its first year, the arm made 12 investments, with a total value of £334m.

The arrival of British Patient Capital is something of a salve for UK venture capital. The European Investment Fund (EIF), by far the largest investor in European venture capital funds, has scaled back its activity in the UK since the 2016 Brexit referendum.

Between 2011 and 2015, the EIF accounted for over a third of investment in UK venture capital.

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