New venture capital firms are often particularly successful in start-up investments. This is the result of analyses by the Munich-based investment platform Equation. “Among the ten best start-up funds of a year, a disproportionate number of investment firms are represented with their first or second fund,” says Equation founder Mark Schmitz.
Competition among venture capital firms in Europe has increased enormously. There are now 550 European venture capital firms. This is stated in the European Capital Report 2022 of the consultancy i5invest, which is available to the Handelsblatt. 48 Venture capital firms were newly founded in 2021. Statistically, the probability of top returns is particularly high there. “The results are contrary to popular perception,” says Schmitz. Because investors are more likely to rely on established companies.
Venture capital firms collect money from private investors, family offices, pension funds and other institutional investors and thus participate in start-ups. If the portfolio companies are sold later or go public, the money flows back. Circles of experts say: the best funds in the world, launched about ten years ago, can now repay their investors 25 times their money and more. It is about these peak returns that the study of Equation is about.
Because there are good and bad start-up years, start-up funds are always compared on the basis of their start time. As with wine, the scene speaks of “vintages”.
Equation has evaluated figures from the Cambridge Associates database for the US market: between 2004 and 2016, significantly more new venture capital firms made it into the ten highest-yielding funds of their year. In eleven out of 13 vintages, more newcomers entered the top ten with their first or second fund than established competitors. Twice they were on the same level – although there were always significantly more established investment companies.
Schmitz’s co-founder at Equation, Reiner Braun, has been researching venture capital as a professor of corporate finance at the Technical University of Munich (TUM) for years. Based on the research, the two assume that the pattern is transferable to Europe.
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An example of a German premiere hit is Point Nine. Among other things, the Dax group Delivery Hero has emerged from the first fund of the company, which was launched in 2011, and the banking software provider Mambu is currently valued at 4.9 billion euros. In Europe, too, the following applies: Investors in first-time funds have a higher chance of exceptional returns. But why is that? Three explanatory approaches.
Explanation 1: Young funds invest particularly early
First of all, the funds differ in size. A first-time fund has an average of $ 46 million, the fourth edition has a good $ 190 million, and the seventh funds have an average of $ 300 million. The size of the fund correlates with the start-up phase in which investments are made. Small funds tend to participate in start-ups early, large funds in the growth phase, when the need for capital increases.
One thing generally applies: the sooner an investor joins, the greater the risk and return opportunities. But TUM Professor Braun says: The higher probability of achieving particularly high returns “cannot be explained solely by structural differences such as the investment phases”. The effects were controlled.
Explanation 2: Young venture capital firms focus on trends early on
New venture capital firms are also betting on new trends, shows a further analysis in which Equation compared the venture capital firms founded in Europe since 2016 with older ones. For example, the younger companies have made 6.1 percent of their investments in technologies for decentralized accounting such as blockchain, while the older ones have made only 1.6 percent. “We even see funds that specialize in the fields of climate technology or aerospace, for example,” says Schmitz.
The investor’s statement: “If there are new trends and sectors to tap into, then those who are already active in the industry will first have to rethink.“ New companies could put together teams from the outset that are familiar with these trends.
Explanation 3: New fund managers have different work experience
TUM and Equation have also found differences among decision-makers, especially in terms of work experience. 72 Percent of fund managers at young venture capital firms have previously founded themselves or worked for start-ups and can pass on this experience. In the case of the established ones, this is only true for half. Nevertheless, investors should be careful when investing in young funds: there is also an increased risk of default.
The stronger the competition, the more difficult it is for new investment firms to win the best deals. For founders, a good network and references are often decisive when choosing their investors. Schmitz argues that it is only with market expertise that it is possible to assess whether a new team in the market is well-wired and well-equipped.
Not for laymen: great opportunities, high risk
The federal government deliberately wants to rely on such venture capital firms, which often still lack confidence among private investors. In expert circles, everyone knows: the first fund is always the most difficult. They want to invest specifically “where the European market still needs to be pushed,” says Anna Christmann, Start-up officer at the Federal Ministry of Economics.
“Especially when the risk is too great for the market, we can use public money to set incentives,” she notes. Investments with KfW Capital should therefore be used to support start-up funds. Most recently, according to Christmann, this was true for 20 percent of all fund holdings.
Six new venture capital firms were founded in Germany in 2021, according to the merger consultancy i5invest, the tech investor i5growth and the Vienna University of Economics and Business in their report. This includes Cusp Capital.
The investor team has previously worked together at Tengelmann Ventures and financed the online retailer Zalando, for example. Cusp co-founder Christian Winter says: “It helps us that we, as people in the market, are personally known by many and have the necessary contacts.“
For example, the company has already been able to convince the founding teams of the purchasing software provider Hivebuy and the catering management software Sides. Whether Cusp has put its first fund on the path to becoming one of the top yield bringers of its vintage, however, will only become clear in a few years.