In this latest Earlybird Global Venture Capital Report, Hendrik Brandis and Jason Whitmire detail how the tech bubbles of the past decade have changed the US and European venture capital landscapes. In Europe, the explosion of innovative ideas and blockbuster businesses in the late 90’s led to a global spawning of venture capital startups eager to cash in. When the bubble burst, two-thirds of these VC firms vanished along with the entrepreneurs they had funded.

Many regarded this as a healthy VC market cleansing, promoting the survival of the fittest among VCs and entrepreneurs alike. With the post-2005 resurgence in the number entrepreneurs, there are a comparatively modest number of enduring VCs to cater to their needs.

While both European and American VCs benefit from of this buyer’s market, European VCs have outperformed their American counterparts in investment exit multiples and values, a fact often overlooked by the major venture data providers such as Thomson or Preqin, which even today contain aggregate data from largely inactive European VC funds. While many entrepreneurs still turn to Sand Hill Road for higher valuations and “better deals,” private equity investors themselves are faring much better in Berlin or London than they do in the US. Since 2009 alone, European VCs reported $15B in venture-backed liquidity based on a $6B capital investment (250% growth), vs. $30B liquidity through $25B of funding in the US (20% growth) during a similar time period. Likewise, from 2005-2011, European VC investments have shown a median investment multiple of 7.2 for exits over $100M, compared a multiple of 4.5 for US VCs. In recent years, European VCs have hit more investment “home runs” (ROIs of more than 10x) and have exited more companies than their US counterparts.

Several factors account for the comparative success of European VCs. First, the number of active US VCs is three times higher than European VCs, allowing European VCs to employ more stringent selection criteria – in the US, VC investments constitute 0.15% of the GDP compared to only 0.03% in Europe. US entrepreneurs also have access to competing forms of funding, including university endowments and pension funds.

The Earlybird Global Venture Capital Report underscores the quality and quantity of Europe’s entrepreneurial pool. With a more than fivefold increase in the number of repeat entrepreneurs from 2000 to 2007, European VCs can be highly selective as to which ideas they invest in. This stiff demand for funding in relation to the number of VCs permits early stage European valuations of less than half those of their US counterparts, with consequent lower risk and higher returns. Likewise, the higher US entry stage valuations have not translated into correspondingly higher returns – the number of exit values at $350M is the same in both the US and Europe.

Of the many VC successes in Europe, Germany has witnessed the highest number of venture-backed exits of over $4.6B in the past 24 months. For a country with only one-quarter the GDP of the US, Germany only has four independent investment-grade VC’s, compared with 227 in the US.

You may view the complete report at http://www.slideshare.net/earlybirdjason/earlybird-europe-venture-capital-report.

Interview with Jason Whitmire, Earlybird partner and author of the Global Venture Capital Report

Hi Jason, thanks for granting us an interview. First, who should be reading your report?

Jason Whitmire: This analysis will not come as a surprise to those LPs already invested in the top-tier of European VC – they have seen the transformation of the VC landscape over the last five years from the “inside”. Given however that US LPs are heavily underrepresented in this group, and typically see only the aggregated data on European VC, I believe they will be the most surprised by our findings.

Your comparison of the US and European VC landscapes indicates that entrepreneurs can obtain higher valuations in the US – what accounts for this VC market discrepancy?

Jason Whitmire: Firstly, there are more VCs in the US chasing after comparatively the same amount of deals in Europe, which means that valuations in the US have steadily gone up to catch what is perceived as a good investment. Also, because average fund sizes tend to be significantly larger in the US, the amount of capital invested in early stage companies is higher than in Europe, meaning that there is more valuation elasticity in US deals.

With their impressive number of higher multiple exits over the past 3-4 years, it appears that European VCs deliver better returns with corresponding lower risk – is this a correct interpretation?

Jason Whitmire: I think so: with the quantum of capital deployed being lower in Europe, yet with exit multiples being on average higher, European VCs are in many ways are practicing arbitrage with their portfolios by buying in low and selling high to global acquirers.

In this age of financial globalization, how do you account for such striking differentials between US and European VC returns?

Jason Whitmire: The higher density of venture capital in the US has led to more froth and frenzy in valuations; this translates into higher risk as it turns into a winner-takes-all landscape, forcing additional rounds which create valuation expectations that make it exceedingly difficult to achieve a 10x return when the exit arrives.

Why don’t European entrepreneurs simply turn to the US market in search of better deals?

Jason Whitmire: Many entrepreneurs, after being declined by European VCs, take their idea to the US and get funded (and then are quite vocal about it). That said, the statistics show that over 2,661 European entrepreneurs received venture-backed funding from European VCs in 2010 – on par with the US and vastly outnumbering the ca. 194 European entrepreneurs who migrated to the US to receive first time funding from a US VC during that same timeframe.

Do you expect the differential in US vs. European VC returns to diminish over time?

Jason Whitmire: I think it is important to remember that US venture capital has been around for over 40 years, while European VC only really got started in the 1990s. The learning curve for European VC has been steep and the gap is definitely closing, but it will still take some time for more funds to move into vintages five, six and beyond.

We’ve seen a number of spectacular financial bubbles grow and burst over the past several years, is there a danger of a recurrence of the VC one?

Jason Whitmire: I don’t think we’re in a VC bubble with the exception of Groupon; there is a VC-led rush to IPO companies which financial fundamentals that are vastly stronger than during the 2000 crash, thus I believe VC (at least the top tier) will weather even another 2008-like financial storm.

You’ve focused primarily on US and European VC markets. What are the VC prospects in other parts of the world, notably India, China, and Brazil?

Jason Whitmire: I believe that there are great VC opportunities in India, China and Brazil as long as those investors who do commit are patient, have a very long term outlook and can accept the loss ratio that goes with the territory. However often over-looked is the opportunity in Central and Eastern Europe (CEE), which I believe represents a significant opportunity given the increasing amount of entrepreneurs creating exciting technology-enabled service plays. Also, the rule of law, low cost labor basis and close proximity to large Western European markets (Germany, France, UK) make the CEE a particularly attractive VC market at the moment.

What impact do you expect your report to have?

Jason Whitmire: If anything I hope that the report helps set the record straight in terms of VC returns in Europe over the past few years and at the same time encourages investors to cast a more differentiated eye on European VC, i.e., look beyond the aggregate returns (which are anyways highly limited by the poor

quality of published industry fund statistics in Europe) and instead at the post-bubble vintage performance (i.e., starting in 2004/2005) of the top tier of European VCs.

Is there anything else you would like to add?

Jason Whitmire: I believe the next decade will be the single most exciting time for both VCs and entrepreneurs, it is a good time to be in this industry.

Thank you for your time.

Jason Whitmire: Always a pleasure.

For more information on Earlybird VC, you can follow Jason’s blog at http://earlybirdjason.com/ or follow the VC firm on Twitter at http://twitter.com/#!/search/earlybirdjason