Why has the investment performance of technology-specialist, European venture capital funds been so poor?

This paper seeks to identify and model the key parameters which impact on the commercial performance of a specialist, technology focused, early-stage, venture capital fund. Using both input (costs) and output (expected values) data provided by a number of specialist, independent venture capital firms, a spreadsheet model of a 10 year term fund is developed. These figures are used to generate internal Rate of Return (IRR) and Net Present Value (NPV) performance calculations for the investment commitments of both the institutional, Limited partners and venture capitalist, general partner. The generically defined model allows the user to address both conceptual and pragmatic questions regarding the relationship between fund structure and performance. The model is further developed to determine the effect on fund performance of two venture capital related, 'indirect' State support schemes (guarantee and leverage options). Iterative interrogations of the model demonstrate the sensitivity of economic returns to the scale of the investment activity. State supported schemes mitigate but do not remove the negative performance consequences of small fund size. A fund with under pound 15 million (US$25 million or ECU21 million) under management is of increasing economic vulnerability. (C) 1998 Elsevier Science B.V. All rights reserved.