What is The VC Factor? Five ways the world would be different without VC
Imagine a world without VC (venture capital). Without access to a time machine (think ‘Back to the Future’), it’s pretty difficult to do.
Or is it? We have created a simulation which shows what companies would have looked like between 2007–2014 had they NOT had the VC backing to support them. We have simply removed the VC Factor. And what have we found out?
Well, start-ups fall into five growth profiles — laggards, commoners, all-rounders, visionaries and superstars. Laggards dwindle, commoners grow mildly, all-rounders record considerable progress, visionaries’ intangibles skyrocket and finally, superstars’ growth is astronomical on all fronts. If we take VC away from these start-ups, they start to move out of their growth profiles and into new ones…
1. Most ‘superstar’ start-ups would have been unable to achieve their latent performance growth without a VC investment. Only around 20% would have remained superstars, 28% would have joined the visionaries and 13% the all-rounders. An even worse fate would have befallen the remaining ones, who would have ended up either as laggards (17%), commoners (18%) or gone out of business by their fourth year (5%).
2. Only 20% of ‘visionary’ start ups would have remained truly innovative without VC. This means 80%, yes, 80% of start-ups in this high-growth category would have fallen into a lower growth profile without VC there to support them. Around half of them would have dropped to the all-rounders profile while the other half would have ended up as commoners or would have defaulted all together.
Wow.
3. More than a third of ‘all-rounders’ would have remained in the same profile, while only 10% would have been better off.
4. “The impact of VC investments on commoner firms was mild at best. The majority (58%) would have grown this way in any case. A further 23% would have been better off without VC (with 16% of all commoners ending up among the all-rounders, 4% among the visionaries and a lucky 3% becoming superstars). Out of the remaining 19%, an unlucky 12% of commoners would have been downgraded to laggards and 7% would have defaulted without the VC investment.
5. Laggards. In a world without VC, half of laggards still moved to higher growth profiles, but as you can see from the dotted line, there are still far more laggards when there is no VC.
So how did we find this out?
Our findings form part of a much wider analysis on venture capital firms in collaboration with venture capital association Invest EU. Together, we analysed 8,960 EU start-ups during the 2007–2015 period.
To compare companies with and without VC, as above, and, similar to a clinical trial, we identified a group of ‘control’ firms who had not received the ‘drug’ of VC investment but would have qualified for one, and compared them to almost-identical firms who had received VC.
We also looked at how companies performed two, four and six years after VC investment. As you can see from the image below, superstar firms turn out to be the most resilient, as they were the most likely to remain within a high-achieving group six years after investment — showing the positive impact of VC financing on high-achieving companies.
Why is this important?
Policy-wise, supporting VC has been key to ensuring innovative SMEs grow in Europe. The EIF in particular invested more than EUR 10bn in cornerstone commitments to European VC funds from 1996 to 2014. Findings like this show that VC has a powerful impact on the very highest growth categories and the very lowest. Important when looking at how to target our support.
Of course, this is only a snapshot of the many findings from analysing 8,960 companies between 2007–2015. To see the true anatomy of the VC market in this period, the dominant sectors and geographies, the main VC growth profiles and what was within them, how companies grew between two, four, and six years after VC investments and much much more, please go to the published report The VC Factor.
