A new report by a group of European business schools shows that 45% of European venture capital (VC) investments fail or do not secure returns above 2x the investment.

The report also found that 28% of the investments exceed expectations, and 9% earned above 10x invested capital.

The report discovered that European venture capitalists receive on average 851 investment proposals per year, of which only 6% lead to investments.

While VCs expect to earn about 30% IRR (Internal Rate of Return) on their investments, the average return they effectively realise is 13% per year.

The report called “Practices of European Venture Capitalists” was authored by leading venture capital faculty experts from Audencia Business School, Vlerick Business School, London Business School, Politecnico di Milano School of Management, Stockholm School of Economics, Universidad Complutense de Madrid, Université du Luxembourg, and Ghent University.

The report’s findings come from a survey of 885 venture capital investors across Europe, with the majority of the responses coming from VCs in France (20%), Germany (13%), Spain and Sweden (each 10%), Belgium (9%), and the UK (7%).

VC investors were asked questions about their involvement from investment to exit, including the reasons why they invest in firms in the first place, the process of doing so, and what makes an investment successful.

The researchers found that VC investors view the management team’s ability as the most important factor influencing their investment decisions.

In fact, 72% of European VC firms consider a competent management team the most critical driver behind investment success.

When asked what other factors make an investment successful, VC investors stated that the offering — the product, service, or technology (72%) — also has a huge impact.

After that, timing is put forward as an important factor (56%), followed by industry conditions (43%), and the business model (39%). Good luck is considered to contribute to successful investments by a third of the VCs.

“Although venture capitalists consider technology highly important when selecting investee companies, which is expected for investors in highly innovative ventures, they primarily base their investment decisions on the management team,” said Benjamin Le Pendeven, Associate Professor at Audencia Business School and project leader.

“93% of the respondents highlight the team as an important factor ­– 73% consider them the most important ­– when selecting investments.

“This confirms the view that European VCs, to a high extent, select their investments based on the jockey rather than the horse.”

The researchers also looked into the average ownership stake VCs attempt to secure with their investments. They found that 63% of the European VC investors target relatively small stakes, between 10 and 20%, when negotiating deals.

Asked about value-adding activities, 83% of the VCs said they support their portfolio companies with raising follow-on financing and by providing strategic guidance, while 75% take seats on the board of directors in the portfolio companies, 72% help their ventures with connections to potential customers and partners, while 69% of the VCs provide support in exit processes.

“Our results suggest that European VCs mainly take a financial approach, assisting with follow-on funding but with a lot of emphasis on the management team,” said Sophie Manigart, Professor at Vlerick Business School and Ghent University.

“There seems to be room to develop a more hands-on approach where VC investors, together with the management team, more actively develop their portfolio companies. Both strategic and operational support are important enablers of new venture growth.”

The most common exit route for the VCs is through sales, amounting to 40% of the investments made, while 7% are through IPOs, and 22% are failures.

“Interestingly, more than 50% of European venture capitalists from time to time do not use formal valuation methods when valuing prospective portfolio companies,” said Anna Söderblom, Affiliate Professor at Stockholm School of Economics.

“Instead, the size of the investment round and the investor’s target ownership percentage determine company value. This is an important insight – not least for us teachers in finance for startups, with our large focus on traditional valuation methods based on discounted cash flows and multiples.”