Investment – Warning over venture capital

A quarter of venture capital investments made in 1996 underperformed as investors paid over the odds for businesses, experts said this week.

Graham Turton, Price Waterhouse’s business regeneration partner, said the sector faced a 1980s-style series of high-profile failures, unless the matter was addressed urgently.

Turton, who prepared a report for the European venture capital industry, looked at 30 venture capitalists in 13 European countries.

It found that 25% of all investments in 1996 either failed or under-performed, at a cost to European business of ecu518m (#347m).

But despite the high failure rate, the venture capital market continued to boom. The UK venture capital market is the largest in Europe and worth #520m, according to figures compiled by Coopers & Lybrand.

PW’s Turton attacked venture capitalists for paying vastly inflated prices for businesses. ‘Venture capitalists have to pay more attention to their clients’ business needs. There is a lot of money chasing fewer deals,’ said Turton.

But Clive Sherling, chairman of the British Venture Capital Association (BVCA), defended the UK venture capital market.

‘In the UK over the last few years, the venture capital market has delivered a 20% to 30% return to investors. This is just an accountant telling us how to understand industry.’ He added that the only way to maintain high returns is to take risks in the market.

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