European VCs and the laws of niche markets

EarlyBird Report saying that European VCs have better results than US ones (see above presentation), but I think it is misleading - as GigaOm points out,the reasons are not necessarily great for European entrepreneurialism:

Because venture money is scarce in Europe, on the other hand, companies have to compete harder for funding — which keeps the value of investments down. At the same time, it also means that VCs can cherry pick the very best investments and focus on backing real winners — which keeps their hit rate high. It’s a combination that creates a more efficient ecosystem, for investors at least.

This is encapsulated by a quote in the report from the head of Deutsche Bank Private Equity, who says that “European venture capital is a cottage industry characterized by an insufficient number of private investors with the capacity and willingness to invest in venture capital, mainly due to past disappointments and the resulting lack of confidence which still inhibits the European venture industry today.

I recall looking at this issue for McKinsey in the mid 1990's, and I don't see that - big picture* - much has changed. Its still the same cottage industry propelled by the laws of niche markets, but not maximising the total entrepreneurial potential value in Europe, just the returns to VC investors. The truth is that a startup is still more likely to get funded in the US, and get a higher valuation and more money.

What I have never understood is why the market hasn't become more competitive, and its still not even economically efficient as it is not maximising the total potential surplus from European entrepreneurialism - if it were a real "Free" VC market in Europe then nearly everything with a positive possible return would be funded - and some real turkeys of course.

The outcome is usually that European companies eventually go Stateswards or get bought by larger, faster growing US ones, and there is a dearth of European champions. For the European VCs its great, for Europe's own wealth creation, less so.

A more efficient market - definitely (within the narrow definition used). A more effective one - probably not.

*By this I mean that even though it has changed structurally, from an outside point of view - as an overall industry sector - it still quacks like much the same duck.