In Part 1 of this article, we looked at the venture capital industry through the lens of the Ewing Marion Kauffman Foundation. According to them, venture capital is a broken industry. In a now seminal article originally published in May of 2012, the Kauffman Foundation’s investment team chastises venture firms for being too big, delivering subpar returns, and remaining stuck in the past. They note that in their twenty-year history of investing in venture funds, only 20% of a 100 total investments “generated returns that beat a public-market equivalent by more than 3 percent annually.”¹ Moreover, after considering the “cumulative effect of fees, carry, and the uneven nature of venture investing, 78% did not achieve returns [that were] sufficient [enough a] reward for patient, expensive, long-term investing.”¹
Surprisingly though, they place the blame for industry’s plight squarely at their own feet. It is they, along with other LPs — institutional or otherwise — who “should shoulder blame for the broken…model as they have created the conditions for the chronic misallocation of capital.”¹ These conditions are the direct result of misaligned incentives between GPs and LPs.