In addition to the numbers given here, another very interesting study from Oliver Gottschalg on the returns from Private Equity (http://www.soxfirst.com/50226711/private.pdf), looking at 1300 firms over the duration of their funds actually indicates that the average return from these firms is S&P minus 3%. The actual results are S&P plus 3% before fees, but these people are expensive and in the end the LPs are not making that good of a deal.

Sadly nobody really cares about what the VCs do, because they are managing money which is considered “alternative investments” by the bigger guys (the LPOs) so as long as they do not loose money but make somewhat reasonable returns, and as long as they do not do anything crazy, chances are that the LPs will be happy. Even if their “alternative investment” does not do as well as they could hope, and as long as the newspapers keep bragging that this is an area worth investing in, then the status quo stands.

But we are now in times of trouble and every single bit counts. So it is time to review what is going on, and try to figure out what the rumor about the VC model being broken is about.

And the issue is that it is based on false assumptions, because the same study mentioned above will also tell you that there is no such thing as track record. A team of experienced VCs will do just as good or just as bad as a team with no track record, the science shows no correlation between the experience of the team and the success of a fund. Oops!
So paying a lot of money for money managers who may or may not perform (costing 6% to the LPs once all costs are factored in) is spending too much money for the value.

The best thing that startups can do for themselves is to stay away from VCs and focus on generating revenues. VCs will not help startups, they never really do, they will help their investors make the best out of the situation. Which means that if you are small and worried about what is going to happen they will use the downturn as a way to get a better valuation for themselves. And with their selection criteria (outside of their own friends you need to have customers, revenues, a solid team, a proven product) if you are alive today you will probably make it without them.