Even then. The actual deployment of risk can be and has been shoved under the rug of these generic and non-specific documents. These documents are not only lacking in the definition of risk, but severely lack controls to allow you as an LP to measure their compliance. And that is exactly why risk has deflated to uniformity and thus subprime Venture Capital.

We don’t believe that it makes sense to compound the operating risk of growing a smaller company and the risk from an ownership transition with the risk of a leveraged capital structure that could have bad consequences for a company if it misses a beat.

Yes, I do commend the ILPA for establishing "dining" etiquette, but it does not change the fact that the food being served is subprime. The way we construct financial systems (in violation of the free-market principles we boast about), by economic principle turns the discovery and arbitrage of the underlying asset subprime (sooner or later). Already in VC 10 levels of bottom-heavy diversification proliferate lies about the real risk deployed in Venture. And the results show it. VC fails to make a dent in the 80% greenfield of technology adoption, nor produce returns for LPs in line with that gap. So, while there are pragmatic things we can do with LPs to start to eradicate those economic lies (as described in my article), a much more fundamental change to the relationship and structure between GPs and LPs can turn their subprime alignment from subprime to prime. Transparency is just a (small) part of the economic framework, and even then the kind of transparency is paramount in establishing a different economic outcome of risk.

The Institutional Limited Partners Association has established a set of "best practices" that center around three guiding principles: 1) alignment of interests; 2) Governance; and 3) Transparency. Logically, if the GP has significant skin in the game by investing along side of the LP there is a higher likelihood they will be more selective in choosing where to deploy capital. The tenets of corporate governance can require a solution for many of the problems Georges discusses. These procedures can mitigate or eliminate conflicts of interest and related party transactions. And finally, if all the cards are on the table, readily seen by all parties, the dialogue becomes real and meaningful. The level of trust goes up and everyone benefits from an open, honest assessment. I am in the hotel real estate sector and we have adhered to similar principles for years. While not in total agreement with the ILPA, their efforts are to be commended as an attempt to bring some measure of standards to the industry.

Yawn, another article from a VC hoping to educate people to become entrepreneurs. Venture is just like American Idol, you find quality - you don't teach singing. People either have the talent or they do not. And Jeff's article(s) reminds me of the desperate Moms who keeps pushing their child to sing, even though when they open their mouth, we all recognize they can't. Not everybody can be an entrepreneur, but an entrepreneur can come from anywhere. The quest is to find prime, not teach subprime. But the real issue in Venture is that Venture Capitalists have not found a way to scale themselves in line with an 80% adoption greenfield and more quality entrepreneurial capacity than ever before. VCs are being beaten and disproven in their assessment of best practices by corporates more and more often. With negative returns on the whole for Limited Partners and perhaps a handful of VCs (out of the 790 post 911 dead weights) making any money monolithically and systemically for LPs, not the quality of entrepreneurial capacity is in question, but the arbitrage of that innovation deployed by VC.So, if Jeff was a wise man he would write an article that describes how Venture Capitalists can scale to detect and entice the entrepreneurial capacity they currently discard as false negatives. And explain why Venture Capitalists with many diversifications built in a period when corporate innovation proves their excuses wrong, really deserve to make any suggestions to budding entrepreneurs.

I think you assessment that just because there are IPOs all is fine in Venture land is overly simplistic. It may demonstrate simply that the public is still easily swayed to buy into the magic of technology, even though many do not produce sustainable social economic value. And with the stock market violating free-market principles, I would not surmise that merely because you can raise another round (this time from the public) the returns will await its investors in the long run. We have seen many IPO's in the late 90s, and where are they now?

Sounds good to me. I wish however the 97% of VCs that don't make any money for LPs would do the same and get the f*k out too. If we all worked on the basis of a meritocracy our world would be a much better and healthier place.

...the decision to sell was a tough call and there was lot of hand-wringing at the Board level. Siri had just raised a new round from Horizons and had close to $20 million the bank.

Oh please. You are bending the truth quite a bit. Siri was great technology due to its inheritance from Calo developed at SRI but hardly a business success you seem to suggest that would prevent it from selling (everyone could see that from the App Store ranking). And $20M in the bank does not erase the fact that the business model as an independent iPhone app was flawed and underperforming. So, the value of Siri was primarily related to the value of the intrinsic IP, not the business execution or the role of Venture Capital in that process.I hate it when VC takes credit for what it didn’t achieve and doesn’t take blame for the things they (not entrepreneurs) did. Hence my need to set you straight. And the future of adoption of Siri in the real world remains to be seen (voice recognition is still fraught with many false positives and false negative that will feed Siri incorrect input, and lack of foreign language support that will minimize its global practicality), but if anyone can turn it into a business success in the long haul it will be Apple.Today it is a great marketing tool, a lot of water needs to go under the bridge before it can deliver incremental market access.You got lucky on this one, let’s leave it at that. Just don’t confuse luck with strategy.

It is the right concept to reduce the 10 levels of bottom-heavy diversification in the deployment of risk in Venture Capital that prevents it from producing viable returns moving forward. And with mostly subprime VCs populating the ecosystem today, the temporal opportunity to remove them may help certain LPs cross the time bridge of change. But Venture Capital arbitrage is needed to produce viable returns, as long as you don't populate it with subprime arbitrage. So, what pensions should focus on is an economic framework that deploys the proper (non-uniform) risk with people who have the merit to spot it. And then force the deployment of non-uniform risk that made Venture Capital so valuable in its inception. The concept of Venture Capital arbitrage is not broken, the execution is. And I wonder if a soccer game without a (highly merited) referee is actually better than one with a bad referee. Especially when we've been living with 20-years of bad VC referees.

Total BS from this snake oil salesman. At 70+ years old with no friends left, he wants us to like him now. Oh puuuhhhlease! This guys is a jerk, dont take money from him, stay away as far as you can. Khosla is always about Khosla, super arrogant punk. He will destroy your company.

Well Jim, as the former Chairman of the NVCA you should be ashamed of the “best practices” of Venture Capital as well. Negative 10 year IRRs, a handful of companies with any social economic value produced by VC as the arbitrage in an 80% greenfield and Venture Capital performing under the adoption rate of technology in the worst of economic circumstances, and a loss of trust by the public in that arbitrage is the despicable outcome of the mediocrity that holds our most precious asset (innovation) in a headlock.Perhaps what Vinod is eluding to is that Venture Capital is a mediocre asset class and arbitrage despite the enormous capacity and adoption greenfield to innovate. With less than 35 out of 790 (original) VCs making any(!) money and around ten doing so with Venture Capital as the monolithic thesis, Venture Capital has proven to be the improper economic construct to drive innovation.And I can fully understand why few smart people want to be associated with that performance or its “best practices”.

Well, average returns of VC funds over the last 10+ years are still in line with the economy, both are negative. More money-in using the current flawed VC economics, in violation of free-markets, only subscribes to how clueless Limited Partners are or how large the size of the Private Equity overhang still is.

No Charles, you are wrong. Venture Capital (no matter who feeds it) is the improper economic construct to support its underlying asset (innovation). Multiple facets are highlighted on my website, but the short of it is that you can’t expect to generate outlier returns from a uniform deployment of investment risk (I coined subprime VC).And the last thing government should do is meddle in the business of innovation. The role of government is to ensure markets operate and obey according to strict free-market principles. And we lack the most fundamental free-market principles that our forefathers instilled upon us. That is why we fail to detect the groundbreaking innovation that fantastic entrepreneurs in this country can create, and we instead have amassed the messy noise of false negatives that turns Limited Partners and the public off.The answer to improving the success of innovation is not to deploy the same deflated risk through new distributions, but to deploy the appropriate risk to the outlier entrepreneurs that deserve it.

Agreed Brad, but for slightly different reasons. No one should correlate the Dow with the state of the economy. Simply because the stock market is not a free-market system (see my blog) and therefor is not representative of the value of the underlying asset. So get on with life and build great innovation.

• Past behavior is no indication of future behavior (a rule of innovation).
• Deal staging says nothing about deal risk and therefore the number of deals says nothing about the viability of Venture taking more or less appropriate risk.
• The number of deals should have gone up dramatically because of the subprime nature of Venture Capital and thus smaller round sizes. Subprime VCs will need to offset deal size for deal volume to reach certain fund commitments. So, the rise in deals may well be offset by its quality.
• Money-in says nothing about money-out, and hence this chart at best how VCs are spinning their wheels. Just to remind you, ten year VC returns are negative 4.6% with only 35 of 790 VCs making any money for Limited Partners.
• Crunchbase (the source) is a very unreliable data source, not just because it cannot accurately capture all deals that are done.
• This data excludes the many angel deals that take place “under-the-table”.

What NY needs (like SV) is less subprime VC. Because when subprime VC is gone and companies with substantial social economic value are produced, investors will care more about securing upside rather than downside, and the commodity squeeze in innovation will disappear. Along with many of the pain points you listed here.

With all respect Mark, but this is a downstream analysis of Venture. Because certain events in VC occurred in a certain order, the next step in that order is relatively easy to predict and may indeed be correct.Yet, the real (upstream) question remains, if technology adoption worldwide is less than 80%, why is VC as the arbitrage not able to trace its massive greenfield. For the answer to that much more relevant question we need to look at the deflated deployment of risk in Venture, that has turned a high risk / high yield sector into the subprime class (with few exceptions) it is today.Best,Georges

Round sizes do not indicate risk, as you can see from my blog ("The economy is not the problem") where I use Vinod's quantification of the deflation of risk with the same money-in. And deflated risk equals deflated returns, hence the reason why subprime VC can only return subprime PE returns.The challenge for VCs is to not look at innovation like deals (or a commoditization of down-side risk), but treat them individually and each with their unique risk and funding requirements. But that assumes a GP who can assess upside risk (rather than money-in, downside) correctly and we are in short supply of GPs who can do that.The problem with innovation remains its arbitrage, not the lack of ideas that can produce great returns.Best,Georges

The real issue is that Venture Capital does not only produce poor index returns, it performs below the consumer adoption rate of technology in the same period, gets outperformed by corporate innovation and capital, has lost public trust because of bad past conversion from valuation to value and does not make a dent in the 80% greenfield of technology adoption. As an LP you should expect from your GPs an alignment with the index of the market opportunity of the underlying asset, not with the performance of those attempting to pursue it. It's a mistake many make in startups as well, where your target and sole focus is the greenfield not on those who failed to empty it. The iPhone strategy is a great example of that. But to step back, any laissez-faire financial system that violates free-market principles turns quickly (depending on market fluidity) subprime. And Venture Capital has turned subprime by virtue of how risk is deployed. Many LPs are unaware of the risk deployed in Venture, 10 levels of bottom-heavy diversification deployed by most LPs demonstrates that despite the belief in the PPM of an individual VC firm you still are unlikely to produce viable returns. So, Chris, the issue is the economic principles by which money is deployed to Venture. And once we fix that, there will be no more room for VC players that cannot perform in line with the massive market opportunity that lies ahead. Innovation scales, and Venture can too. Just not with the current financial model deployed by most LPs. And my fix resolves that.

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• For those who are fooled by the belief that the stock market is a free-market and therefor accurately represents the health of companies or its authentic attraction The Wall Street Journal site Smart Money gives an interesting top-level overview of the performance of those assets across sectors. [Links: SmartMoney]
• IPO's are up to $1B in the first quarter compared to same period last year, those who know Silicon Valley well realize that is a sign of how the smarts of great entrepreneurs escape Venture Capital arbitrage, not because they benefit from it. Just give them the money and get out of the way of success is the only model that is sustainable today (Facebook & Twitter anyone?). [Links: PEHub]