On HBR Blog: Why VCs Get Rich, Even When They Make Bad Investments

Are venture capital firms coming up short in terms of their returns to investors?

Diane Mulcahy thinks so, and the data supports her view.

In an article for Harvard Business Review's Blog Network, Mulcahy, a Kauffman Foundation senior fellow, outlines the economic misalignment of the VC industry, which allows VCs to enjoy high levels of fee-based compensation, even when their funds perform poorly

Mulcahy notes that VC funds persistently underperform the fully liquid, low cost public equity markets, yet VCs themselves continue to receive high levels of fee-based compensation.

She questions whether institutional investors should continue to pay VCs well regardless of return performance, and offers recommendations for how investors in venture capital funds can hold VCs more accountable.

Read an excerpt from the post below.

Venture Capitalists Get Paid Well to Lose Money

2013 had all the signs of being a comeback year for venture capital. Booming public equities and a recovered IPO market generated record portfolio company exits and distributions from VC funds.

The industry realized its highest returns since the Internet boom.

Yet 2013 annual industry performance data from Cambridge Associates shows that venture capital continues to underperform the S&P 500, NASDAQ and Russell 2000.

Read the rest of the article on the Harvard Business Review Blog.