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Obligatory: http://www.kauffman.org/what-we-do/research/2012/05/we-have-...

Summary:

The Kauffman Foundation investment team analyzed our twenty-year history of venture investing experience in nearly 100 VC funds with some of the most notable and exclusive partnership “brands” and concluded that the Limited Partner (LP) investment model is broken ... Our research suggests that investors like us succumb time and again to narrative fallacies, a well-studied behavioral finance bias. We found in our own portfolio that:

- Only twenty of 100 venture funds generated returns that beat a public-market equivalent by more than 3 percent annually, and half of those began investing prior to 1995.

- The majority of funds—sixty-two out of 100—failed to exceed returns available from the public markets, after fees and carry were paid.

Don't forget the .001% of VC funds that are fraudulent.

As an entrepreneur, you should vet your investor as much as they vet you.

I've seen someone claim to be a General Partner in a VC Fund that had $50M in capital. They ran around offering to sign investment deals with companies that had terrible ideas.

Only later did it surface that the person was GP in a fund with no money. The agreements signed weren't worth the paper they were printed on.

Entrepreneurs taken by this person invested in things like legal fees to negotiate terms and lost all that cash.

Couple that with the fact that most Venture Funds don't give their LP's a return and venture funding is a terrible business to be in if you are smart.

More and more people are waking up to this.

I've seen people go from thinking they want to start a VC Fund to starting a business like a Venture Studio.

A Venture Studio typically forgoes the 2% management fee's for managing the fund and deploying capital.

However, the Venture Studio will usually own a dev shop or marketing agency that they do all the work through.

They make their money on the professional services side.

Not sure if this will be more successful but it's something I see increasingly common.

I'm intrigued by this "Venture Studio" model, but a quick Google search didn't net much in the way of good examples or a precise definition.

Can you share some examples you've run across? Thanks!

http://www.coplex.com http://builders.vc/

Those are two of them.

Email me hn (at) strapr dot com if you want to chat regarding details on how do a venture studio.

Wait, how do the fraud VCs make money?

I am guessing it is at the other end of the sausage factory. Institutional investors, banks etc. will drop money into their bank account in order for them to 'invest' it wisely with startups they find. Fraudster simply withdraws the cash and disappears with it.

They don't make money from the VC fund.

My guess is that the go down this route because of ego. After it bimbos they use the fact they were a GP in a VC fund to accelerate their career.

After all being a GP in a VC fund you must be good at raising money? Most leaders in business aren't exposed to scammers like this. They would most likely consider the fraudster for a more senior role.

>>All kinds of shady stuff happens to these investments on life support, like kicking back money to the VC, paying for "business" travel for the VC, yadda yadda. The founders have no incentive at all to talk about it, since they need to get money for the next idea and it's all a reputation thing.

Pleased to see someone bring this up. I've seen those things and more happen in my time in the startup community.