This, to me, is the real reason. I know it doesn't paint the entire picture, but if I were a portfolio manager at an endowment or pension fund I wouldn't invest in 500 Startups:

1. The fund is performing below the industry average (caveat, I'd like to see what makes up that "venture funds" average), and

2. even if we ignore the venture funds average return, 18% net IRR seems extremely low for an investment vehicle that has above average risk. From a portfolio management perspective I'd rather investment in mezzanine funds, where the return is higher than 18% and a risk lower than equity/VC financing.

My feeling is that 500 Startups returns are decoupled from the inherent risk... all I'm saying is that 500S is not picking the right (home run) investments/companies.

Let's remember that these LPs/institutional investors have a fiduciary duty to make sound investments, and 500 Startups doesn't meet the "right" criteria. However, I were fund raising for 500 Startups, I would target wealthy individuals, family offices, et al. who investment on their own behalf[1], and haven't got that third party responsibility.

[1] I'm not saying these investors are not disciplined, but are able to take on unconventional risks.