Defending VC: Poor Returns Are Driven by LP Inefficiencies, Not Just GPs
arian_ghashghai · x · 2026-08-06
Pushing back against the recent timeline dunking on VCs for poor returns, the author argues that the blame is misplaced and highlights several structural realities of the industry:
- Pareto Distribution: VC is an outlier-driven industry by definition. LPs boast about this when it comes to returns, but must accept that the majority of funds will underperform.
- LPs Dictate Strategies: VC funds reflect LP financial interests. If LPs want AI exposure, GPs will raise AI funds. Many fund failures are a direct consequence of LPs committing to bad or trendy strategies.
- 'Artisanal' Funds Overlooked: Many top-performing funds rely on intangible, artisanal strategies rather than chasing en vogue sectors. Empirically, LPs dislike these and they struggle to raise capital.
- Mega-LP Allocation Inefficiency: The vast majority of VC dollars come from massive institutions (e.g., SWFs) that need to deploy huge checks. Because only mega-funds can accept $200M LP checks, capital continuously flows into mediocre products. Well-established data shows smaller funds outperform, but mega-LP inefficiencies prevent capital from reaching them.
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