Those who fund young, growing companies love to tout their industry's role in job creation. Jobs — we could use some of those now, right? But with venture-capital firms like Sequoia Capital insisting on across-the-board layoffs, it's hard to buy that argument; jobs may be created at startups quickly, but they are just as rapidly destroyed. But startups aren't the only ones being pinched by venture capitalists — they're also taking their investors for a ride, according to an industry insider.That insider is Adeo Ressi, the lanky, geeky founder of, a site which lets entrepreneurs rate venture capitalists on everything from smarts to etiquette. (One effect of the site: Entrepreneurs say they no longer see as many VCs rudely pecking away at their BlackBerrys during pitch meetings.) Ressi recently gave a presentation to faculty members at the Harvard Business School. His message: venture capital has crossed a line. That line is the amount of money venture-backed companies have generated when sold, either to public-market investors in an IPO, or to larger companies in an acquisition. Historically, that has exceeded the amount invested in venture capital by pension funds, college endowments, and other institutions. Put dollars in, get more dollars out: that's the magical money machine that drove a multibillion-dollar boom in venture capital since the mid-'90s. In the first half of this year, that ground to a halt: Venture capitalists raised approximately $22 billion from investors, but their companies only generated $19 billion when sold. The reasons are many, but they amount to this: Venture capitalists are clubby, insular, and unimaginative, passing up 9 out of 10 deserving companies. And as a result, hundreds of their funds return no money to investors. If anything, the situation is far worse than Ressi posits; some of the profits from startup sales go to their founders, after all. And a large chunk goes to the VCs themselves, who typically take 3 percent of the money they invest each year as a management fee, and 20 percent of the profits they distribute to investors. One venture capitalist I know estimates that the actual venture-capital deficit — the difference between money invested in funds and money returned — has been running at $6 billion a year for years. Not all of that goes into VCs' pockets; some of it is simply wasted on businesses which will never turn a profit. But still: $6 billion a year, up in smoke. What is this — the automotive industry? Where's the bailout for venture-capital investors? The truth is they haven't been that outraged, if only because venture capital is such a piddling business for them, compared to their other investments. Those larger investments are in peril, however, and are jeopardizing VCs' fortunes. Some pension funds are running short on cash, their money locked up in securities they cannot easily sell — and their managers are turning down venture capitalists' requests for more cash. That, in turn, is spilling over to startups, which are being told they cannot raise more money. The consequence: There will be a slow-motion bloodbath. Slow, because the partnerships which tie venture-capital firms and their investors together are notoriously tricky to unwind; slow, too, because the extent to which VCs' startup portfolios are worth less — or just plain worthless — will take years to unfold. The problem has been an excess of optimism. To a bullish venture capitalist, every investment looks like it might be the next Google; to a pension fund manager, every VC firm might be the next Kleiner Perkins or Sequoia Capital. That optimism has been turned from liquid cash into illiquid hope, to the tune of billions of dollars. Bleeding out that hope — finding the deep, despairing bottom — is a process which might take a decade. Ressi thinks that the number of venture-capital firms should drop from 4,800 to 1,000 — while funding a larger number of startups. This will require painful changes in how they do business. But the venture-capital industry has hid its sickness for a long time, making a recovery all the more prolonged. Ressi will no doubt watch gleefully: He feels VCs mistreated him at his last company, Game Trust. "I will not rest until there is balance in the force," he told The Deal last year. Revenge is a dish best served cold, via PowerPoint. Ressi's presentation:

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