The received wisdom, magnified in the years following the dot-com bust, is that the universe of top-performing venture capital firms is very small. Fewer than 30 firms perhaps compose the privileged lot. As for the rest -- 840 as of 2011 -- limited partners have largely been disappointed with general partners' poor to middling returns. Yet investors continue to pour money into their coffers, despite the fees and investment risks.

The reasons behind the concentration of elite VCs are more readily understood than the reasons why institutional investors persist in backing mediocre performers. In the self-perpetuating ecosystem of early-stage betting, firms like Sequoia Capital get first dibs on the best deals that they source from successful entrepreneurs who seed other ideas that feed into the VC firms' network.

What motivates LPs to commit capital to less worthy GPs is more complex -- and certainly deserving of a frank assessment by an LP. The Ewing Marion Kauffman Foundation, a longtime investor in VC and a staunch advocate of entrepreneurship, recently obliged by taking a critical look at its own practices, dating back at least two decades.

Its report card shows that 20 of its 100 portfolio VC funds produced returns that beat a public-market equivalent by more than 3% annually. (No names were offered, but news releases indicate prior commitments to Institutional Venture Partners of Menlo Park, Calif., Research Triangle stalwart Intersouth Partners and CID Capital of Indianapolis.)

The chosen few

Net multiple values of Kauffman Foundation's VC portfolio of 99 funds from 1989 to 2011

The mean is 1.31x Source: Kauffman Foundation (data as of 12/31/2011)

"They probably got into some top-quartile funds but went in at the wrong time," says University of Chicago professor Steven Kaplan, whose own study, published in February, found that on average U.S. venture capital funds outperformed public equities in the 1990s but underperformed in the 2000s.

Part of the reason: The industry hasn't downsized to optimal levels. VCs raised nearly $800 billion from 2005 to 2008 alone, and a further $668 billion from 1996 to 2004. Compare that with $148 billion from 1980 to 1995.

But the Kauffman Foundation, established by Kansas City philanthropist Ewing Kauffman, reserves its harshest criticism for LPs, arguing that the LP model is broken. It faults investment committees for failing to require information from GPs in the same way GPs require it of their portfolio companies. Among its findings:

• LPs' investment committees create "buckets" of investment classes that lead to self-imposed pressures to put capital to work.

• Institutional investors commonly invest in VC funds without requiring information about GP compensation, carry structure and firm-level income, expenses or profits.

• LPs decline to deviate from the standard 2% management fee and 20% carried interest in favor of a performance-based sliding scale for fear of jeopardizing relationships with GPs.

There is, after all, little incentive for VC investors to call attention to poor performance or misaligned incentives since few would willingly "raise a line of inquiry that could be job threatening."

What must be done? Kauffman turns its mea culpa moment into a challenge to fellow LPs for a more enlightened and disciplined approach. It suggests a range of stratagems that it hopes would make better investors of LPs, such as walking away from a recalcitrant GP, even if it means the loss of a favored VC.

Why it's taken Kauffman this long to seek remedies is curious, considering that many LPs have gained considerable concessions in recent years. "People are being very cautious about VC," says Colin Blaydon, director of the Center for Private Equity and Entrepreneurship at Dartmouth's Tuck School of Business.

The fact remains that access to the best-performing VCs remains paramount. "Clients will only invest if they can get access to high-quality managers," says Cambridge Associates LLC managing director Peter Mooradian.

Kauffman is aware of it, agreeing to "stand down on terms" where it's convinced that a top-tier firm's outsized returns are likely to continue. It has consolidated partnerships and focused on building a concentrated portfolio of larger commitments to top-performing, "better-aligned funds" while redeploying capital into public equities.

Eventually, it says, it will have narrowed its portfolio to five to 10 VC firms based on performance, transparency and better-aligned terms.

These criteria don't often come hand in hand, however. "If that were so, we'd be in Lake Wobegon, where everyone is above average," quips Kaplan. "The VC world is both competitive and cyclical; that means you have to work hard."

Vyvyan Tenorio writes about private equity for The Deal magazine.