Carnegie Mellon's $4B Investment Chief Warns of Venture Capital Crisis

In Brief:

The venture capital industry faces a fundamental crisis where 90% of limited partners shouldn't be investing in the asset class, according to analysis showing median returns barely exceed 8% while top-quartile funds struggle to beat public market equivalents. Miles Dieffenbach, Managing Director of Investments at Carnegie Mellon University, shared this stark assessment on Harry Stebbings' 20VC podcast, drawing from his experience overseeing a $4 billion endowment with heavy exposure to venture capital. Dieffenbach warns that massive fund sizes are creating unsustainable return expectations, with multi-stage venture funds now requiring nearly $800 billion in exit value to achieve target returns—more than the entire best exit year in venture history. His analysis comes as the industry faces its worst liquidity drought since 2004, with fundraising hitting seven-year lows despite record amounts of capital deployed.

Big Picture Drivers:

• Liquidity Crisis: Three years of minimal distributions have left LPs cash-strapped and unable to make new commitments

• Fund Size Inflation: Multi-stage funds have grown so large they need unprecedented exit outcomes to generate returns

• Access vs. Performance: Brand-name funds command premium fees despite mediocre returns relative to risk

• Market Structure Breakdown: Private market capital was cheaper than public for years, creating artificial market conditions

Key Insights:

• Fund Size Mathematics: A $7 billion multi-stage fund needs approximately $800 billion in exit value to achieve a 4x net return, requiring an entire year's worth of IPO and M&A activity for just one manager.

• Performance Reality Check: Top quartile venture funds historically achieve only 1.8x DPI over 15 years, while median IRR sits at 8% net—barely compensating for the extreme risk taken.

• Access Inequality: New entrants to venture have virtually no chance of accessing top-decile managers, making the asset class unsuitable for 90% of potential investors who cannot achieve returns above public market equivalents.

• Seed Fund Economics: The popular $50-100 million seed fund model is mathematically flawed, as average $4-5 million seed rounds require $3+ million checks for meaningful ownership, leaving insufficient diversification.

• Partnership Risk Assessment: The primary failure mode for venture partnerships is misaligned incentives and work distribution, with more partnership changes occurring in the past two years than the previous eight combined.

• Market Timing Paradox: While private companies remain starved for liquidity, public market giants like Meta and Google are generating $600 billion in operating cash flow annually, creating unprecedented acquisition potential.

Memorable Quotes:

• "90% of LPs shouldn't be in venture. My question to any new allocator is: do you think you're going to have access to top decile managers?" - Miles Dieffenbach, explaining the access barrier that makes venture unsuitable for most investors

• "These business models these GPs are creating are some of the best high margin businesses ever created" - Dieffenbach, acknowledging why venture firms continue raising larger funds despite performance concerns

• "I find it really funny how all LPs love $50 to $100 million seed funds and when you actually run the math, that's the worst place to be" - Dieffenbach, criticizing popular but flawed fund sizing strategies

• "So my message here to all venture capitalists: now is the time. Please take your companies public" - Dieffenbach, urging immediate IPO activity as public markets finally price risk appropriately

• "If you're raising over $4 billion, you should be charging long-only public equity fees, which are 1 and 10" - Dieffenbach, on appropriate fee structures for growth-stage investing

The Wrap:

Dieffenbach's analysis reveals a venture capital industry at an inflection point, where traditional assumptions about returns, access, and fund structures no longer hold. His mathematical breakdown of multi-stage fund economics exposes the impossibility of generating historical returns at current scale, while his institutional perspective highlights the growing disconnect between GP incentives and LP returns. As liquidity finally begins flowing in 2026, the industry faces a reckoning that will likely reshape fee structures, fund sizes, and investment strategies. The warning is clear: without fundamental changes to how venture capital operates, the asset class risks becoming viable only for the largest, most sophisticated investors with guaranteed access to top-tier managers.