Though an interesting data point in terms of specific numbers, I also am not very surprised that VCs are losing money at the moment. What I did find somewhat refreshing was the fairly limited discussion of how this is an indicator that venture capital is dead and Silicon Valley innovation has come to a grinding fault. I think the days of needing millions of dollars to build a web app might be over. I think its possible to start a company with less capital now. But... there are still plenty of capital-intensive and innovative companies for VCs to invest in for the big payoff.
I noticed from the last 'downturn' (so to speak) that the VC backed companies that failed did so in a way that opened a new market. A few years later companies moved into that same space and was able to succeed because the companies that failed opened people up to the idea but were just too far ahead of the public's willingness to adopt.
"Short-term returns are so low because of there were fewer ways to exit the investments. With the public markets in turmoil, venture investors have simply been unable to take their portfolio companies public, and acquisitions last year were down 28 percent from 2007.
Poor returns have led some investors to question whether venture capital is still a profitable model."
Emphasis mine. Looks like instead of getting acquired, VC-funded companies will have to just do it the old fashioned way and make some profit. The good news is that cashflow and profits are awesome, and owning a portfolio of companies generating positive returns for investors and growing is not a bad thing. Positive profits combined with growth typically sells well, though it does mess with the time horizon.
I reckon it'll mean less investors looking into IPO/acquisition for a huge score on a small percent of their companies, and more investors looking for solid, rapidly profitable and clearly useful companies.