Paul Kedrosky has a really nice article on revamping the venture model. The gist is that LP's should be more closely aligned with the GP's by changing fee structures and payouts. The only problem as I see it comes from the fact that the top tier VC's have the scarce resource: skill.
If one person has the scarce resource they will raise prices until they get to keep all of the excess profit in a business, and this is what happens in venture. Sure, LP's can drive down prices on firms that don't perform, but it is well known that you shouldn't be investing in firms that aren't top decile anyway. That leaves the top firms to charge whatever they want, and so they will get the excess profits. While I agree that LPs should try to renegotiate the contract I'm sure they will really have the power to do so over the long term. LPs provide capital, and until recently that wasn't a scarce resource. If it stays a scarce resource then we probably have larger problems and venture investing will be poor. If the economy turns around then once again the LPs power will diminish as capital rushes to the best managers.
