A woman watches Facebook founder and CEO Mark Zuckerberg speaking in a promotional video ahead of the company's IPO, in Washington on May 8, 2012.
A woman watches Facebook founder and CEO Mark Zuckerberg speaking in a promotional video ahead of the company's IPO, in Washington on May 8, 2012. - 

Facebook is courting investors this week for its upcoming initial public offering. And let's think back to one legendary moment that made it all possible -- when Mark Zuckerberg landed that first big chunk of venture capital. Remember from the movie...

Ten years later, the venture capital industry is in a bad way. A new report from the Ewing Marion Kauffman Foundation declares venture capital is broken -- specifically, the method by which large “limited partners” supply the money venture capital firms invest. The foundation's director of private equity, Diane Mulcahy, says the foundation itself puts lots of money into venture capital.

"We looked at the venture capital portfolio and realized it was not generating the returns that we expected," she says. "We decided to delve into that and try to understand what was going on." It's not just the Kauffman Foundation; Mulcahy says venture capital in general has seen poor returns for the past 15 years.

Mulcahy says the investors with the big money -- pension funds, foundations like hers -- hand over billions to venture capital firms that are supposed to be picking the next Googles, Facebooks and Apples -- the innovators that will offer us new choices and improve our lives. But lately the investments just aren't paying off... and investors are pulling out.

Entrepreneurial advisor Bert Vermuelen of Corp21 says that money is important to many startups. "There are certainly areas of the country, and the San Francisco area in particular, where the percentage of businesses that are based on investments from venture capital is very high. It would affect the economy, and it's something we want to have as one way to start businesses."

But Vermuelen says there are lots of innovative companies that never used venture capital. And Mulcahy says startups with a great idea have more options than they used to. "There is innovation in the startup financing industry. You've seen increase in angel capital investing, there are small innovative funds," along with sites like Kickstarter that allow entrepreneurs to turn directly to the public.

One notorious -- and true -- story about Mark Zuckerberg is that he once showed up to meet venture capitalists in his pajamas. A billion Facebook-users later he's still taking heat for dressing like he's playing "Call of Duty" on his couch. This week's fashion critic is a financial analyst, Michael Pachter. He's not so crazy about Zuck's outfit as he presents to potential IPO investors around the country.

A few stray words on Bloomberg TV and Michael Pachter is having his 15 minutes, that's for sure. But I'm not sure I agree, and because we're so short on time, I've put my thoughts in a limerick:  

To the billionare kid in his hoodie,
The suits on the Street gasped, "how could he?"
But if he turned up well-dressed,
Just to make us invest...
Wouldn't know what we're getting, now would we?

(A little Facebook "I-P-Oetry" for you.)

“I think the best compliment I can give is not to say how much your programs have taught me (a ton), but how much Marketplace has motivated me to go out and teach myself.” – Michael in Arlington, VA

As a nonprofit news organization, what matters to us is the same thing that matters to you: being a source for trustworthy, independent news that makes people smarter about business and the economy. So if Marketplace has helped you understand the economy better, make more informed financial decisions or just encouraged you to think differently, we’re asking you to give a little something back.

Become a Marketplace Investor today – in whatever amount is right for you – and keep public service journalism strong. We’re grateful for your support.

Follow Jeff Horwich at @jeffhorwich