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There’s been a lot of chatter in recent months about the “broken” model for venture capital, highlighted by a blistering report last month from the Kauffman Foundation which found that most VC funds that it has worked with have failed to outperform the Nasdaq or Dow over the years. Now, here comes some contradictory data from the Cambridge Associates, which just released its Venture Capital Index.

According to Cambridge’s report, venture capital returns outperformed the major public market indices last year with a positive return of 13.2 percent. That compared to an 8.4 percent gain for the Dow Jones, and a 1.8 decline for the Nasdaq.

“Venture capital generated its second consecutive year of strong performance in 2011, due primarily to returns posted in the first two quarters of the year,” said Theresa Sorrentino Hajer of Cambridge Associates. “The active M&A environment and healthier IPO market helped drive realizations and boost unrealized valuations.”

That’s the good news. But the picture wasn’t entirely rosy. According to the report, returns slumped in the fourth quarter, with a gain of just 1.4 percent. That compared to double digit gains for the Dow, Russell 2000 and S&P 500, and a 7.9 percent gain for the Nasdaq. As the chart below shows, venture capital also failed to outperform public markets during the 3-year and 10-year time periods.

The market for venture fundraising has been tight, though Seattle’s Madrona Venture Group just bucked the trend by capping its fifth fund at $300 million. Some of that is tied to Madrona’s individual success, including investments in companies such as Isilon and Amazon. Madrona, like many Seattle venture firms, specializes in software, Internet and mobile companies.

And that’s an area that is still showing strength, with the report saying that the software sector posted a positive 7.7 percent return during the fourth quarter. (Energy was the worst, down 2.8 percent). For the year, IT and software generated a 32.8 percent and 27.3 percent return, respectively.

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