You'd be better off replying to a post of the actual Kauffman report than the summary on "Geekwire.com". From the beginning of the report:

Recommendation 1: Abolish VC Mandates: The allocations to VC that investment committees set and approve are a primary reason LPs keep investing in VC despite its persistent underperformance since the late 1990s. Returns data is very clear: it doesn’t make sense to invest in anything but a tiny group of ten or twenty top-performing VC funds. Fund of funds, which layer fees on top of underperformance, are rarely an effective solution. In the absence of access to top VC funds, institutional investors may need to accept that investing in small cap public equities is better for long-term investment returns than investing in second- or third-tier VC funds.

Kauffman isn't disagreeing with you, but is observing that LPs are often required to allocate capital into VC as an asset class, and can thus be required to plow money into huge and underperforming funds because it's too difficult to get enough money into the smaller funds that do outperform the market.

You can read just a couple pages into this report and see that they're on the same page you are in this regard, right?

Obviously they're "on the same page" now. But they must not have understood the sharp dropoff in VC performance when they invested in mediocre funds, or they would not have done it.

That's not necessarily true. The Kauffman Foundation is a non-profit whose purpose is to support entrepreneurship. Investing in VC may accomplish that goal, even if the investment loses money. Heck, it may have been worth it from a research point of view, just to gather the data that went into this report.

I think the point of the report is that system as now does not force "lame" firms to improve.

In other words, top VC funds will be top VC funds - the improving rules will not influence them. The question is: Is there a better system to force bad VCs to improve (or to make them bankrupt faster so they can be replaced with better ones)?

The report also cites Landmark's simulated auction of carried interest, which showed that they might be able to collect 42.5% carried interest if they actually implemented such an innovation. That'd be wonderful for Landmark, and democratizing as well, since it'd shift investment in oversubscribed, top-tier funds away from cozy relationships, and towards those who value that investment most highly.

As such, this really isn't a report saying 'VCs make too much money', but rather that standard LP/VC terms overcompensate poor VCs and undercompensate top-tier VCs, and that this is unlikely to change unless LPs change their behavior en masse. There were numerous examples of GPs who were open to innovations in the VC/LP relationship, but didn't pursue them because of intransigent LPs.

The article isn't talking about the fact that most VCs don't make returns. It tries to analyze the reason this is happening.

According to the article, that the reason is misaligned incentives - the VCs get lots of money when they raise lots of money, regardless of whether they get a return on their investment.

I think it's important to distinguish the "VC model" (meaning investing LP money in early stage companies) with the current compensation models that are prevalent in the industry. The first is alive and well. The latter is broken.