When you say 25% return - I assume you mean per
year - which translates into a 3 X multiple at the 5 year point. That would
be on the low side of the return most VC firms look for.
It was the average for a fund measured annually. That is the return the
fund is producing for the limited partners.
As you more or less explained the return includes the zeros from the bad
investments. Hence a fund that is producing 25% for the limited partners
is clearly doing better than that on some specific investments.
As you also noted different investors have different ideas as to the risks
being taken and the rewards required.