My group did figure out we were supposed to re-shuffle, but it took a long while to actually find that rule in our rulebook (Enhanced Edition, newer printing) when we needed it, since it appears in a Quick Reference but not in the main rules sections. I believe in Magic and various other games you actually lose outright if you need to draw and your deck is empty, and in Vs. System, I'm pretty sure nothing happened—unless you were playing the one team that had a strategy of depleting the opponent's deck and the card that let you win if their deck was empty. So it's definitely reasonable for a new player to be confused about what they're supposed to do: re-shuffling, the heroes losing, and nothing-so-your-resources-are-limited-now are all possibilities from other games that folks may have played. (At least based on the base set, since as jsz2 noted, some later villains like Akash'Bhuta help point players towards the answer.)
I've also got to agree with Edwin that the Sentinels entry in the Vengeance rulebook probably could have had a bit more information to help figure out unusual situations. It notes that the player gets to decide what happens if it's ambiguous which character card is affected, but that doesn't actually explain how to handle cards that say they effect just "the hero." It might be that this line was intended to convey something like "if something affects the hero as a whole, pick one Sentinels character card and apply that effect to just that character card," but I don't think it actually gets there. First you have to know that the effect will apply to just one of the character cards before the language about ambiguity seems to apply, so I do wish there'd been a sentence explaining in general terms how to handle effects that impact just "the hero," or a clause added like Edwin suggested. There is an example about Plague Rat, which is helpful, but it starts with "Note that Plague Rat's Infections interact with The Sentinels oddly." If anything, that language is suggesting that the rule about Infections is not giving you a rule to follow generally, because it's talking about Infection as a strange interaction rather than as an example of how The Sentinels work generally.
By the time I came around, the reshuffle rule was in the book (again?), so while I agree it's important, I'm covered there. Some of the rules about The Sentinels, though, I think we're all still figuring out and/or relying on forum consensus—the rules and official rulings we've seen before do leave gaps here and there that we're still filling in.