Yonatan Stern describes Limited Partners as entities that manage massive pools of capital, often totaling trillions of dollars. Their investment strategy is highly conservative by design. The majority of their funds, roughly 95%, are allocated to safe, low-yield investments, while only a small fraction, typically around 1–2%, is allocated to high-risk, high-return opportunities such as Venture Capital. Because the capital base is so large, even a small percentage represents a significant investment.
A critical aspect of the LP role is the liquidity constraint. LPs invest cash and require cash returns within a defined timeframe, usually 7 to 10 years. They cannot operate with illiquid holdings such as small equity percentages in private companies. As Stern notes, a pension fund cannot pay pensioners with shares in a private startup; it needs liquid cash.
This requirement creates structural pressure throughout the VC ecosystem. Venture Capital firms have contractual obligations to return capital to their LPs with profit before the fund’s lifecycle ends. As a result, exits such as IPOs or acquisitions are not optional but mandatory. This LP-driven pressure explains why VCs push startups toward rapid growth and quick liquidity events, often prioritizing exits over long-term sustainability.
