How a Venture Capital Firm is Created
A group of smart people get together and decide that they would like to raise a venture fund to make investments in promising companies. In order to attract investment capital, they reach out to and pitch Limited Partners (LPs) who commit large sums of capital to the fund. They believe that the newly minted venture capital firm will make smart bets on promising young companies which will create a huge return on their investment.
A Limited Window to Invest
The venture capital firm typically has between 7 - 10 years in which to invest their LP's money into a startup, grow that startup, and sell the startup to another company or take it public (the exit). In the grand scheme of growing companies, that isn't a lot of time.
Therefore the newly created fund needs to find opportunities relatively quickly toward the inception of the fund, put that capital to work, and then spend the rest of their time trying to make sure those investments become big exits.
The only type of deal that works for these venture funds is to take an equity stake in the startup's company, which hopefully they can sell later when it becomes wildly successful. Venture Capitalists get paid on a percentage of the profits they generate for their LP's, so if there isn't a big sale, they only get a pre-determined salary, which usually isn’t terribly small either.
The entrepreneur and the Venture Capitalist are in a constant struggle between giving up enough equity to make the entrepreneur still feel happy and taking enough equity to earn the venture capital fund enough profit to return to its Limited Partners.