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Alsop believes that venture capital activities can be reduced to two very simple notions: First, a venture capital firm is a money management firm. Venture capital firms raise large sums of money from limited partners who are typically institutional investors, and are expected to provide a high return on this money. “You hear venture capital partners talk about being in the business of technology: They are not. They are in the business of managing money,” he says. In essence, think about venture capital partners as rational investors who are seeking the highest possible return for their clients.

Second, the typical venture fund has a life of 10 years. This means that the firms expect to distribute all of the proceeds of the funds back to the limited partners within this period. While that may sound like a long time, it can take several years to invest the money received in a single fund. The central point here is that the typical venture capital investment needs to achieve liquidity anywhere between 3 and 6 years, and this need for liquidity becomes the driving force behind any venture-funded investment.

Once an entrepreneur accepts venture capital investments, he or she is inevitably setting the company on a specific course. The firm must drive as rapidly as possible toward a liquidity event, which means either an IPO, in which the firm’s stock is offered for sale to the general public, or the sale of the entire firm to a larger company. This liquidity event is what allows the venture firm to return earnings to the limited partners who have invested with it.

This drive for rapid liquidity also means that the firm needs to grow very fast and become valuable very fast. Neil Weintraut, now a partner at Palo Alto Venture Partners, is also a well-known Silicon Valley veteran. In a detailed article in Fast Company magazine several years ago, Weintraut emphasized the need for fast growth even more strongly than Alsop. The story said:

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GO IT ALONE! Copyright 2004 by Bruce Judson. Reprinted by permission of HarperCollins Publishers. All rights reserved.