[asanwal]

Not totally correct. VC firms often have many concurrent funds. So while they're investing out of fund 1, they're raising for fund 2.

And they're using Fund 1 early returns (often paper returns) to make the case for why the LP should invest in Fund 2.

Felix Salmon summed up the phenomena well here:

"In reality, reported returns peak very early on, in month 16 — which just happens to coincide with the point at which the GPs tend to start going out on sales calls, trying to raise their next fund. Of course, at month 16, none of the returns are realized: they’re driven instead by increases in portfolio-company valuations, and those valuations are set by the GPs themselves."

His article here - http://blogs.reuters.com/felix-salmon/2012/05/07/how-venture...