LPs are basically the investors in YC who remain mostly silent as to the operations of the firm. They participate in the proceeds and receive limited liability from the affairs of the business. Sequoia invested in YC, just as YC invests in startups.
Practice. We could never have done that when we started, but after 5 years of gradual refinement, plus hiring more people, we do a better job for the current 43 than we did for the initial 8.
To apply directly to the venture capital world, LPs are the ones who provide the capital to the fund manager to invest. Other than providing the capital, they normally have no role in managing the fund (except perhaps an advisory committee role). Regardless of the legal structure of the fund, "LP" is shorthand for investors in a VC fund. To make an analogy, LPs are to the VC funds what the VC funds are to the companies they invest in, with the only distinction that LPs are typically far less involved in the funds they invest in than the VCs are in the companies they invest in.
LPs for large institutional funds are generally university endowments and pension funds.
How do you guys manage 40 startups in one batch? I am quite excited to read about them when they launch.