> They probably have 10 years to deploy the capital
They probably have about that much time to return the capital. 10-year fund doesn't mean you get to keep 10% of the capital in a box for a decade (apart from reserving for management fees).
There's heterogeneity in the "they" we're referring to. As a rule, no, funds do not reserve capital for follow-on rounds. A venture fund's cost of capital (i.e. expected return) is high, making the compounding cost of holding cash cumbersome.
Instead, a firm will generally raise one fund for early-stage (e.g. seed) and another, either later or if they have a strong pipeline concurrently, for later investments (e.g. A), where preference is given by the latter to companies invested in by the former.
1. The funds don't "hold cash" for follow ons. They "reserve capital" which is subsequently called. There's no dead weight uninvested cash drag on irr (or properly, very little of such).
2. "Crossover" investments between funds are generally frowned upon, although the pendulum swings on that practice and more recently it seems they are in favor again. Still, it is the exception rather than the rule that the same manager (VC X) is allowed / supposed to put money from two different funds (X fund I and X fund II) into subsequent series of the same company's stock. If you think about it, that makes a ton of sense because in downside cases, VC X may then have to play King Solomon and split the baby between its Fund I and Fund II investors, both of whom it has a fiduciary duty to, hence a conflict it's best to avoid altogether. Now, that is a problem that comes up in downside cases and recent times have been good, so once again people are overlooking the conflicts in the name of keeping the punchbowl full and spiked.
3. Funds do most definitely reserve for and participate in pro rata follow ons in subsequent rounds. 100% of market early stage A/B/C term sheets will ask for pro rata rights (for follow ons). If you don't have follow on reserves you risk facing a "pay to play" or other punitive term in a future round (again only in the downside cases which people start to neglect in the up cycle times like the last 2-3 yrs).
They probably have about that much time to return the capital. 10-year fund doesn't mean you get to keep 10% of the capital in a box for a decade (apart from reserving for management fees).