All that VC dry powder is damper than you think

Author: Michael Robinson

In recent years, there’s been a lot of talk about the “dry powder” in the venture capital (VC) industry. This is the money that VC firms have raised but haven’t yet invested. And it’s a lot of money: as of June 30, 2019, dry powder totaled a record $155 billion, according to PitchBook Data.

But here’s the thing: that dry powder is a lot damper than you think. The reason is that a large portion of it is committed to so-called “late-stage” investments, which are defined as deals in which a company has raised $10 million or more. In other words, it’s not really “dry” powder at all; it’s committed powder.

How much committed powder is there? As of June 30, 2019, late-stage dry powder totaled $93 billion, or 60% of the total. That’s up from $77 billion, or 47% of the total, just two years earlier. In other words, the amount of dry powder committed to late-stage investments has doubled in just two years.

What’s driving this trend? One factor is the increasing size of late-stage rounds. In the first half of 2019, the average late-stage deal was $38 million, up from $28 million in the first half of 2017, according to PitchBook Data.

But the bigger factor is the increasing number of late-stage rounds. In the first half of 2019, there were 739 late-stage deals, up from 566 in the first half of 2017. That’s a 32% increase in just two years.

The upshot of all this is that the dry powder in the VC industry is a lot damper than you think. And that’s a problem because it means that VC firms are becoming less and less flexible in their investment strategies. They’re becoming more and more committed to late-stage companies, and that’s not a good thing.

All that VC dry powder is damper than you think

Authored by Jeremy Berdichevsky

When it comes to the venture capital (VC) industry, the popular saying goes “the best time to raise money is when you don’t need it”. This advice is usually floated to encourage startup founders to have a continuous dialogue with potential investors, even when they may not be immediately interested in writing a check.

But what if the tables were turned? What if it was VCs who were trying to raise money, and the ones holding the purse strings were the ones saying “now is not the time”?

This is starting to happen. A confluence of factors – including shrinking exit markets, the rise of late-stage private investing, and a general increase in VC fundraising – has created a situation where there is more dry powder (committed but unspent capital) in the VC ecosystem than ever before. And as deal-making has slowed in recent months, that dry powder has only continued to grow.

According to CB Insights, a leading provider of data and analytics to the VC industry, global VC dry powder reached an all-time high of $2.8 trillion in June 2020. This is more than double the amount of dry powder that was held just four years ago in 2016.

While it’s understandable that investors would want to keep their powder dry during times of economic uncertainty, this hoarding of capital is starting to have a negative impact on the startup ecosystem. With more money chasing fewer deals, valuations are being driven up to unsustainable levels and good companies are being forced to accept terms that are unfavorable to them.

In a recent article in The Wall Street Journal, one VC was quoted as saying that “it’s becoming a seller’s market for startups”. And while that may be good news for some companies that are able to raise money on favorable terms, it’s bad news for those that are not.

The bottom line is that the current state of VC dry powder is not sustainable. At some point, the dam is going to break and all that pent-up capital is going to start flowing again. When that happens, we’re likely to see a return to moreNormalized valuations and a more balanced startup ecosystem.