Yes, There’s Lots of “Dry Powder” in Venture Today. But There is Zero Pressure to Deploy It.

So 2023 is a whole new world in venture.  2022 was sort of a tale of 2 worlds.  At the start of 2022, things were still part of the Boom Times of 2021.  Unicorns were minted daily and weekly, and valuations were sky high.  By late Q1, it was over.  And things just got tougher and tougher as the year went on.  Growth rounds essentially stopped:

Cooley: Series D Deals Dropped 78% in Just Q3 Alone. Late Stage Has Fallen Off a Cliff.

So far, things aren’t any better in 2023.  But they are arguably calmer.  Everyone now has a thesis for investing in 2023.  I’d roughly summarize as follows:

  • Successful seed investors are planning to invest as usual, just looking for lower valuations.
  • Successful, established growth investors are mostly sitting on their hands.  They are hoping to do maybe 10% of the deals of 2021.
  • New seed investors probably can’t raise another fund, unless they have amazing results or strong LP support.
  • Upstart growth investors have mostly disappeared.  “One and done” new funds, random SPVs, Tiger’s deal-of-the-day, Softbank loving SaaS … that’s all gone for now.

You can take a look at just how frozen growth stage is here:

Now, there’s just one point I think it’s important for founders to understand in 2023, and it’s both important and non-obvious:

-> Yes, there is tons of “dry powder” in venture today.  But now, with one exception, there is zero pressure to deploy it, to invest it.  None.

What does this mean?  Well, VC funds are in most cases sitting on tons of undeployed capital.  You might think that means they have to invest it, even in a down market.  But that’s wrong — at least for 2023.  VCs have their own investors, Limited Partners, or LPs.  And right now:

  • LPs have too much committed to venture (for now).  So they are not only fine if VCs slow down the pace they invest, in some cases, they are strongly suggesting it.
  • LPs want to slow down when VC funds “come back to market”, i.e. ask for another fund.  So the longer, as a VC, you have to wait to raise another fund, the more slowly you’ll invest the current one.
  • LPs are worried about the amount of cash all these funds will call.  When a VC fund raises say $1B, it rarely “calls” it all.  It generally calls that money from LPs over a decade.   But VCs raised so many new funds, and bigger funds, so quickly, that LPs just want in many cases for it all to just slow down.

So while you’d think all this so-called “dry powder” will create investment velocity, really for now, in 2023, it’s the opposite.  Right now, VCs’ own investors just don’t want them to call it and invest it.  They’re overloaded already.

That will eventually change.  But not likely for some time, and almost certainly not until late 2023 at the earliest.

Now, what’s the big exception?  Private Equity firms.  They have raised massive funds to buy out private and public companies at scale.  And to take advantage of today’s lower valuations and multiples.  More on that here.  They want to deploy those funds quickly.  But that’s not venture.

So net-net, don’t count on “dry powder” creating a lot of desire to fund you in 2023.  It might seem like it should be the case.  But the reality is, it works the opposite.  At least in the short term.

Published on January 9, 2023

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