Amidst Market Slowdown Venture Capital Uninvested Cash Pile Grows

That money will be put to work, especially as the markets appear to be enjoying a rebound. 

The question is whether venture investors will continue to winnow their startups and invest in later stage companies or continue to wait out the current period of uncertainty. Experience suggests that many, if not most, will become impatient and will not be able to resist new opportunities. JL 

Marc Vatarbedian and Beber Jin report in the Wall Street Journal:

Venture-capital firms are sitting on a record cash pile. Their so-called dry powder—money raised but not deployed—has increased by more than $100 billion worldwide since the end of last year, reaching almost $539 billion in July. The buildup comes as many venture firms have slowed deal making amid the market pullback, a signal that investors ranging from stalwart firms to niche crypto investors are hoarding capital as they grow more picky about which startups to back. The reserves will likely be crucial in helping startups survive what many venture capitalists say will be a long period in which funding is hard to come by.

Venture-capital firms are sitting on a record cash pile. Their so-called dry powder—money raised but not deployed—has increased by more than $100 billion worldwide since the end of last year, reaching almost $539 billion in July, according to data firm Preqin Ltd.

The buildup comes as many venture firms have slowed deal making amid the market pullback, a signal that investors ranging from stalwart firms to niche crypto investors are hoarding capital as they grow more picky about which startups to back.

The rising stockpile is in part the result of investors preparing for an extended bear market fueled by economic uncertainties including inflation and higher interest rates, venture capitalists say.

The reserves will likely be crucial in helping startups survive what many venture capitalists say will be a long period in which funding is hard to come by. With initial public offerings essentially at a standstill, firms may draw on the capital to help mature portfolio companies as they put off public share sales.

Venture capitalists and analysts say the increase in dry powder indicates limited partners that commit capital to venture funds, including institutional investors and pension funds, remain bullish on the asset class despite this year’s rout of tech valuations and interest rate increases that typically divert investors away from venture capital.

“The ability of [venture firms] to raise I think continues to show the interest of money managers in the ability of the alternative asset class to produce outsize returns,” Ernst & Young U.S. venture-capital leader Jeffrey Grabow said, pointing to the long-term adoption of tech and software.

Venture firms typically charge a management fee based on capital committed to the firm, not dry powder, so limited partners aren’t necessarily dinged by the high capital reserves.

Through the first half in the U.S., venture firms raised nearly 90% of the amount they raised all of last year, according to a report from analytics firm PitchBook Data Inc. and the National Venture Capital Association. Large funds, in particular, helped propel the increase.

The fundraising haul is likely a spillover from last year’s red-hot market, some investors say. When raising funds, firms typically spend months courting investors and often delay announcing when they have closed a new fund.

At the same time, venture firms in the U.S. slowed their investing. Firms made 3,374 deals in the second quarter, down 24% from the prior quarter, according to PitchBook.

Stock market pullbacks typically cool venture investing because public company valuations serve as proxies for the value of still-private startups. Also, venture firms may find it difficult to raise additional funds because limited partners allocate less capital to them when values for all of their assets decline.

Global levels of dry powder dropped following the dot-com bust in the early 2000s and the financial crisis of 2008. Since 2012, the year-end dry powder level has marched consistently upward.

“I think it will be a slow fundraise for a lot of folks going out in 2022,” said Rick Heitzmann, a partner at early-stage venture firm FirstMark Capital. “The market will have to absorb all of the capital that was raised over the last several years.”

Insight Partners said in February it raised a $20 billion fund to back startups and high-growth tech companies. The New York-based firm made roughly 75 venture investments in the second quarter, down from roughly 80 in the first quarter.

Fewer companies are seeking funding after many raised large rounds last year, Insight managing director Hilary Gosher said. Since startup valuations have fallen, founders have shifted their mind-set toward making capital last longer, she added.

“There’s always capital for good companies, but with the uncertainty, if founders don’t need capital, there is no reason to raise,” Ms. Gosher said.

Cryptocurrency and blockchain-focused venture firms, in particular, are sitting on mountains of cash despite a broader selloff in popular cryptocurrency assets like bitcoin and Ethereum. Investors globally raised $21 billion for such funds so far this year, compared with the record $31 billion raised for crypto-dedicated funds last year, according to PitchBook.

The haul included a record $4.5 billion raised earlier this year by Andreessen Horowitz for its fourth and largest crypto fund.

Meanwhile, the number of crypto-related deals globally fell 10% to 435 in the second quarter, their first decline since the onset of the coronavirus pandemic, according to CB Insights.

The slower fundraising pace will likely continue amid the current crypto market downturn. The paucity of attractive deals might push some crypto-focused firms to deploy capital into cryptocurrencies and digital tokens, rather than to traditional startup equity, venture capitalists say.

Some firms are forging ahead. Sequoia Capital intends to keep the same investment pace for new crypto startups, which constituted around 25% of its new investments last year. “The current market conditions haven’t changed our strategy,” said Shaun Maguire, a partner at the firm.