All the data points indicate that venture-capital firms across the world are sitting on a record level of what is known as “Dry Powder” — money that was raised but not deployed.
According to various sources, access to “Dry-Powder” capital raises have increased the capital that is sitting on the sideline by more than $100 billion worldwide, in comparison to the same point one year ago, and is estimated to be almost $600 billion by the end of this year. This may seem surprising given that venture firms have slowed their deal making amid the market pullback. Nonetheless, this is a signal that investors are hoarding even more capital than at any point in history, as they wait to pick the startups they want to back.
The capital accumulation is the result of investors waiting to see how the economic uncertainties, inflation and higher interest rates, will impact the short and the long term of the economic recovery . This does not beget the point that more capital than ever is on the sidelines waiting to be deployed in the startup ecosystem.
The “Dry-Powder ” will be crucial in helping startups survive what many venture capitalists say will be a long period in which new capital deployment in new startups will be hard to get. The initial public offerings are at a standstill, firms may draw on the capital to help mature portfolio companies as they put off their IPO’s share sales. Venture capitalists and analysts say the increase in Dry Powder, year-over-year, indicates LP’s, institutional investors, and pension funds are as bullish on the asset class as it has been at any time in history.
The VC Strategy assessment:
- Supporting existing portfolio.
- Deploying large rounds into highly mature well funded startups.
- Reduce the “down rounds” and valuation downfall on their books
- At the time of market recovery deploy capital into startups that survive and thrive during the slowdown.
- Preparing for the next rally of the tech sector estimated will start in 2024-25
Despite the last 16 month rout of tech valuations and interest rate increases that historically divert investors away from investing in this asset class, this does not show any slowdown in fact it clearly shows an influx of cash.
The Angel Investors Opportunity
Any time that VCs are slowing down, it creates the opportunity for Angels to gain traction. Just remember that Angel investment portfolios are the VC’s future deal flow. Without Angel Capital there is no VC activity. Slow down in VC capital deployment creates a unique opportunity for Angels to build their future portfolio. Investing in a startup that will be highly attractive for VC down the road.
The Short-Term market overview:
The assertion is that the VCs hoarding capital and being reluctant to deploy in new deals will create the following:
- Mid- to Late- Stage valuation will go down
- Founder will become more modest in their ask
- Startups will raise smaller round and more bridge rounds
- Startups will be willing to give Angels favorable terms
- Founder will compete on the investors instead of investors compete on startups
The Long-Term market overview:
The assertion is that after a period of a drought in terms of closing new deals and at point of exit out of the economic downturn will create the following:
- VC will be hungry to close new deals
- They will be willing to close deals at any cost
- Valuation will dramatically increase
- Angels portfolios book value will sky rocket
- Corporate ventures will go on a buying spree which mean more highly attractive exists
Angel investors have a unique opportunity to be bullish and build high performing portfolios. In order to take advantage of the window of opportunities we highly recommend the following actions:
- Join an experienced and credible Angel Fund or Angel Group in order to increase your InvestmentIQ
- Calculate how much capital you can part with for the next 4-6 years and how much you can invest each year
- Invest small in large pool of highly vetted companies
Doing it the right way is much less risky than most people think. Apply the 80/20 rule. Keep 80% of your capital in less risky investments and 20% of your capital in alternative asset classes.