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US venture capitalists are sitting on $311bn in unspent cash, as they shy away from risky bets on Silicon Valley start-ups and concentrate on finding ways to return capital to their own backers.
American VC groups have deployed just half of a record $435bn they raised from investors during the pandemic-era boom between 2020 and 2022, according to private markets data company PitchBook.
That has added to a pile of unspent reserves — known in the industry as “dry powder” — which has accumulated as venture firms adopt a more cautious stance to investing amid declining start-up valuations, preferring to find ways to back more established tech groups or prop up their existing portfolio of companies.
Josh Kushner’s Thrive Capital, among the most active venture firms, signed several large cheques for companies already within his portfolio last year. This includes investing $1.8bn in to fintech group Stripe, which is valued at $50bn. Thrive is also leading a purchase of employee stock at ChatGPT-maker OpenAI, in a deal valuing the company at $86bn.
“There is dry powder for sure, but it’s not like the world is going to be flooded with VC money again,” said Ibrahim Ajami, head of ventures at Mubadala Capital, part of the $276bn Abu Dhabi sovereign wealth fund Mubadala Investment Company.
Ajami added that a lot of dry powder would be used to “clean the mess” created during a period of ultra-low interest rates, which has been exposed as rate rises have saddled start-ups with higher costs.
Venture funds raised an unprecedented amount of cash during the pandemic. Andreessen Horowitz raised $4.5bn to target crypto; ex-Andreessen partner Katie Haun’s new crypto fund raised $1.5bn; Tiger Global Management raised $12.7bn in one the largest venture funds ever.
But now VCs are coming under increasing pressure to return capital to their own backers — institutional investors, foundations and pension funds, known as “limited partners”.
LPs typically receive a return when a VC fund successfully “exits” a start-up at the point they are sold or achieve a public listing. But a dearth of exits meant US-based VCs distributed just $21bn back to their LPs last year — a seventh of the total paid out in 2021, according to PitchBook.
“LPs don’t usually like to put pressure on VCs to spend money, but if you’re entering your third year of not doing anything, they’re starting to ask what are my fees for,” said a Silicon Valley venture capital investor.
Most VCs continue to charge LPs a management fee regardless of whether they had made investments, but Sequoia Capital, one the premier tech VC groups, started waiving fees on capital it had not yet committed to companies in some of its funds last year.
VCs are seeking creative ways to return capital, such as launching new investment vehicles known as continuation funds that unlock cash in existing assets without a traditional exit. Lightspeed Venture Partners, one of Silicon Valley’s biggest firms, is putting together a $1bn fund.
The head of investment at a large endowment fund said he would like VCs he had backed, which include some of Silicon Valley’s largest names, to return some of the money committed to them by LPs rather than sit on it for much longer.
“In the first tech bubble crash [in 2000] there were a number of funds who downsized their funds significantly,” he said. “I would hope that we do see that, venture firms cutting their fund size and forgiving commitments to their investors and resizing. That would be a really good outcome.”
As VCs resist spending their reserves, young companies without an obvious path to profitability or a lucrative exit will instead face drastic cuts to their valuations and potential failure.
Start-up collapses have doubled over the past year according to PitchBook. Companies once valued at more than $1bn including Hopin and Convoy were among the casualties.
“In some ways, dry powder is a mirage. It’s a theoretical number,” said Nigel Dawn, global head of private capital advisory at investment bank Evercore. “Portfolio companies in venture funds are feeling the cash squeeze more than ever: the idea that you can simply grow and grow with no profitability in sight and the cash spigot will always be on are gone.”
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