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U.S. venture capitalists have $311 billion in unspent cash as they avoid risky bets on Silicon Valley startups and focus on finding ways to return capital to their own donors.
U.S. venture capital groups deployed only half of the record $435 billion they raised from investors during the pandemic boom between 2020 and 2022, according to market data firm private PitchBook.
This added to a pile of unspent reserves – known in the industry as “dry powder” – that have built up as venture capital firms take a more cautious stance on investing in a context of falling valuations of start-ups, preferring to find ways to support more established technology groups. or strengthen their existing business portfolio.
Josh Kushner’s Thrive Capital, one of the most active venture capital firms, wrote several large checks last year for companies already in its portfolio. This includes a $1.8 billion investment in fintech group Stripe, valued at $50 billion. Thrive is also leading the purchase of employee shares in OpenAI, the maker of ChatGPT, in a deal valuing the company at $86 billion.
“There’s dry powder, for sure, but it’s not like the world is going to be flooded with venture capital money again,” said Ibrahim Ajami, head of projects at Mubadala Capital, which is part of Abu Dhabi’s $276 billion sovereign wealth fund, Mubadala Investment Company.
Ajami added that a lot of dry powder would be used to “clean up the mess” created during a period of extremely low interest rates, which came to light as rate hikes saddled start-ups with higher costs.
Venture capital funds have raised an unprecedented amount of money during the pandemic. Andreessen Horowitz raised $4.5 billion to target crypto; Andreessen’s ex-partner Katie Haun’s new crypto fund has raised $1.5 billion; Tiger Global Management has raised $12.7 billion in one of the largest venture capital funds ever created.
But today, venture capital firms are under increasing pressure to return capital to their own backers – institutional investors, foundations and pension funds, called “limited partners.”
LPs typically receive a return when a venture capital fund successfully “exits” a startup at the time it is sold or obtains a public listing. But the lack of exits meant that U.S.-based venture capital firms distributed just $21 billion back to their LPs last year, a seventh of the total paid out in 2021, according to PitchBook.
“LPs generally don’t like to pressure VCs to spend money, but if you go into your third year doing nothing, they start asking me what my fees are for” , said a Silicon Valley venture capitalist. .
Most venture capital firms continue to charge management fees to LPs whether or not they have invested, but Sequoia Capital, one of the leading tech venture capital groups, last year began waiving to charges on the capital that he had not yet committed to the companies in some of his funds.
Venture capital firms are looking for creative ways to return capital, such as launching new investment vehicles called continuation funds that unlock liquidity in existing assets without a traditional exit. Lightspeed Venture Partners, one of Silicon Valley’s largest companies, is setting up a billion-dollar fund.
The chief investment officer of a major endowment said he would like the venture capital firms he backed, which include some of Silicon Valley’s biggest names, to return some of the money which was promised to them by the LPs rather than staying on it any longer.
“During the first crash of the tech bubble (in 2000), a number of funds significantly reduced their funds,” he said. “I hope we see that, with venture capital firms reducing the size of their funds and forgiving their commitments to their investors and rightsizing. That would be a very good result.
While venture capital firms resist spending their reserves, young companies without an obvious path to profitability or a lucrative exit will instead face drastic reductions in their valuations and risk of failure.
Startup bankruptcies have doubled in the past year, according to PitchBook. Companies once valued at more than $1 billion, including Hopin and Convoy, were among the victims.
“In a way, dry powder is a mirage. It’s a theoretical figure,” said Nigel Dawn, global head of private capital advisory at investment bank Evercore. “Portfolio companies in venture capital funds are feeling the liquidity crunch more than ever: the idea that you can just grow and grow with no profitability in sight and with the cash spigot always on has disappeared. »