$500 Billion in Venture Capital is Sitting on the Sidelines

Over $500 billion in venture capital is sitting on the sidelines, according to a report that broke this morning in The Wall Street Journal:

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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.

Across the market, fewer deals are getting done. Deals were down 24% in the second quarter, per Pitchbook.

That likely understates how cold the market is.

Venture deals routinely take months to close. Deals that were announced in Q2 were likely agreed to in Q1 or even before.

The slowdown really hit hard this spring, so I expect the Q3 numbers to be much worse.

I see this slowdown every day as an angel investor. One after another, VC’s and angels have retreated from the market.

Just this morning, a top VC pulled out of a deal I’m working on, citing market conditions. No matter — I’ll find them another firm.

Is this just a brief pause, given how much money is waiting to be deployed? Maybe not.

Just because limited partners (LP’s) have committed $539 billion to venture funds doesn’t mean it’ll ever go to startups. LP’s can ask the VC to slow down or stop deployment at any time.

Many have already done so, in all likelihood. And if a VC has a long term relationship with a major institutional investor, the VC will obey.

Why would these institutions pull back on their commitments? Target allocations, for one.

LP’s have taken big losses on their public stocks. If they wanted to allocate 15% of their total assets to venture capital, that would be $150 million of a $1 billion endowment.

But their stocks have fallen so much this year that their endowment might be down to $750 million. So, they can only allocate $113 million to venture.

Add the math of target allocations to general fear and wimpiness, and you’ve got yourself a venture slowdown.

What this means for founders is raising money now is going to be a lot harder than in the past. I expect the market will take a year or two to recover.

But if you keep your game tight and extend that runway, you’ll be fine.

I’m actually investing in startups faster than ever.

I’ve committed to 4 deals in the last two weeks, by far my fastest pace yet. I normally do about one deal a month.

Especially at the early stages, there are a ton of great deals out there now. And the prices are much better than during last year’s bacchanal!

This slowdown has pushed the weak companies out of the market, along with my competing investors. It’s go time!

What do you think about the venture slowdown? Leave a comment at the bottom and let me know!

More on tech:

Inside the Seed Funding Slowdown

Talking Startups and Today’s Fundraising Pullback

The Startup Glossary

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