VC’s have over $300 billion of money they haven’t invested, also known as “dry powder.” But you may never get it.
What Is Dry Powder?
Let’s say I’m running investments for Francis University.
I decide to invest in ABC Ventures. I promise to invest $100,000,000 — so that means I need to wire $100,000,000 right?
Well, not exactly…
All I’m really doing is signing an agreement. I might have to send $25,000,000, not the whole $100,000,000.
On Day 1 before they make any investments, ABC Ventures has my whole $100,000,000 as “dry powder.” But there’s only $25,000,000 of that in their bank account.
“Your Call Is Important to Us”
Eventually, ABC Ventures will invest the money that I and the other investors (known as Limited Partners, or LP’s) sent. When they’re running low, ABC will put out a “capital call.”
ABC will tell Francis University to send in the next $25,000,000. I’ll have 2 weeks to do it.
ABC will keep investing. Eventually, there will be another capital call, until I’ve sent in the whole $100,000,000.
“Reduce Speed”
Keep in mind, this relationship is a two-way street. ABC can call down capital — but we can tell them to slow down.
Francis University is their biggest LP. They hope to work with us for many funds, not just this one.
In short, they don’t want to piss us off.
Why Are LP’s Pulling Back?
Why does Francis University want to slow down? Because, like many big LP’s, we have a “denominator problem.”
Our target allocation to venture capital is 10% of the endowment. But our stock portfolio is treading water — even though our VC funds are still marked up to 2021 prices.
Instead of being 10% of the endowment, venture capital is now 20%.
My bosses are getting nervous. This is way too much for a risky asset class.
If Francis U slows down on sending in more capital to ABC Ventures, we avoid pushing that 20% even higher. Given enough time, we’ll get more liquidity through IPO’s, and the denominator problem is solved.
Cheering From the Sidelines
Meanwhile, inside the sleek glass offices of ABC Ventures…
“We better slow down our investments. LP’s are getting nervous. I just heard from Francis University this morning.”
“Right. Let’s go to Aspen!”
And this, dear founder, is why you can’t get your deal done.
Those VC’s “have” $300 billion they haven’t deployed. But they don’t really have it — it’s theoretical.
Over time, a lot of that money will get invested. But VC’s are spending it slowly.
Wrap-Up
VC’s may be sitting on a fortune. But if you’re a founder, don’t count on getting it.
Run your business as if you’ll never be able to raise another cent.
Then if you can raise on decent terms, great. If not, no factor.
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