Why Bill Gurley & Josh Wolfe Think VCs Won't Deploy All Their Dry Powder Anytime Soon
Read my text conversation with Lux's Wolfe about venture 'wet powder'
A running question in this newsletter for the past year has been how much dry powder is there out there, really? Venture capital firms raised humongous funds — but how quickly would they deploy them?
As I reported last month, venture firms have taken very different approaches when it comes to deploying the money they’ve raised. Some firms have basically halted investments, while others are still cutting checks. Almost everyone, though, has slowed down significantly. And to make matters worse, the IPO market — an often under-appreciated source of funding for late-stage startups — has slowed, with capital raised down 36% year-over-year.
Benchmark’s Bill Gurley argued convincingly this week that just because venture capital firms have raised big funds doesn’t mean they feel that much pressure to actually deploy them.
He wrote, “There is no urgency to draw them down. The money isn’t actually at the VC firm, they are still sitting in the coffers at the LPs. No VC firm I have ever been exposed to feels ‘pressure’ to ‘get dollars to work.’”
He continued in a series of tweets:
On the back of a market reset, & w/ portfolio valuations being slashed, GPs are mostly sharing bad news w/ LPs. No GP wants to look aggressive/carefree. Imagine being a teenager with two speeding tickets & a fender-bender insisting on taking the new family car out Saturday night.
Additionally, LPs are in a tough spot from a liquidity perspective. New tax laws & mandates insist they pay out ~5% each year to their constituency. Meanwhile, outbound liquidity from VCs (IPOs/M&A) are at a 15 year low (all but stopped). GPs know this.
There are also new market realities. Public comps have changed materially, & founder expectations have not moved as fast. Whole industries trade at a fraction of former multiples. So in many cases there simply isn't a market clearing price. This takes time.
Lastly, startup cap charts are very flexible when prices are rising, but quite brittle/problematic when prices fall. This is due mostly to liquidation preference. Most investors will simply “pass” vs stepping into this complexity.
Anyway, I wouldn’t expect a massive rebound due to this perceived “dry powder.” VC crashes seem instantaneous. Rebuilds take time as the industry slowly works through previous sins, & slowly regains confidence. Risk off is very fast. Risk-on is very slow.
In short, venture capitalists are under no obligation to invest the money that they’ve raised and limited partners (the people who fund venture capital firms) have plenty of reasons to want VCs to invest less.
Lux Capital’s Josh Wolfe has talked about the term “wet powder.” He told TechCrunch, “I say it is ‘wet’ because if 2023 resembles the dot-com bust, all the money raised at valuation peaks will get spent propping up ‘walking dead’ zombie companies that can’t raise outside money and instead have to turn to inside rounds.”
I asked Wolfe in a text message if he didn’t think venture firms would feel pressure to deploy capital as they outlined to their limited partners when they raised the money.
Wolfe texted me,