By Madeline Shi, a senior financial writer for Pitchbook News. Madeline writes about private equity and the debt markets.
Venture capital firms' cash piles continued to grow, even as dry powder fell across other private investment strategies.
Global venture firms were sitting on $585.5 billion of capital raised but not allocated as of the end of Q3 2022, according to PitchBook data. VC is the only private investment strategy in which dry powder is on pace to rise from 2021 levels.
One factor allowing global VCs to retain and grow a record stockpile of dry powder is the heavy presence of nontraditional VC investors. This money, which is not captured in the VC dry powder figures, has augmented the capital available to startups and allowed growth of the asset class beyond money available to VC firms.
A large portion of the capital invested in venture deals, especially those in the top end of the market, has come from asset managers such as mutual funds, hedge funds and private equity funds, said Kyle Stanford, a senior VC analyst at PitchBook.
Data from the Q3 2022 PitchBook-NVCA Venture Monitor shows that through Q3 2022, the total value of venture deals with participation from nontraditional investors hit $145.1 billion—about 74% of all US VC deals. This group of investors participated in around 92% of mega-sized venture deals in 2021.
This has, in part, explained the disconnect between the growing cash pile held by venture firms and the high deal value in the market, while many of the other strategies saw their dry powder failing, Stanford said. However, the participation of nontraditional investors fell sharply through 2022 as valuations in public and private markets diverged.
Strong fundraising in the first half of 2022 also contributed to these heaps of dry powder.
Despite the stock market correction, global VC fundraising remained resilient last year. Global venture firms amassed a total of $223.6 billion through Q3, with the bulk of capital coming from the first two quarters. If this pace is sustained, it will bring VCs' total capital raised in the full year well above 2021's tally, according to PitchBook data.
At the same time, the pace of investment has slowed considerably. US VC deal value overall dropped 31% last year from 2021's record high to $238.3 billion, PitchBook data shows.
Venture firms have become more selective about which companies they want to invest in amid last year's market turbulence and falling tech valuations, according to Stanford.
"A lot of recently closed VC funds have been holding onto their capital and waiting for the market to bottom out, or they have a better sense of what the pricing of these deals should be," he said.
In 2023, Stanford expects VCs to see a slight decline in dry powder, as a more challenging fundraising market and continued capital deployment will draw down this figure.
About the Author:
Madeline Shi is a senior financial writer for Pitchbook News. Madeline writes about private equity and the debt markets. Previously she has written for news outlets including Debtwire, Pageant Media, Business Insider and CoinDesk. Madeline earned a graduate degree from New York University's school of journalism and is a graduate of Northeast Normal University in China. She is based in Seattle.