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Everyone keeps talking about how VCs have so much "Dry Powder" to invest.
It's all B.S.
A quick 🧵👇
It's all B.S.
A quick 🧵👇
Most newsletters and analysts peg the amount of dry powder available at ~$300 billion.
But VCs don't physically have the money. And they don't have to use it anytime soon.
But VCs don't physically have the money. And they don't have to use it anytime soon.
When a VC raises a fund, they don't have all the money up-front (usually).
They instead have commitments from their investors (the LPs) and they "call" the capital as needed per investment (the capital call).
Those LPs though? They're pretty tapped out.
They instead have commitments from their investors (the LPs) and they "call" the capital as needed per investment (the capital call).
Those LPs though? They're pretty tapped out.
No surprise LPs are tapped out.
Their investments have dropped significantly in value -- public markets, private holdings, etc.
Other assets have become more illiquid.
Why sell your real estate assets in a tough market?
Their investments have dropped significantly in value -- public markets, private holdings, etc.
Other assets have become more illiquid.
Why sell your real estate assets in a tough market?
If every VC called that $300b now, a lot of LPs would feel A LOT of pain.
Some wouldn't even be able to honor their commitments.
So the best thing for a VC to do for their LPs is wait.
Some wouldn't even be able to honor their commitments.
So the best thing for a VC to do for their LPs is wait.
LPs are also watching VC investments more heavily, after several very public disasters (FTX being the best-known).
Making a bad investment now could mean this is your last fund as a VC.
It's safer to wait.
Making a bad investment now could mean this is your last fund as a VC.
It's safer to wait.
For sure, there are some VCs fearlessly making deals now and getting good prices.
Others are only going after the most obvious safe bets -- profitable companies with crazy growth (think 5-10x ARR growth).
But most are not doing any deals or are just sniping deals here & there.
Others are only going after the most obvious safe bets -- profitable companies with crazy growth (think 5-10x ARR growth).
But most are not doing any deals or are just sniping deals here & there.
Yes, VCs theoretically have to deploy capital at some point.
LPs don't pay VCs 2% yearly management fees to sit on their hands.
But waiting a year is nothing in the time span of VC investment.
VC funds have 10-year life spans, minimum. Some have longer.
LPs don't pay VCs 2% yearly management fees to sit on their hands.
But waiting a year is nothing in the time span of VC investment.
VC funds have 10-year life spans, minimum. Some have longer.
VCs can wait a year or two, and their LPs will be okay with it. Even happy.
VCs can always modify their agreements with their LPs and extend the time horizon.
VCs can always modify their agreements with their LPs and extend the time horizon.
So when will VCs start investing like they did in 2021?
Well, they won't, at least not until there's a new generation of VCs.
This downturn will be deeply seared into the minds of every active VC & LP working today.
Due diligence will take much longer. (This is a good thing.)
Well, they won't, at least not until there's a new generation of VCs.
This downturn will be deeply seared into the minds of every active VC & LP working today.
Due diligence will take much longer. (This is a good thing.)
FOMO is dead. It's been replaced by FOZO (Fear of Zeroing Out).
Fear that you will invest in the next FTX or Fast.
You won't lose your job if you wait. You will if you invest in a big loser.
Fear that you will invest in the next FTX or Fast.
You won't lose your job if you wait. You will if you invest in a big loser.
BUT! VCs will come roaring back I predict -- when the market starts going on a tear again.
If new tech stocks suddenly rise, it will be a signal that new deals can be made.
LPs will have heftier balance sheets.
At that point, VCs won't have an excuse to keep waiting.
If new tech stocks suddenly rise, it will be a signal that new deals can be made.
LPs will have heftier balance sheets.
At that point, VCs won't have an excuse to keep waiting.
So what should founders do right now?
1) Be profitable. Nothing matters more.
VCs don't want to give money so you last 18 months anymore. They want you to last forever.
VCs won't lose their jobs if you are default alive. They will if you burn all your cash.
1) Be profitable. Nothing matters more.
VCs don't want to give money so you last 18 months anymore. They want you to last forever.
VCs won't lose their jobs if you are default alive. They will if you burn all your cash.
2) If you're Series A or later, wait until 2024.
Better chance the market has improved by then, and the pressure on VCs to invest will be up much more.
You'll be able to raise at 10x ARR instead of 3x ARR.
Better chance the market has improved by then, and the pressure on VCs to invest will be up much more.
You'll be able to raise at 10x ARR instead of 3x ARR.
I'll repeat it again: BE PROFITABLE.
Nothing feels better -- or creates more FOMO -- than completely controlling your own destiny.
Nothing feels better -- or creates more FOMO -- than completely controlling your own destiny.
3) If you're pre-seed or seed, raise as little as you need to reach profitability.
$2m pre-seeds are gone. Raise $500k or $1m.
There's enough money out there, but you need to show you understand the market conditions and have a plan for making the money last forever.
$2m pre-seeds are gone. Raise $500k or $1m.
There's enough money out there, but you need to show you understand the market conditions and have a plan for making the money last forever.
I'll repeat this again: a VC will not lose their job if you are default alive.
Founders need to deeply understand the situations and incentives of their VCs.
Founders need to deeply understand the situations and incentives of their VCs.
4) The above rules are somewhat different for A.I. startups.
There will be a FOMO race for top A.I. startups.
I'm already seeing it.
THAT said, if you are A.I. and profitable, you will demand double the valuation instantly.
Nothing beats controlling your own destiny.
There will be a FOMO race for top A.I. startups.
I'm already seeing it.
THAT said, if you are A.I. and profitable, you will demand double the valuation instantly.
Nothing beats controlling your own destiny.
5) For the non-founders out there -- make sure you ask questions of any company you join about their balance sheet and runway.
If you can, join a profitable company with founders who have good heads on their shoulders.
If you can, join a profitable company with founders who have good heads on their shoulders.
6) For the young or aspiring VCs out there -- it's moments like these that make careers.
In this market, it only takes one investment to make your career.
It only takes one to destroy it as well.
Doing nothing will not give you job security. Need something to show.
In this market, it only takes one investment to make your career.
It only takes one to destroy it as well.
Doing nothing will not give you job security. Need something to show.
