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“Dry Powder” in Venture Capital and Early-Stage Funding

April 22, 2019

This content is for educational purposes only and should not be considered tax, financial, or legal advice.

 

An undeniable fact about investing: you need cash to do it. That means that startups searching for funding or venture capital need to focus on potential investors who have the intent and means to invest in the near term.

 

The cash on hand that funds and investors deploy into companies is commonly known as “dry powder”.

 

To build a good investor pipeline means identifying well-matched investors who have dry powder. Here’s some ways to gauge whether they do:

 

When did the investor close its most recent fund?

 

The typical institutional fund has a 10-year life cycle. This is the time it takes to deploy capital into companies, sell or otherwise liquidate those investments, and return capital (and value) to LPs.

 

For the first 2-4 years, an institutional investor is actively sourcing companies and making investments. But the remaining 6-8 years of the cycle are generally spent nurturing and providing follow-on investment into existing portfolio companies, and managing / participating in the additional transactions and eventual exits for those companies.

 

An institutional investor that has not closed a fund in the last 2-4 years may be either raising an additional fund or inactive.

 

How many investments has the investor made since closing its most recent fund?

 

Once you have verified that the investor has closed a fund within the last 2-4 years, the next step is to check the investor’s recent investment history to gauge whether it has dry powder.

 

Institutional funds typically have a “reserve ratio”, which is the portion of a fund that is reserved for follow-on investment into its existing portfolio companies.

 

A 2:1 reserve ratio is common. So a $30M fund may deploy only $10M into initial investments and reserve $20M to invest in the later rounds of current portfolio companies.

 

So by checking an investor’s recent activity, you may be able to gauge if it’s actively sourcing new investments, or if it’s deploying reserve capital.

 

Example: an investor that has closed only one $30M fund in the past 2-4 years, and has deployed $15M+ in initial investments may be either raising a new fund or inactive.

 

What about other investors like angels and evergreen funds / family offices?

 

Non-institutional investors can be a difficult segment to evaluate because there’s often not much data publically available on their investment activity.  In general, place a higher priority on non-institutional investors that have made investments in the past 5 years.

 

Of course, if an investor is well-matched to your company but you’re not sure if it has dry powder, go ahead and add them to your pipeline.

 

Raising capital is, after all, a numbers game!

 

Greenprint Growth Partners LLC is a boutique consulting firm specializing in corporate development for early-stage companies and investors.

 

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