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January 19, 2023 | Tom Ballard

Investor Outlook 3 | Thoughts on dry powder

Dry powder is money raised by venture capital firms, but not yet deployed.

Today’s Question: You read a lot about the amount of “dry powder” that many venture and angel firms are holding rather than making new investments? How would you characterize your strategy in this regard going forward?

Eric Dobson, Chief Executive Officer, Sheltowee Angel Network: A lot of money is still on the sidelines and has been for a while. That money has to go to work soon, especially given the inflationary period we are in at the moment. Sitting on cash is a bad idea. It needs to be working in the economy and appreciating in value. We have never believed in “dry powder” and will not plan for it in our new venture fund. Our base operation is an angel group, and every deal has bespoke elements. Our venture fund will be significantly more regimented in its approach and leverage the angel group’s successes by investing in the winners. The fund then solidifies the value of the angel group in a symbiotic fashion. That really means the “dry powder” of the angel group is the Fund II. And the “dry powder” of Fund II will be Fund III so on ad infinitum.

Scott Ewing, Principal Business Analyst, Appalachian Investors Alliance: All but one of our active funds has “dry powder.” And that one fund, which last year became fully invested, has begun a discussion about raising a follow-on fund next year. The dry powder issue gets back to a shortage of high quality deal flow. Our answer has been to get involved in producing and delivering “mind of the investor” educational content in conjunction with a number of our regional partners. We very much want entrepreneurs to fully understand what it is investors are looking for, and we’re very open to sharing our investors’ insights.

Tony Lettich, Managing Director, The Angel Roundtable (ART): ART continues to invest, and we are not formally limiting investment or intentionally holding “dry powder.” However, we have become significantly more disciplined as we pursue investment opportunities. Overall, the result is that it has become more difficult for entrepreneurs to obtain funding in the current environment.

Grady Vanderhoofven, President and Chief Executive Officer, Three Roots Capital: We have a lot of capital to deploy right now from some of the pools of capital that we manage. For some other pools, we actually are trying to raise more capital now. I definitely would characterize this period as a time to be conservative with respect to holding “dry powder.” For VCs and sophisticated angels, now is probably a good time to be opportunistic, as opposed to aggressive, especially in this region of the country. Frankly, some people may not agree with that perspective because valuations are substantially lower now than 12 months ago, so right now could be perceived as a good time to go shopping, from an investment perspective. Companies should be very careful to not run out of cash right now. Borrowing costs are high and increasing. The cost of debt is the highest it’s been in maybe 15 years. The cost of equity from VCs and sophisticated angels could be very high right now for a company that runs out of cash and is forced to raise capital.

Ken Woody, President and Partner, Innova: We are currently only still investing in existing companies until our next funds close. We made the decision early in 2020 to ONLY invest in current companies, knowing the pandemic could cause some real challenges for those companies. We saw a real reluctance from many VCs and angels to invest in new deals, and we frequently had to extend bridge financing to keep our companies growing. With these new funds, we will re-engage new opportunities and are ready to invest aggressively going forward. Innova launched in 2007 and found many great opportunities during that challenging market. We are seeing very similar conditions now.

David Adair, Co-Founder and Managing Partner, Solas BioVentures: There are two camps:  one that is sitting, the other is moving. Some of the greatest companies of today were founded during recessions. The fact that some funds are not deploying capital creates opportunity at value pricing for those willing to move. We are reminded of the quote from William Penn Adair Rogers: “Even if you’re on the right track, you’ll get run over if you just sit there.” We are movers. Our latest fund was specifically started to take advantage of the opportunity to deploy capital in outstanding opportunities. In summary, we see our portfolio remaining in strong position as we enter 2023 with multiple impending inflection points across our portfolio. Given the current “closing” of the public markets, many large life science companies’ Business Development departments are swamped with increased activity for M&A. While this increased activity and economic turmoil may cause some delay in exits, we believe our mission, to invest and support companies making seismic changes in healthcare, remains a steadfast strategy.

Derren Burrell, Founder, President and General Partner, Veteran Ventures Capital: Deals are out there to be found, and while “dry powder” does seem to be at higher levels over the past year, we see deal syndication growing in 2023 as more firms diversify their risk through collaborative efforts with other like-minded firms.

EDITOR’S NOTE: We will pause the series for about a week to post other feature articles.