5 Ways Investors Use Dry Powder Dry powder is the amount of committed but unallocated capital that a venture capital (VC) or private equity (PE) firm has on hand. It is, in other words, a cash reserve that has not yet been invested.
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The term "dry powder" first appeared in the 1600s, when warring armies used gunpowder to fire guns and cannons. In addition to keeping stashes of the powder readily available for use at any time, the powder had to be kept dry in order for soldiers to use it properly in battle. Having a reserve that can be used is a prevalent concept across many professions and sectors, including the financial one.
Dry powder can be used in a variety of ways. A venture capital firm, for instance, could use part of its cash on hand to fund a promising startup. A corporation may reserve funds for future add-on acquisitions, whereas a private equity firm may use its dry powder stockpile to leverage the purchase of a bankrupt company.
Since 2022, several VC firms, including Sequoia Capital, Accel, Elevation Partners, Nexus Venture Partners, and Matrix Partners, have raised money for or established funds specifically for India, but due to global macroeconomic headwinds, a sizable portion of these assets remain unutilized.
However, choosing when and how to deploy this cash reserve is not always simple. Here are 5 ways by investors to use dry powder:
To fuel portfolio firms' growth
Investors strategically deploy dry powder to support portfolio companies, fuel growth, and seize opportunities, according to Anup Jain, Managing Partner at Orios Venture Partners.
"Timely financial support helps navigate challenges, maximize returns, and mitigate risks. Additionally, investors explore new investments aligned with their thesis for promising prospects. A thoughtful approach optimises the impact of dry powder in the evolving investment landscape," Jain said.
To provide struggling portfolio companies with crucial liquidity
Ankur Bansal, Co-founder and Director of Blacksoil Capital, believed that dry powder acts as a lifeline by giving struggling portfolio companies during economic downturns vital funding. This assistance fosters resilience and aids companies in surviving difficult times. It also gives portfolio companies access to additional resources so they are not exclusively dependent on outside funding, which is helpful during tough times. Additionally, this helps portfolio companies to take advantage of growth possibilities and bolster their competitive advantage when unexpected opportunities arise.
"Investors are leveraging their available capital to assist portfolio companies in strategically acquiring peers or competitors at lower valuations during these distressing times. Startups are facing difficulties in raising funds, making it an opportunity for portfolio companies to expand their market share, consolidate their industry position, and gain access to new markets, customer bases etc. For example, Aurum's acquisition of NestAway showcases how companies can benefit from strategic acquisitions during challenging times," Bansal said.
To capitalise on emerging trends
Ankit Kedia, Founder and Lead Investor, Capital A emphasised that dry powder enables investors to stay nimble and adapt to emerging trends swiftly. They can allocate funds toward industries or sectors that show promise or are expected to experience substantial growth. This proactive approach allows investors to capitalize on evolving market dynamics.
To make new investments at realistic valuations
With valuations skyrocketing in 2021 and the beginning of 2022, both early stage and growth stage investors kept a tight lid on fresh investments. This has now allowed them to stay in the market and invest in good founders, even as others who deployed their funds fully in 2021, 2022 are having a hard time to raise new funds.
"In circumstances like these, current investors find it challenging to provide a startup with more than bridging funding unless it is performing really well. Down rounds affect both the startup and the VCs, as previous valuations might no longer be valid.
"Once things settle down and founders are back in the market at reasonable valuations, the majority of dry powder will be placed aside for new investments at realistic valuations," said Prasanna Krishnamoorthy, Partner at Upekkha, a SaaS accelerator and early-stage fund for SaaS startups.
To give uprounds priority
We Founder Circle uses dry powder to prioritise uprounds for its portfolio startups.
"Last year, we facilitated uprounds in 17 companies, deviating from traditional VC strategies. Expanding our investments to Series A and B, we diversify and mitigate risk. Supporting high-growth-stage companies like Garuda Aerospace and Rooter with INR 5 crore monthly revenue, we leverage our dry powder funding potential to back our portfolio and target established ventures like Zypp and BluSmart," shared Neeraj Tyagi, Co-founder and CEO of We Founder Circle.