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Comment by Zetice | Hacker News Reader

It's just weird, because fundraising is hitting record levels, but funding is dropping. [0]

So there's a lot of "dry powder" (I hear that phrase constantly to describe the situation) just sitting there, doing nothing. What are the VC funds preparing for? What are investors being sold on?

Given all the tech layoffs, my bet is there will be a whole lot of new startup growth coming soon that will "ignite" that dry powder.

[0] bizjournals.com/sanjose/news/2023/02/15/despite-us-fundraising-activity-hitting-record-h.html

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There is a crazy amount of dry powder in the U.S. financial system. A lot of the money printed during the pandemic is just sitting there, growing at ever-higher risk-free interest rates.

Quick reminder here. Money sitting at banks in “risk free” interest rates is losing money in real terms. There arent a lot of good investments in the market right now especially when adding inflation costs.

I highly doubt your described situation exists.

I don't know about pandemic checks causing this, but VC's have a huge amount of undeployed capital from the boom of 20/21. https://www.theinformation.com/articles/venture-firms-290-bi...

There's a lot of money specifically allocated to venture funds that needs to be deployed.

It's only losing money in "real terms" if you use CPI. Given that VCs aren't buying cars and televisions, that's not an appropriate measure of inflation to use. Tech valuations have been falling, so the assets purchased by VCs (equity in tech companies) is deflationary.

Walk me through this. How is money losing buying power not related to this? 3% gain on something that cant buy as much in the future is still a loss. It is relavent

VC money is not losing buying power. Think about it like this: what is inflation, exactly? It's actually pretty hard to measure and the answer depends on what you're spending your money on. The Fed uses CPI as a proxy for inflation as felt by the average consumer. CPI uses a basket of goods and services as a measure, but really it's just an estimate. For instance, CPI might be 6.5% YoY, but if you run a restaurant, where food is a major expense, you're feeling inflation at something like 10% YoY.

Now let's consider VCs. Like a restaurant, VCs spend money in a way that doesn't align with the basket of goods / weighting used for CPI. VCs spend most of their money on equity in tech companies. Equity in tech companies has actually gotten cheaper. Here is a concrete example: Stripe was valued at $95 billion in 2021. In order to buy 1% of Stripe, you'd need to spend $950 million. Now, Stripe is valued at $60B. You can buy 1% of Stripe for only $600 million. That's deflationary.

You haven't gone through the full thought experiment.

I agree tech valuations have imploded. This is a function of equity being predicated on expected returns in the future. Many reasons for tech valuations imploding - part of them -> cost of salaries to match CPI and cost trimming from other companies as inflation hits their bottom line and product sales aren't as robust.

In your example the valuations are on the private market and do not replicate what the public market would pay for them because the expectations on returns are out of whack with reality. VCs bought into their own hype and started thinking that they would get absolutely bonkers returns on companies that have no ability to get the returns required to drive those valuations.

This reality is because all of a sudden there is interest rates in the market and other returns elsewhere to be gained and that interest free money is gone.

VCs might have better buying power of what portion of a company they can buy however the expected returns are no longer in the same ballpark as they were. As a function of inflation their exit from investments looks far worse than it did a short time ago. However what VCs are buying is future returns not necessarily company size. So if you can buy more of a company on lower returns it isn't far different from less of a company on higher returns.

Just like inflation can be caused by many things, e.g. supply chain disruption and money printing, deflation can also be caused by many things, including interest rates. In fact, isn't that what the Fed wants? To lower inflation / cause deflation via higher interest rates? So yes, I agree with you: a large part of the deflation is caused by interest rates, but that's still deflation nonetheless.

> So if you can buy more of a company on lower returns it isn't far different from less of a company on higher returns.

There is a big difference when you're in a highly deflationary environment. Inflation and deflation can cause price spirals. In periods of high inflation, people rush to spend money because it's losing value daily, which causes prices to go even higher. In periods of deflation, the opposite happens: people hold off on spending causing further price drops. VCs are holding cash and not investing much of it because of deflationary expectations. This is causing valuations to drop even lower.

Equities are coming back to reality while the underpinnings of businesses are being hit by inflation. The equity coming back down is a function of the inflation. VCs aren't investing because the returns on the companies look particularly poor in the current macro and in a macro that has interest rates as opposed to free money.

I think we're saying the same thing with different words. I'm saying that tech equity is deflationary. You're saying the price of tech equity is going down. Those are equivalent statements. The reasoning isn't that relevant. What is "macro economic outlook" other than an expectation about the future price?

VCs are in a particular sort of situation though where those assets getting cheaper strongly impairs their way of producing returns for their investors.

Depending on when valuations start to slide, and whether or not they ever start to accelerate like they did at the latter half of the last decade, they could get called in to a lot of hard conversations about "if you're not using my money, give it back."

If you're a VC you want to be raising new funds from your investors for the next wave of startups, you don't want to be unable to find promising investments for your current funds. You're not gonna be able to raise again in the future in that case.

AKA a "zombie."

Ask the Magic 8 ball: What over hyped tech will be invested in next? Answer Magic 8 Ball: Large Language Model Chatbots silly.

Dry powder is a term that predates VC. It's fairly common in IB and PE too. Essentially ready cash that is looking to be deployed.

In the old days, you had to load [gun]powder into your weapon along with the projectile. Dry powder burns hotter and faster, shooting your projectile farther, faster, straighter, and deadlier.

Also in the old days of naval warfare, if you won a battle it was accepted that the other ship (what was left of it) was your prize. Everyone in the chain of command had a predefined percentage of the ownership, with an eighth or so divided evenly among the common sailor. This ownership stake was converted into cash either by your own government or a private prize broker depending on the circumstances.

An exceptionally successful deployment would leave the common sailor with enough money to retire; the captain of the ship might even become fabulously wealthy.

But anyway. Keeping your powder dry on the way to the battle is important if you want to win, get your prize, and retire from all that cash.

I think a lot of VC and IB take the metaphor way too seriously, but you can see how many parallels there are!

This is a really interesting bit of history! Thanks!

I have a US based startup looking for dry powder but lack any connections to VCs, how do I get ignition?

If you're cashflow positive (or on your way), you won't need connections. They'll just take the meeting.

I wonder if anyone has insight into Tilt5 with Jerry Ellsworth. I hear complaints that they can’t raise constantly despite being a healthy profitable business.

I was always told that revenue and profit is bad for valuations. Profit is for lifestyle businesses.

Possibly b/c it locks in a real valuation and prevents playing valuation games with future expected MAU/cashflow.

That’s when it’s ‘oh crap, go go go’ on the investor side, because the startup owners can’t play as many games with valuations.

When the investors are picking and choosing, they usually want to see that you have some ability to deliver.

It does make it harder to raise funds on vapor.

One option is create an Angel List account and use its tools to connect with investors. https://www.angellist.com/

This comment is a good start. I sent you an email. :rocket_emoji:

No self respecting VC can miss out on ChatGPT mania. Take whatever you are doing and reframe it as a ChatGPT application. This will get their juices flowing almost immediately (see Pavlovian response). Make sure you do not demonstrate an actual implementation however because reality may intervene in their thinking and prevent closing the deal. Finally prepare for a future pivot.

Is this not considered fraud?

> Is this not considered fraud?

Commenter is being sarcastic, but also pointing out some truth.

For instance, this mobile operator [1] "New S’pore MVNO Gorilla Mobile lets you turn unused mobile data into digital crypto tokens" taking advantage of the AI/crypto craze introducing a completely unnecessary crypto token into the product. It's just pure marketing. Although not exactly lying, you can get the drift the commenter was making.

[1] https://vulcanpost.com/749452/gorilla-mobile-telco-singapore...

I mostly jest but the best jokes have an element of truth. You and I might consider it fraud or at least unethical. Some might call it doing business. Consider Theranos - billions invested, board of famous old men with zero domain knowledge - due diligence not so much.

BTW: Bing is stalking me - I told Sydney it was over but it keeps heart facing me. Anybody know how to make it stop.

> So there's a lot of "dry powder" (I hear that phrase constantly to describe the situation) just sitting there, doing nothing. What are the VC funds preparing for?

The Fed is reducing its balance sheet to zero and the boomers are retiring. Some might argue it is a return to sanity/normalcy and you will have fewer money guys to plow enormous sums into juiceros and FTXs going forward.

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