Venture Capital Cash Holdings Increase... Fewer Investment Opportunities Amid Economic Uncertainty

Increasing Venture Capital Dry Powder [Image Source= Wall Street Journal]

[Asia Economy Reporter Park Byung-hee] As global economic growth slows and investment opportunities decrease, the amount of cash held by venture capital firms has also been confirmed to be increasing.

According to the Wall Street Journal citing financial information firm Preqin on the 10th (local time), venture capital dry powder reached $539 billion as of July, an increase of about $100 billion compared to the end of last year. Dry powder refers to the funds raised by venture capital that have not yet been invested.

Due to rising inflation, interest rate hikes, and the war in Ukraine, financial market uncertainty has increased, causing venture capital firms to hold back on investments. According to market research firm PitchBook Data, the number of venture capital deals in the U.S. in the second quarter of this year was 3,374, a 24% decrease from the first quarter.

The recent decline in cryptocurrency and blockchain-related investments, including Bitcoin and Ethereum, due to falling cryptocurrency prices, is also cited as a reason for the increase in venture capital dry powder.

According to PitchBook, the amount of funds raised by venture capital firms primarily investing in cryptocurrencies is $21 billion so far this year, significantly down from $31 billion last year.

In the second quarter of this year, the number of cryptocurrency-related deals also decreased for the first time since the COVID-19 pandemic. According to another financial information firm, CB Insights, the number of cryptocurrency-related deals in the second quarter was 435, a 10% decrease from the first quarter.

However, venture capital dry powder has shown a steady increase over the long term, and some analyses suggest that this year's increase in dry powder is not unusual.

In fact, venture capital dry powder has steadily increased since 2012. Except for the early 2000s when the dot-com bubble burst and the 2008 global financial crisis, venture capital dry powder has consistently grown.

Jeffrey Grabow, a director at accounting firm Ernst & Young, explained, "The steady fundraising by venture capital shows that investors' interest in alternative investments, which can yield high returns, remains strong."

According to PitchBook and the National Venture Capital Association, the amount of funds raised by U.S. venture capital in the first half of this year is close to 90% of last year's total annual fundraising. Although venture capital investments have slowed, there is no issue with venture capital firms securing investor funds.

There is also an analysis that the decrease in startup funding demand this year, following the large amounts raised by startups last year, is another reason for the increase in venture capital dry powder.

Hillary Gosher, a director at venture capital firm Insight Partners, said, "Many companies raised significant funds last year, and the number of companies seeking funding this year has decreased." Insight Partners decided on 80 investments in the first quarter but slightly reduced the number to 75 in the second quarter. Gosher added, "Because startup valuations have fallen, startup founders are taking a longer-term view on their fundraising plans."