PARTNERSHIPS

„Dry powder“ isn’t just a trending VC term – it’s the fuel that could ignite the next unicorn.

Dry powder refers to the unallocated capital VCs have raised, but have not invested yet.

In 2023, Europe’s VCs were holding a record €410 billion of it. This surplus isn’t just from recent fundraising; it’s a result of cautious investing in an uncertain market. VCs raised big in 2021 and 2022, but when the economy shifted, they pumped the brakes on deploying capital.

Private equity and venture capital dry powder reached a record €410 billion in 2023, equating to 86% of the investment total of the past four years.

In 2023, buyout firms dry powder rose to €284 billion, while venture capital and growth capital levels of dry powder increased modestly to €53 billion and €43 billion, respectively.

1. Record-Breaking Dry Powder: €53 billion for venture capital and €43 billion for growth capital. That’s a lot of zeros waiting to back the next big thing.
2. Cautious Optimism: Despite the abundance of dry powder, VC investors are exercising caution in deploying capital due to market uncertainties and limited exit opportunities – ready to pounce, but carefully choosing their moment.
3. Sector Spotlight: Keep your eyes on cleantech, AI, and health tech. The surplus capital provides a strong capacity to back innovative companies focused on competitiveness and sustainability.

Here’s why:

• Increased Competition for Deals: More money chasing fewer deals? That’s a recipe for sky-high valuations for a stake in high-potential ventures.
• Pressure to Invest: When you’re sitting on a mountain of cash, the temptation to spend it can lead to hasty decisions.
• Potential for More Patient Capital: With ample reserves, VCs can afford to take a more patient approach, allowing startups longer runways to achieve their milestones without the pressure of immediate returns.

So, what’s a smart VC to do?

1. Careful Due Diligence: Don’t just scratch the surface. VC firms should prioritize rigorous due diligence to identify high-potential investments. This approach ensures that dry powder is allocated to ventures with strong growth prospects and aligns with the firm’s investment thesis.
2. Maintain Disciplined Valuation: Don’t let FOMO drive you to overpay. VC firms can avoid contributing to unsustainable market bubbles.
3. Focus Active Portfolio Management: Don’t just invest and forget. Nurture your startups to supercharge their growth.

Whether you’re a founder, investor, or just fascinated by the startup world, this dry powder surge is reshaping the landscape. It’s creating:

• More funding opportunities for innovative startups,
• Increased competition among VCs for the best deals,
• A potential boost to Europe’s economy through new job creation and technological advancements.

European private equity and venture capital continues to grow strongly and sustainably. Record capital under management illustrates the industry’s scale and contribution at a European level, providing investment and expertise for young companies to develop their ideas and grow, and more mature businesses to consolidate their positions and expand internationally.

As the VC landscape evolves, the need for specialized support in managing unallocated capital becomes increasingly crucial. We at ACE Alternatives are

at the forefront of this shift, offering tailored solutions for fund administration, tax and accounting, ESG requirements, and regulatory compliance. By leveraging tech-driven processes and deep industry expertise, such firms enable GPs to focus on strategic decision-making while ensuring efficient management of dry powder and overall fund operations.

Europe’s €410 billion dry powder presents a unique moment in the startup funding landscape. As this capital starts flowing, we could see a new wave of groundbreaking startups emerge. So, keep your eyes peeled. The next big thing might just be around the corner, fueled by massive reservoirs of cash.

What do you think? How will this surge in available capital shape Europe’s startup ecosystem? Share your thoughts in the comments!