Dry powder, an informal word referring to cash reserves and highly-liquid securities that private equity and venture capital firms have available to deploy when an opportunity arises, is expected to propel ventures in 2023. Despite the business disruption due to the pandemic, increased volatility, high-interest rates and global conflict, there is nearly $2 trillion in dry powder. While many private ventures might face uncertainties and challenges as the full effects of 2021 and 2022 upheavals continue taking root, dry powder provides the ability and flexibility to tap into new opportunities.
As venture capital firms and private equity companies deploy their massive dry powder, investment levels are expected to be greater than in previous years. Will this affect technology in 2023?
What Is Dry Powder?
Dry powder is a term used to refer to cash reserves held by companies for investments, acquisitions or buyouts. Treasuries and short-term highly liquid assets are considered dry powder. The dry powder for private equity globally is estimated to be $1.3 trillion, and that of venture capital is estimated to be $580 billion.
Many venture capital firms may use dry powder to fund private equity investment opportunities as they arise. Venture capitalists require enough cash to finance companies and invest in new opportunities. Private equity firms may use dry powder to profit from distressed investments by buying off struggling company equity or restructuring it to make it profitable again. In addition, private equity firms may use dry powder as emergency funds to avoid a liquidity crisis in case of an economic downturn or loss.
Will Dry Powder Affect Technology In 2023?
2022 faced market uncertainties and reduced competition, which led many VCs to have a stockpile of undeployed capital. Venture capital firms in the United States have an estimated $290 billion dry powder ready to be invested in tech startups. The question remains, where is all this dry powder go? Because of the low valuation in the tech industry in 2022, venture capital investment deployment was reduced. VC investors are still cautious but ready to invest in the tech industry as valuations normalize.
Though 2021 recorded high valuation and investment, tech stocks experienced a tremendous decline in 2022 as tech valuations declined. The Nasdaq index experienced 32% losses at the beginning of 2022, with Amazon, Netflix, Meta and Google experiencing a $2.5 trillion market value decline. 2022 was a year of correcting or normalizing tech stocks after the headwinds experienced during the pandemic, rising interest rates and recession. In 2023, several trends and investments started in 2022 will continue to bear fruits and guide leaders on curve-outs and acquisition decisions. Venture capitalists are holding onto the massive dry powder waiting for the right opportunity and make a big move into the tech industry. According to Herbert Smith Freehills (HSF), a VC legal advisory company, there is a lot of dry powder available for the right business.
Among the macroeconomic trends to watch for in 2023 is a climate-tech investment. With the need for clean energy, investors expect companies campaigning for more reliable power to fuel growth in cleantech. Investors tend to focus on businesses that have an impact and, at the same time, make profits. Health and wellness and biotech firms may also experience tremendous growth in 2023.
The economic slowdown, triggered by the pandemic, had a detrimental effect on companies that had not invested in technology, with huge losses. In 2021 and 2022, companies in every industry sought technology solutions to help them stay afloat. The need to hire the right talent, like software developers, incorporate digital tools and consider cloud technology to minimize employee management and supply chain problems.
The tech industry has remained resilient due to growth in crucial trends like AI and cloud solutions. The shift in how we work has compelled investors to inject more capital into upgrading digital processes and infrastructure. With startup valuations still normalizing, it could be an ideal period for investors to increase investments in tech startups that have shown some success despite the rocky past years. Many tech startups funded when valuations were lower have achieved great success, and their investors achieved great financial returns. In 2023, tech startups should be prepared for more funding from venture capital firms.
Despite venture capital firms sitting on massive dry powder, expect investment velocity to be at a different time than in 2022. Private equity firms have considerable funds to take advantage of lower valuations and buy out companies at scale. Despite cautious investment predictions, companies with solid business missions, cash flow, and fundamentals will get more funding in 2023. In addition, private equity firms will be on the lookout for startups with good tech, and they will buy out those stuck in the valuation trap.
Many VC investors are optimistic for the year 2023. However, there will be rigorous due diligence by investors seeking sustainable financial returns and growth, diversity and solving more extensive issues. Also, 2023 is predicted to bring resilience among businesses, and tech startups will more likely strategically display themselves to attract investors.