What is dry powder in venture capital?

Dry powder refers to capital that has been committed to a fund by limited partners but hasn't yet been deployed into investments. When an LP commits $10M to a fund, that money isn't transferred immediately — it sits on the LP's balance sheet until the GP issues a capital call requesting it. Until then, it's counted as dry powder.

Dry powder matters for several reasons. For GPs, it represents their ability to make new investments or follow on into existing portfolio companies in future rounds. Running out of dry powder too early — before the best opportunities have emerged — is a real risk in early-stage investing. GPs typically hold back "reserves" to follow on in their best performers.

For LPs, dry powder affects their liquidity planning. They need to have cash available when capital calls come in, sometimes on short notice (usually 10-14 business days). Large institutional LPs model their pacing carefully to ensure they can meet calls without having to sell assets at bad times.

Industry-wide, dry powder levels are watched as a macro indicator. High levels of undeployed VC capital can indicate an overheated market (too much money chasing too few deals) or a risk-off environment where GPs are waiting for conditions to improve before deploying. Global VC dry powder reached record levels in 2021-2022 before the market correction.