Fund Structure
Dry Powder
Committed but undeployed capital available for new investments or follow-on rounds — a measure of a fund's remaining investment capacity.
Dry powder refers to capital that has been committed to a fund by LPs but not yet deployed into investments. It represents the investment firepower a VC firm has available to make new bets or follow on in existing portfolio companies.
At the start of a fund's life, all committed capital is dry powder. As the fund makes investments, dry powder decreases. Most funds reserve 40–50% of their capital for follow-on investments in their best-performing portfolio companies, so the deployment of dry powder is strategic — not first-come-first-served.
In volatile markets, the level of industry dry powder matters: when there's a lot of undeployed capital in the system (as there was in 2021–2022), valuations tend to inflate. When funds are mostly deployed and new fundraising is difficult (as in 2023), capital becomes scarce and founders have less leverage.
In Practice
A $200M fund has made $80M in initial investments over two years. It has $120M of dry powder remaining: $60M earmarked for follow-on investments in existing portfolio companies, and $60M for new deals in years 3–5.
Why It Matters
Founders should understand a fund's dry powder position before taking money. A fund that's nearly fully deployed can't lead follow-on rounds, which means the founder will need to find new lead investors for subsequent raises. Conversely, a fund with significant dry powder is a stronger partner for companies that need multiple rounds.