StopDown

Fund vintage, dry powder and why VC money comes in waves

By · Startup Decoded

A fund's vintage is the year it started investing, and dry powder is money that investors have promised but the fund has not yet used. Together they explain why venture funding swings between busy and quiet years.

What is a fund vintage?

The vintage year is the year a fund makes its first investments or has its first close. Funds of the same vintage started under similar market conditions, so they are often compared with each other. A 2015 fund bought into companies at different prices than a 2021 fund, and that affects its results years later.

Vintage matters because returns depend heavily on when money goes in. A fund that invested at low prices before a boom may do well, while one that invested at peak prices may struggle even if its companies perform. When investors study a manager's record, they look at several vintages, not just one.

What is dry powder?

Dry powder is money that has been committed to a fund but not yet invested. Say a fund has raised ₹1,000 crore and has invested ₹400 crore so far. The remaining money, after fees and reserves, is its dry powder. The term is also used for whole markets, such as the total unspent capital of all venture and private equity funds.

A large amount of dry powder suggests that investors will keep funding startups, but it does not guarantee it. Funds can hold back if prices look too high or if they expect trouble, and reserves are kept for existing companies. Dry powder tells us about capacity, not about intent.

Dry powder also depends on who holds it. Money in the hands of a fund that invests only in seed companies cannot easily be used for late-stage deals. When people quote a large national total, they are adding up funds with very different mandates, so the figure says little about how much is open to a given founder.

Why do VC funds run in cycles?

A fund is raised, invested over three to five years, and then closed to new deals while it supports and sells its holdings. When a fund has put around 60 to 70 per cent of its money to work, the firm usually starts raising the next one. This is why a firm shows up again every three to four years.

Raising depends on the market. When listings and sales return cash to investors, limited partners have more to commit again. When exits dry up, they hold back. This loop links the startup market to the stock market and the interest rate cycle.

The time between the first cheque and the final cash return is long. A fund started in a boom year may not know whether it succeeded until the early 2030s. That delay means managers and investors act on partial information, and sentiment can swing more than the facts justify.

How did the boom and slowdown happen?

Around 2021, low interest rates, a strong stock market and an easy flow of money from global investors led to record funding and many new unicorns in India. Prices rose quickly, and many deals closed in days. After that, as interest rates rose and public markets became less friendly to technology stocks, funding slowed in 2022 and 2023. Many companies cut costs and some raised money at lower valuations.

Since then, funding has been more selective. Investors asked for clearer paths to profit, and many funds slowed or paused new deals while they dealt with older holdings. Data on amounts and counts should be taken from StopDown's reports, which update with the latest numbers, rather than from this general account.

What happens when a fund runs low on money?

A fund near the end of its investing period cannot back many new companies. It keeps cash for follow-ons in its best performers, and may decline new first cheques. Founders talking to such a fund may hear a polite no even if the investor likes the idea.

Founders should ask a simple question: where is the fund in its cycle, and how much is left for new deals? A newly raised fund with plenty of dry powder will be more open than one in its last years.

How do funds raise their next fund?

They show limited partners a track record: companies that have grown, partial exits, and above all cash returned. A fund still waiting for exits may struggle to raise again even if its paper value is high. This is why firms push portfolio companies to sell shares in secondary sales or to list.

New managers face a harder path. Investors often prefer proven teams, so first funds depend on family offices, angels, development banks and government schemes such as the Fund of Funds for Startups.

How do investors measure a vintage?

Researchers group funds by vintage and compare their returns after ten years or so. A strong vintage tends to be one where funds invested when prices were reasonable and sold when markets were open. A weak vintage is one where funds paid high prices and could not sell for years.

Because venture returns take a long time to appear, a vintage cannot be judged early. Paper gains in the first years may reverse. This is why experienced limited partners spread their commitments across several vintages instead of putting everything into one year, a habit sometimes called vintage diversification.

Founders should also watch signals in their own sector. When several funds in a field have just raised new money, competition for good deals rises and valuations may go up. When funds in the field have stopped investing, good companies still get funded but with more questions, tighter terms and slower decisions.

What are secondaries and continuation funds?

When exits are slow, funds look for other ways to give cash back. A secondary sale lets a fund or an early shareholder sell shares to another investor without the company listing or being bought. A continuation fund is a new vehicle that buys the best assets of an older fund, so the older fund's investors can cash out while others stay for more upside.

These tools became more common when IPO windows were narrow. They help funds near the end of their lives, though they also raise questions about pricing, because the manager sits on both sides of the deal. Limited partners usually ask for an independent valuation.

Finally, remember that investor mood is a poor guide to company quality. Some of the strongest businesses were started and funded in difficult years, when there was less competition for talent and customers, and weaker ones were funded easily in boom years.

Tracking these cycles is easier with data. StopDown's funding reports and investor lists show which funds are most active in a period, which stages they back and how that changes from year to year.

What does this mean for founders?

Timing matters. Raising in a hot market may be easier and cheaper, but taking too much money at a high price can create pressure later. Raising in a cold market is harder, but investors who do invest may be more careful and more helpful.

The practical advice is to raise when you can, keep a buffer of cash for 18 to 24 months, and not depend on any single investor. Nothing here is investment advice.

Recent examples on StopDown

Questions people ask

What does dry powder mean in venture capital?

It means money that investors have committed to funds but that has not yet been invested. It shows how much capital is available, not how much will actually be spent.

What is the vintage year of a fund?

It is the year the fund started investing or held its first close. Funds of the same vintage are compared because they started in similar market conditions.

Why does venture funding slow down?

Often because exits and listings slow, interest rates rise and investors become more cautious. Funds also pause when they have spent most of their money and are waiting to raise a new fund.

How long does a VC fund take to invest?

Usually three to five years for first investments, with follow-on investments continuing for longer. The full fund lasts about ten years.

Does lots of dry powder mean more startup funding?

Not necessarily. It means there is capacity. Whether it is spent depends on prices, the quality of deals and how comfortable investors feel.

Read next

← How VCs pick startupsGovernment funding for startups: Fund of Funds, Seed Fund and more →

Startup Decoded · Glossary · Sectors explained · Investor directory · FAQs