Earlier this week, I published a look at the blitz of fundraising deals for artificial intelligence startups, often triggered by unsolicited term sheets. A few days later, my colleagues Sri, Erin and I reported on Perplexity’s talks to raise more money at a valuation of more than $20 billion, which, if it closes, would be its third fundraising in about three months. Unbelievable as it may be, some venture capitalists are now worrying VC funds will run through their dry powder if they keep investing at the current pace. This is a reversal from the last two years, when untapped capital committed by limited partners to VC funds was at or near record highs, as the chart below shows.
Aug 14, 2025
Dealmaker
By Natasha Mascarenhas
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Earlier this week, I published a look at the blitz of fundraising deals for artificial intelligence startups, often triggered by unsolicited term sheets. A few days later, my colleagues Sri, Erin and I reported on Perplexity’s talks to raise more money at a valuation of more than $20 billion, which, if it closes, would be its third fundraising in about three months.
Unbelievable as it may be, some venture capitalists are now worrying VC funds will run through their dry powder if they keep investing at the current pace. This is a reversal from the last two years, when untapped capital committed by limited partners to VC funds was at or near record highs, as the chart below shows.
This year, a stampede of investors writing very large checks into AI startups has absorbed a lot of that cash. Dry powder levels fell to $221 billion in the first half of this year, according to estimates by venture capitalist Jon Sakoda of Decibel Partners, who based his analysis on PitchBook and National Venture Capital Association data. He expects it to sink to $164 billion by year-end, the lowest level since 2019.
If VCs keep investing at today’s clip, the industry would run out of money in six quarters, Sakoda estimates. Without the two startups that have taken much of the VC dollars into AI this year—OpenAI and Anthropic—money would run out by the end of 2028.
Of course, VC funds could always raise more. But limited partners, in contrast to the 2021-2022 investment boom, have been reducing their VC investments because they’ve had so few cash returns.
Venture firms raised just $26.6 billion across 238 funds in the first half of this year, a nearly 34% drop from the same period last year, according to PitchBook. At the same time, VC funds’ investments jumped 75%. The mismatch between capital coming in and capital going out raises the risk that some firms could run low on dry powder if the fundraising slump persists.
So what are firms doing? An LP I spoke with said some VC funds are turning to special purpose vehicles to raise cash to invest in a particular funding round, say OpenAI’s ongoing $40 billion raise. VC funds are finding it easier to get a prospective investor to sign on to invest in the vehicles, which typically invest in just one company, than an entire fund that backs many startups, the investor said.
SPVs also let VC funds participate in deals without putting the entire round on their own balance sheets and give their LPs more exposure to a startup. Sometimes (but not always!) venture funds waive their typical management fees on these SPVs.
But that could change if more VC funds turn to SPVs, said Charles Hudson, managing partner of early-stage venture firm Precursor Ventures.
“While money isn’t getting deployed into funds, LPs are going direct into a small subset of companies,” he said.
“For certain companies, there’s just so much investor demand, that if you have access, you can get people to pay you fee-like economics,” similar to the management fees that investors charge when they raise traditional funds.
As well, several large fundraising hauls will add some fresh capital to the market.
Andreessen Horowitz has discussed raising $20 billion for a new fund that would back AI companies around the world, according to a person who spoke to investors at the firm.
Whether lesser-known funds raise more money in the next year depends on a very simple factor: cash returns. Initial public offerings for Figma and Circle are a good start, but LPs need to see a lot more offerings and mergers to feel flush again.
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