As interest rates rise, startups and VCs are playing a new game – Marketingwithanoy

The era of free Money is now officially behind us: The US Federal Reserve has raised a key interest rate benchmark by 0.50% or 50 basis points this week.

Startups have long lain in the sun of effective money at no cost. As a result of a historic period of low interest rates, the relative attractiveness of investing in bonds and other safer, albeit lower-yielding assets has declined, meaning investors around the world have been looking for a place to park funds and take an opportunity. on material incomes.

Technology fared well during the period, with tech startups getting an even bigger shot in the arm. The mechanism is simple to understand: low interest rates led to capital flowing into more exotic investments, such as venture capital funds. Those funds then grew in size and number. The result of that influx of money to investors has been a burst of money for startups.

More capital pools with more funds led to competitions for access to deals, leading the founders to lead the way when it came to valuations and terms. Another factor at play was that the COVID-19 pandemic bolstered the value of public tech companies, while many other concerns were hit by travel restrictions and other related economic changes.

Crossover funds piled up in public and private tech companies, the latter triggering a spate of funding events that sent valuation multiples to the moon.

Now we see the rubber band snap back. As interest rates rise, the funding available to venture capitalists diminishes and crossover capital has already left the scene to lick its wounds. Meanwhile, other investments — think bonds — are just more lucrative than they used to be.

In fact, pandemic-era technology trading has faded, leaving startup public compositions far from their peak valuations. This creates a unique shit moment where startups fight what should feel like a capital drought, while investors get more conservative and exits are limited due to low prices in the public market.

It’s a mess for startups that have only known summer. Winter is not coming; it’s here.

The Enterprise Response

Venture capitalists are talking publicly about the changing climate, a shift from earlier in the year when such commentary felt scarce. Whether it’s because of more near-term pain in the market or VCs simply finding their voices, the commentary is now shrill and regular.

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