Does A Rate Rise Hurt Startup Financing?

ISM was up this month.  The US has been on almost 0% interest rates for a long time.  The Fed meets in June to discuss another raise.  I think the Fed should raise rates.  Personally, having zero cost to money creates all kinds of imbalances and opportunity costs in other parts of the market.

Since 2009, money has flowed to riskier assets. First the stock market, then alternative assets.  0% interest rates are a part of the perceived “bubble” in startups.

Going forward, rates will alter the decision making process of some people.  They will choose to take less risky paths to get return on capital.  But, I think the shift away from alternative assets will be slight.

I also don’t see a dramatic drop in stocks.  Earlier this year, I thought they might.  I was wrong.  Stocks might decline, but it’s going to be a drip, drip decline not

World GDP Growth Chart

rush for the exits.

More important for the startup world is economic growth.  Economic growth heals a lot of wounds. Growth whets acquirers appetites. Growth makes it easier to get customers-they are more willing to take risk on new technology because there is less fear.  The best way to improve your bottom line is increase your top line.

Midwestern companies have been forced to get to revenue faster because there is less venture capital money for them.  They learned, having increasing sales allows you to last longer between financings.  The rest of the startup world that has relied on a river of cash to grow is now learning the top line revenue lesson.

Startups have done very well since the 2008 crash.  They have impacted every business sector.  Imagine what they could do if the broader economy was good.  John Cochrane wrote the clearest way to get to a high growth economy here.   I wish every elected official would read it and execute on it.  American GDP growth has been anemic for 8 years, never sustaining long term growth above 3%.  Worldwide economic growth in developed economies has also been extremely slow.
World GDP Growth Chart

World GDP Growth data by YCharts

One of the things startups have experienced over the past 8 years is a change in the funding cycle of their business.  It used to be hard to get seed.  That money is easier to get than it ever has been before.  Part of it is more money going into startups.  Part of it is that it is so cheap to start a company up check sizes are smaller.

We heard about the Series A crunch.  Then, the Series B crunch.  If the Fed aggressively raises interest rates that puts them on a path toward a normal discount rate of 4%, we will start hearing about a Series D, E, F crunch.

I think another thing we are going to start to see is aggressive acquisition by corporates.  Corporates are flush with cash.  They are lean on debt.  First, it will be M+A at a high level.  But, so much is changing so fast that corporates are going to be forced to buy innovation because they lack the internal resources to develop it.

If I were a startup, I would ignore everything I heard or read about a crunch. If you are building a business with increasing sales, the money will be there for you. It might not be at the exact price you want, but it will be there.