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Higher Interest Rates = Lower VC Activity

The FED decision to increase “the range of its benchmark interest rate by a quarter of a percentage point to between 0.25 percent and 0.50 percent” is based on the assumption that suggests the U.S. economy has and is still improving. While some might say that in general this is a good sign for the economy, one could also postulate that it’s a bad sign for a subset of that economy: startups.

“When rates are higher, investors often look for more predictable returns”. Startup investing is a high risk / high reward endeavor. Regardless of what seems to be a relatively small bump up in interest rates, decisions are being made for today and tomorrow based on it. Other forecasts suggest a “rate of 1.375 percent at the end of 2016”, furthering the idea that less risky investment opportunities will become more attractive.

“This expectation could be prompting some North American VC investors to re-evaluate options that could provide reasonable rates of return at lower risk should rates rise as expected”. Evidence may be shown in the 30% decline in VC dollars or the 16% decline in the number of VC deals. If this type of environment holds, startups will indeed have a more difficult time of raising funds than before. This could also mean that high growth companies that have more fundamental metrics could overshadow those that require large amounts of capital before seeing more traditional signs of success. While the FED decision might not be directly connected to the decline in VC activity, it at least appears to be symbolic of period of financial tightening.


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