Briefing Summary

  • Interest rate increases have created a domino effect in the market for startups and established businesses, making money more expensive to lend & borrow
  • With fundraising rounds less frequent and credit lines more expensive, companies will be increasingly cash conscious and focused on profitable revenue
  • Sellers need to adapt new tactics for this era where CFOs have more weight than ever before
  • Product-focused messaging will fail, automation is not a cure-all, and being blaisé about your own numbers is a surefire way to get caught flat footed
  • Sellers need to be focus on workflows, fish for deals like a spear fisher, and be disciplined about their own numbers

The end of easy money

Since the early 1980s, interest rates have been trending downward. It's seemed like a law of physics that interest rates would gradually go lower and lower. This was not always the case – as you can see from this historic chart between 1955 and today.

Consider if you had a billion dollars. (I mean... one can dream) The safest bet to preserve those billion dollars is to buy a bond, usually from the US government. You're loaning money to the government and they promise to pay you back at some date in the future.

The problem is starting in 2008, bonds would offer you, uh, basically nothing in return. That's the interest rate. (See chart above) So you could buy a bunch of bonds and preserve your pool of cash, but if you're a pension fund or a big institutional investor, you need the pool of cash to grow every year.

So you dedicate a big chunk of money into venture capital funds to make extremely risky bets on startups – most of whom fail. But if you invested in the fund that creates Uber, Airbnb, and so on, you get a huge payout compared to your bonds.

Consider in 2021: the average internal rate of return (IRR) for venture capital was 19.8%. That is much much higher than a 2% US Treasury bond. But like all risky strategies – that's an average for one year. (If you can find it, check the VC return in 2009 or 2016). Many funds will earn very little in a given year, and many will earn well above that average.

Source: Pitchbook

But now interest rates are increasing. Bonds are now worth something – and they're a much safer bet than those risky VC funds.The Fed continues to increase interest rates, making these bonds all the more attractive.

Companies and large institutional investors can earn 5% on a bond, risk-free. (Think about that – can your software generate a 5% return for the company??) But anyway, this has created a domino effect in the market: