What Founders Should Know About Interest Rates

Between 2008 and 2021, the market was operating under zero-interest rate policy (ZIRP). That changed in 2022 back to historically normal interest rates (5-6%) set by the Federal Reserve.

Interest rates drive investment behavior. Low interest rate periods lead to risk taking for long-dated returns (venture capital, moonshots). High interest rates lead to short-term decisions which value revenue over growth.

For many founders, their entire career happened under ZIRP.

What adjustments need to be made?

Founders should probably not model or emulate the success of companies in the last 10 years. Many investments did not appear bad during ZIRP and malinvestment doesn’t become apparent until later. As Warren Buffett said, “Only when the tide goes out do you discover who’s been swimming naked.”

For example, it’s very unlikely a company like Uber or WeWork would happen in our current economic environment. Blitz-scaling seems less viable when the cost of capital is much higher.

Getting stuck between environments is existential for a startup. With the changing interest rate came suppresed valuations and founders might not clear the bar for their current stage and be unable to raise more capital. Many down rounds, layoffs, and closures happened as a result.

Building a large durable business was always important, but it wasn’t always essential. It used to be easier to make a lot of money without building a business.

Founders need to more tightly control expenses to keep up with expectations. Efficient growth with smaller teams is much more valuable now.

Of course there are counter examples. AI founders and investors clearly feel AI businesses are different as evidenced by the enormous amount of investments being made in the space.