A lot of this is because VCs are in bed with the media, especially tech news sites. They've been publicly and loudly unhappy with the prices of rounds for several years now. They raised an enormous amount of capital over the last few years that they are expected to deploy as soon as possible. This is all coordinated with a drop in public markets and, yes, somewhat of a tech bubble, to force valuations down and make them more palatable for VCs.
Source: Former SV startup CEO currently helping with a raise at an AI company. We aren't getting pushback on anything except our valuation which they constantly use the news of the day to try to lower.
It's not like VCs don't have capital on hand and it's not like they will all have big paydays if they don't invest it. They just want better returns and have for a while.
The whole economy is intertwined. This is a very simplistic way of looking at it, but if you can park risk-free capital somewhere which generates high interest, the opportunity costs of investing in tech become higher, so VCs stop investing. Also - you're committing money in a business with a higher risk of not returning them given the economic outlook of their customers and revenue. Tech isn't isolated from the world.
>"This is a very simplistic way of looking at it, but if you can park risk-free capital somewhere which generates high interest, the opportunity costs of investing in tech become higher, so VCs stop investing."
But if the funds are not investing, that money is not doing any work. How long are investors willing let that cash sit idle before they ask for redemptions?
When interest rates are low, there's a lot more money sloshing around in search of better return, instead of just comfortably getting a high, low-risk return. When more money sloshes around, higher-risk investments like VCs get more money.
Most of these tech companies build business models around giving away money, with a plan of eventually making a profit. They are affected by interest rates because the higher interest rates you have today, the more attractive it is to have money today instead of tomorrow. Interest rates available today are the discount rate for those future cash flows (profit).
This. Historically, a company is fundamentally valued by the discounted rate of its free cash flows into the future. The discount rate is decided by several factors including the risk free rate.....which is frequently tied to interest rates. So interest rates go up, the risk free rate goes up, cash flows become worth less, and corporate valuations go down.
in addition to the article mentioned by the replier, also, keep in mind that the way that equity markets work: it's all about the ratio of buying to selling. if there's even a small skew in buyers to sellers it can send prices up or down by quite a bit. IE: a 10 Billion$ fund, doesn't need to see 2B sold in order to go down 20%, a much smaller amount sold can affect the price quite dramatically, depending on the ratio. So, if a few buyers turn into sellers, it can cause quite the correction.
also, keep in mind that markets are forward looking to about 6 months. right now they're starting to price in a mild recession.
I think the dynamic for private (VC) money and public markets are different
VC money will dry up as endowments look to shift more money into safer asset class when interest rate is high
public markets company valuation models change with interest rates changing. when rate is close to 0 investors are willing to buy asset with a very long term view for expected future profit (say 10 years). when rates go up that time frame shortens since opportunity cost of buying that stock today is now much higher.
gsibble|3 years ago
Source: Former SV startup CEO currently helping with a raise at an AI company. We aren't getting pushback on anything except our valuation which they constantly use the news of the day to try to lower.
It's not like VCs don't have capital on hand and it's not like they will all have big paydays if they don't invest it. They just want better returns and have for a while.
blululu|3 years ago
slavoingilizov|3 years ago
bogomipz|3 years ago
But if the funds are not investing, that money is not doing any work. How long are investors willing let that cash sit idle before they ask for redemptions?
wutbrodo|3 years ago
tyrfing|3 years ago
gsibble|3 years ago
throw8383833jj|3 years ago
also, keep in mind that markets are forward looking to about 6 months. right now they're starting to price in a mild recession.
crate_barre|3 years ago
[deleted]
kooshball|3 years ago
https://www.investopedia.com/investing/how-interest-rates-af...
I think the dynamic for private (VC) money and public markets are different
VC money will dry up as endowments look to shift more money into safer asset class when interest rate is high
public markets company valuation models change with interest rates changing. when rate is close to 0 investors are willing to buy asset with a very long term view for expected future profit (say 10 years). when rates go up that time frame shortens since opportunity cost of buying that stock today is now much higher.
tschellenbach|3 years ago