Silicon Valley investors cheer Fed interest rate cut

Wall The Street cheered the interest rate cuts this week, but there’s another class of investor that’s just as enthusiastic: venture capitalists.

The tech correction of the past few years has left many startup investors nostalgic for the Federal Reserve’s former zero-interest-rate policy that helped fuel the industry’s 2021 boom at the height of the pandemic.

Today’s 50-basis-point rate cut, the first in more than four years, is “a reason for optimism,” said Anna Barber, a partner at M13. She expects consumer and business spending to eventually pick up. Barber also said the rate cut could encourage investors at venture capital firms or limited partners to be more optimistic about the asset class. “Capital will flow more freely at lower rates,” she said.

Barber added that the policy could even lead to more startup sales. She noted that cheaper debt could make it easier for companies to finance acquisitions.

Interest rates affect the economy in myriad ways; one effect is that low rates encourage consumers to spend more because there is little incentive to keep money in a savings account. Silicon Valley startups focused on consumers have benefited from this phenomenon. Venture capital firms may also be supported because safer assets like Treasury bonds pay lower returns and startups can borrow more freely.

Jeff Richards, managing partner at Notable Capital, is also hopeful for a rate cut. He sees more startup liquidity events on the horizon, including more tech IPOs, which have been few and far between since rates were raised in 2022. “That should be positive for the IPO market,” he said. “Lower rates generally encourage capital allocators to seek more risk, and newly public companies carry risk.”

Richards said many venture capitalists have learned lessons in recent years about how the macroeconomic environment might affect their industry. “This cycle has certainly opened a lot of eyes to the impact of interest rates, inflation.” BLOOMBERG