(Bloomberg) — Wall Street rejoiced over this week’s interest rate cuts, but there’s another investor class that was just as enthusiastic: venture capitalists.
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The tech correction of the last couple of years has left many startup investors longing for the Federal Reserve’s bygone zero interest rate policy, or ZIRP, which helped fuel the industry’s boom in 2021 at the height of the pandemic.
Today, the 50-basis point rate cut, the first decline in more than four years, is a “reason for optimism,” said Anna Barber, partner at M13. She expects that consumer and business spending will eventually go up. Barber also said the rate cut could encourage investors in VC firms, or limited partners, to be more optimistic about the asset class. “Capital will flow more freely at lower rates,” she said.
The policy could even lead to more startup sales, Barber added. She noted that less expensive debt could make it easier for companies to finance acquisitions.
Interest rates impact the economy in countless ways; one effect is that low rates encourage more consumer spending because there is little incentive to keep money in a savings account. Consumer-facing Silicon Valley startups had benefited from this phenomenon. Venture capital firms can also be buoyed because safer assets like Treasuries yield less, and startups can borrow more freely.
Jeff Richards, managing partner at Notable Capital, is also hopeful about the rate cut. He sees more startup liquidity events on the horizon, including more tech public listings, which have been sparse since rates increased in 2022. “It should be positive for the IPO market,” he said, “Lower rates generally encourage capital allocators to seek more risk, and newly public companies bring risk.”
Richards said that many VCs have learned their lesson in recent years about how the macroeconomic environment can impact their industry. “This cycle has certainly opened a lot of eyes to the impact of rates, inflation.”
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