Rate Cuts! A Game Changer for VC?

The Fed has just cut rates by 50 bps and is on track of further cuts. Without delving into the merits of the decision — since, as Austrians rooted in sound economic theory, we oppose any form of price control — the key question for Silicon Valley is: How will this affect the VC industry?

Across every possible dimension – capital raised, dealmaking, exits and distributions – VC has been struggling since the onset of monetary tightening in early 2022 (for more details, see: US VC Fund Performance Q1 2024).

There are numerous examples of how unnaturally high interest rates can stifle entrepreneurial spirit. Truly, the delicate balance between savings and investments can be only maintained in free markets. However, in a world driven by central monetary policy making, business cycles are inevitable (on the flip side, artificially low interest rates lead to bubbles). Hopefully, we are entering a phase where capital will once again flow toward entrepreneurship.

Indeed, after the Fed rate cut announcement, bank deposits & money-market funds already experienced sizable outflows. And stocks, Nasdaq and NYSE, soared.

Perhaps, the most important thing to look at now is how the IPO market will respond. The tech IPO has been broken for the last 3 years. Only 15 tech companies IPOed in 2022-2023, the lowest mark in history. Meanwhile, over 100 great tech companies are in cue to access the public markets, waiting for a shift in sentiment.

This window closing has led to a liquidity crunch, with VC funds seeing gains only on paper, but no real DPI (Distributed to Paid-In Capital). The only source of liquidity has been through secondaries, which has been far from enough to recycle capital back to the LPs.

Conclusion

Entrepreneurship is super hard, and venture investing is a tough business, typically demanding more than a decade of gestation.

It has been rough years for the VC ecosystem.

But, independent of the Fed, there are other reasons for renewed optimism; we are now witnessing the rise of the most exciting tech wave yet — AI.

We are just at the start.