Why do startup valuations fall when interest rates rise? – gotechbusiness.com


A new day, another rate hike. Some serious Fed faces have announced they will no matter what curb inflation. Wall Street is invariably in the red and startup outlets are proclaiming tighter capital availability and lower valuations.

But what is the relationship between interest, seed capital and valuations?

Echoing modern monetary theory (MMT), the Fed is raising interest rates to “cool the economy” and prevent a further rise in inflation.

Despite the focus on interest rates, it is the second aspect – inflation and the resulting government response – that will have the most significant impact on founders and the public.

If your customers are taking advantage of inflation, chances are your business will too.

Inflation affects your customers, providers and capital

The startup literature on the impact of inflation on startups focuses on cutting costs, positively setting defaults, managing burnout, and slowing hiring. But some of these measures, while helpful during recessions, are too general to be helpful. Instead, you can better prepare for inflation by understanding how price increases affect your business.

Every business has three major components: customers, suppliers (including employees), and capital. How does inflation affect each of these factors?


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