These next few posts have been in the queue for a long time.  But, they are still relevant- and can help us learn how to run our own businesses better. Hope you enjoy them!

Now that the Fed (US Federal Reserve) is clamping down (ok, raising interest rates ¾ of a point at a time), startup firms are finding it very difficult to connect up to venture capital investors.  OK- they can connect up to venture capitalists- but the money is simply not flowing their way.  (By now, we’ve already learned that the area of “free money: is about over.)

Venture capital funding was down 8% (comparing the fist six months of 2022 to the first 6 months of 2021)- but venture debt (bonds, loans) was up 7.5%, reaching $17.1 billion in the first six months of 2022.  Yet, the interest rate for those investments is close to 10%, which means balance sheets and profitability are negatively affected.

It got even worse in the 3^rd quarter- where $ 90 billion in VC funding disappeared (only $ 81 billion were completed)  compared to 2021.  The drop was pretty uniform for both early stage and late stage VC funding.

Yet, even credit funding is dropping.  While it reached record levels in Q2 2022, the amount of credit funding had dropped in ½ by Q3 2022.

Moreover, the concept of going public has also been negatively affected.  145 firms went public in 2020- and that doubled in 2021 with 303 public offerings.   And, for the first 10 months of 2022, there were only 59 public offerings.

Yup.  Now, the game may be credit, it’s certainly not equity.  (We relied on debt financing when we began operations for our medical device manufacturer years and years ago.  It wasn’t the worst choice.)
And, obtaining credit funding means these tech firms can still progress.  It also means there should be no “down rounds”- occasions when the tech startups are provided equity- but those cause the firm’s valuation to drop.   (NOTE:  It’s not just the startup that wants to preclude a down round; investors have a strong avoidance desire.)

So, it looks like the Fed policies are having a great affect on startups- even though inflation is not being harnessed by the Fed policies.  (Now would be a good time to realize that the inflationary pressures are world-wide, not based upon domestic conditions.)

(And, as I reported last week, the F3d interest rate hikes have cause two mid-sized banks to fail.  OK. not quite true- these midsize banks were asleep at the wheel and could have done much better job of managing their risk. )

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