It Is Always Time to Build

Interest rates do not equal innovation rates

January 5, 2023

There are some dumb ideas online that I am compelled to correct. Like this:

It's funny that there was exactly an 18-month period where interest rates were low enough

To fundraise for as crazy of an idea such as space factories

And we got enough funding that we're going to make the damn thing work now, irrespective of current rates

Funny funny

or this:

Jack Raines@Jack_Raines

We lived in an era of near-zero interest rates where we could have borrowed virtually unlimited money to fund cool stuff like high-speed rail networks, cancer treatments, and nuclear reactors.

Instead we got the metaverse and monkey JPEGs.

Or this paragraph from the otherwise excellent Newcomer newsletter: “There’s an argument that the best time to invest in bet-the-farm, wildly optimistic companies are [sic] already in the rearview mirror. When interest rates were essentially at zero—as they were for much of the past decade—that was the time to change the world. Now markets are pressuring companies to show they can turn a profit and deliver cash flow in the near term.”

The sentiment that low interest rates made highly risky companies fundable is one that has come up again and again in my private conversations with venture capitalists. There is this tribal belief that because interest rates are higher, it’s time for “safer” startups to prevail.

They are wrong.

While there is some merit to the idea that when interest rates are lower, risky ideas are funded because returns are more challenging to find, it misses how great companies begin. If you’ve read the histories of Gates, Jobs, Ford, or Edison, they didn’t worry about federal interest rates when they started their companies. Technology companies came to be because scientific advancement met charismatic founders and risky happy financiers.

Increased interest rates have a dampening effect on investment decisions but do not dampen innovation decisions.

To move beyond hyperbole, I pulled the interest rates for when 21 of the greatest technology companies of the last 100 years were founded.

The average? 5.07%.