An inside look at how interest rates are pressuring VCs and stifling innovation | TechCabal

This article was contributed to TechCabal by Yacob Berhane, Co-Founder & CEO of Pariti. Founders…we’re not the only ones struggling. In the past 18–24 months, we’ve heard the term “dry powder” over, and over again. Basically, the perception is that after record-setting fundraising years, VC funds are sitting on massive piles of capital that they haven’t deployed. The perception in many of my conversations with founders is that investors are sitting on cash and watching us flounder. The reality is far from that. I wanted to write this for my fellow founders who may not have the time to research or may not have had the exposure to capital markets as I did during an investment banking stint. Hopefully, this is helpful and informative in tying some of the different threads on this topic together. Sorry for the jargon; I’ve done my best to link back to useful resources to help you along the way. This isn’t a pity party for investors; it’s a reality check for us. There’s no one coming to save us. We have to build resilient businesses solving big problems, with great distribution/moats, adapt to the new AI world, and still grow at exceptional rates. If that sounds ridiculous, it is. But so is believing we can build a unicorn and change the world—right? Mario Gabriele, writing in The Generalist, once said, “If the 2020s have one ultimate message, however, it is that we live in the most chaotic timeline. This is the age of superbugs and superbubbles, lockdowns and collapses. Welcome to the roaring twenties: a decade of pandemonium.” The quote above captures the essence of what it means to be a founder, especially a millennial one. We’ve come of age in rapid boom and bust cycles and now need to get comfortable with the reality that until interest rates come back down, there’s no reason to believe the VC dollars will start flowing at a high clip. It would be awesome to look at the Fed Funds Future contracts and be able to predict rates, but I’d rather spend time and effort figuring out how to build a phenomenal business that solves massive problems. This allows us to endure the hard times so that we’re able to appreciate the good ones to come. Topics to unpack New normal for founders and investors. The definition of a good deal has drastically changed. Yes, as founders, it feels like the goalposts have now moved—they did! But not just for us. VCs are struggling to raise. If you check the data, you will see that it’s hard out here for everyone. If you’re a VC that doesn’t have a good track record of DPIxTVPI or some solid name-brand exits, raising the next fund is an uphill battle. Focus on protecting portfolio value. General partners (GPs) have needed to and will likely continue to focus on the bird in hand rather than over-indexing on the birds in the bush, thinking (and/or hoping) their portfolio founders will just figure it out. Funds have ring-fenced capital to their portfolio to ensure survival for their winners and potential winners (as best as they can) to be able to ride out the storm (hopefully). It’s also a new world for a lot of VCs. Many GPs are new to this game and have never been through a bust cycle just as us founders, so we’re all learning in real time. We also must remember our investors have other investments and only approximately 30 days in a month. So, a good exercise for us founders is to look at the size of the fund compared to how much they invested and consider what they mark you at and the likelihood you’re a fund returner or not. It’s not easy, but that level of sobriety is critical, especially in these times. Opportunity cost for calling capital. Depending on the limited partner (LP) base (institutional, endowment, pension fund, HNWI), they can have different capital needs. In an environment where you can earn 500+ basic points (bps) risk-free and be able to get out of money markets in days, it begs the question: Why allocate into illiquid asset classes like early-stage equities, especially when your public market equities are down over-indexing the portfolio in equities in general? So now what?   Ask yourself: Is this my life’s work? If it is, you’re playing an infinite game. There’s no shame in losses that come with that, as long as you operate with integrity and genuinely are obsessed with solving a problem that can improve the lives of others. This whole thing is a series of experiments. Something else that’s important to align with your leadership team and major investors is: Are we going for default alive, investable, or acquirable? Be clear and decisive here.  Remember: build something that matters to people. We obviously all want to be fund returners, unicorns etc. Sometimes that’s not in the cards. Sometimes it is. What is in your control is being customer-focused and obsessed with solving problems using data and feedback. At Pariti, we’ve realised that by co-creating with our community building around data x AI models, we can change capital and talent markets and empower people to earn. Supercharging their efforts with AI does not replace them. Some of our community referrers are earning more monthly than the average GDP/per capita in Africa. Are we satisfied? No! But every day I get reminded that there are people in the world grateful for what we’ve built, and that reigns supreme above all else. For those of us who make it through this cycle, I believe the businesses we are building will be some of, if not the most, transformational businesses the world has ever seen. If you want to learn more about this and other related topics sign up here. I’ll be interviewing founders/investors over the coming weeks to unpack more of these current events and get different perspectives from early-stage to growth-stage founders & investors.