written by
Renjit Philip

Fed Interest Rate hikes: Pointers for Startup founders

Startups Interest rate hike 2 min read , June 23, 2022

Today the Fed (this was written when Fed raised the rates in June 2022), has just announced the most significant rate hike in nearly three decades of 0.75%. What are the implications for Startups?

Nothing more than what the founders expected if they had been paying attention to the events of the last 100 days. Inflation is stubbornly high, War in Europe has pushed up food costs and created supply chain constraints, and oil prices are high. Stock markets have taken a beating along with the bonds and so have the crypto markets. Risk tolerance is close to zero.

The VCs folks at Sequoia are usually pretty fast to move on this kind of a crisis. They famously came out with a "RIP Good times" memo in 2008 (remember that financial crisis?) and the "Black Swan Memo" following the start of the Pandemic in 2020.

There is unlikely to be a "V" shaped recovery. This time it is different as the usual tools the US (still the largest economy) has at its disposal are not there. China is a much bigger economy than it was in 2008. Still, because of their housing crisis, tech crackdown, and zero covid policy, it is unlikely they will be able to untangle themselves enough to help drive the world economy.

Eurozone countries, India, or the rest of the G20 are not big enough to lift the world economy independently and have their issues to sort out.
High Inflation means that politicians lose elections, so Central Banks must raise interest rates. High-interest rates mean a slowdown or a recession (historically speaking).

So long story short, here is my advice to my portfolio of startups drawing on the RIP memo by Sequoia:

1) Cash flow is king, queen, and everything in between
2) Focus on quality hires, right size compensation
3) Cut discretionary costs and reduce all "unnecessary" expenses. Does it not support revenue gen? Cut it! Be kind if you have to layoff people; talent never forgets
4) Charge more for your products if you can, and reduce discounts if you cannot.
5) Drop everything but the essential revenue-generating new features on your product roadmap.
6) Make sure you have a path to positive cash flow, not just accounting profitability. Remember what Paul Graham said about being "default alive" as a startup?
7) Unit economics is again essential (why did it go out of fashion?). No growth for growth's sake; sustainable, profitable growth is back in fashion
8)Fundraising will be more challenging, valuations lower, and the process itself will take longer. Start early and be patient.

All that said don't forget that great companies were created in tough times. GEICO was formed during the depression, and Uber, Snap, and Airbnb were created or borne out of the 2008 crisis.

This, too, shall pass… When you survive the next 12-18 months, you will be the leader of a strong, frugal, and profitable company.