Interest Rate Cut Could Help Jumpstart Venture Capital Funding
As most analysts predicted, this week the Federal Reserve voted — nearly unanimously — this week in favor of a historic half-point interest rate cut, a move welcomed by many borrowers and investors alike. But, to be fair, because so many analysts saw it coming, changes were already being priced into key market segments.
Inflation — which had hovered around 9 percent two years ago — landed at 2.5 percent in August, something that likely informed the Fed’s decision. The drop in inflation and the anticipated rate cuts meant many prospective home buyers were being offered reduced rates on residential property purchases weeks ahead of the Fed’s decision. Accredited investors were also seeing discounts long before the 50 basis point cut was announced. The commercial real estate market, for instance, was showing renewed signs of life months ago.
“Wall Street’s storied commercial real-estate lending machine has been running at full tilt since early summer, helping ease some of the pain of a debt hangover created a decade ago,” reported Marketwatch a week before the big cut.
[Read Susan’s recent analysis of the West Palm Beach real estate market.]
Now, other non-mainstream market segments — namely venture capital (VC) and alternative asset funding — may also be poised to benefit from the newly reduced rates. Financier Worldwide recently reminded its readers, “... as interest rates decline … investors are likely to give alternative investments … a closer look.”
Fintech funding could also benefit in the new rate environment. According to the World Economic Forum, “fintech has consistently ranked as one of the top sectors in terms of VC investment, attracting a 12% share of all VC funding on average.” However, “rising interest rates dampened valuations, leading to a decline to $30 billion in 2023 – marking a 67% decrease from the 2021 [fintech] peak.”
Now, thanks to lower borrowing costs, that may be changing. “As … investor confidence returns, the fintech industry is well-positioned to attract renewed interest, fuelling the next wave of innovation and growth,” according to the WEF. But it isn’t only fintechs that stand to benefit. The same factors that tightened fintech funding in recent years also significantly dampened other VC investments, according to one recent study.
“VC Fund Performance,” from Carta, looked at more than 1,800 venture funds and found that fundraising and liquidity both dramatically slowed since 2022, with about 60 percent of VCs receiving less than $25 million in capital commitments during the last two years. “[Venture] fund managers have found themselves in a heightened competition for limited partner dollars across many asset classes,” Carta concluded.
Now, with significantly lower interest rates a reality, funding prospects for VC funds could improve. Although it remains to be seen how venture capitalists will react to the lower interest rates, Carta’s findings suggest that some accredited VC investors — many of whom have been sitting on interest-bearing cash reserves for the last two years — could now be incentivized to support new endeavors. If so, it would likely be welcome news to cash-strapped startups.
VC funds may not be a good fit for rank-and-file investors, but if you’re an accredited investor interested in supporting startups — especially those deploying new technologies like artificial intelligence, blockchain, robotics, and more — learn why the Avestix Venture Fund may have a place in your portfolio.
