Interest rates have rose to levels not seen in recent history, meaning startups and tech companies are likely to be operating in a business climate not seen recently: an environment of elevated but stable interest rates. This rise in interest rates has primarily driven the transition to a more challenging environment for startups over the past 18 months, affecting everything from VC/fundraising to top-line growth to day-to-day operating costs. As we head into 2024, the question on everyone’s mind regarding interest rates is, how do we plan for the future? I recommend that companies focus on three things: (1) innovation ROI, (2) capital preservation, and (3) risk management.
Return on investment
In terms of ROI emphasis on innovation, growth is still paramount at tech companies, but they need to grow in a way that yields ROI and ultimately cash flow. In their early years, most tech companies are funded by venture capital, specifically designed to finance businesses that lose money initially, taking significant risks (and big losses) to eventually make outsized profits.
The interest rate trajectory has been more stable in recent months.
This assumption still holds true today, and high growth is the primary indicator of a new company’s ability to eventually generate significant future cash flow. This is true in all interest rate environments. However, the nuance is that with higher interest rates, the value of future cash flows is discounted at a higher rate (worth less today), so the relative value of huge outsized future returns versus current losses is more muted.
The interest rate trajectory has been more stable in recent months. At this elevated but not astronomical level, technology leaders should continue to emphasize investments and projects that will drive growth. However, they will need to do so with greater visibility — and tighter timelines to realize the benefits. Specifically, this means funding projects (often product builds) with clear—at least—medium-term (six to 18 month) paths to revenue growth and/or cost reduction.
This does not mean that projects that only affect the user experience are ignored. these are always relevant, but it means, for example, being clear about how this user experience improvement will lead to product loyalty that, in turn, moves a desired metric (which in turn likely affects revenue or the cost). Clearly state this metric movement and hold project leaders accountable for it.
