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Friday Letter: Don’t worry, inflation won’t stop the venture engine

With a potential interest rate hike on the horizon, some VCs see a potential impact. Sarah Liu, newly promoted partner at Fifth Wall, says: 'The top start-ups will probably actually fare all right.'

Inflation and interest rates are linked together. It’s an ongoing topic in the corporate world and among consumers. But I don’t often hear venture capitalists talking about inflation and its impact on VC.

Last year, over lunch, I brought up the subject of inflation to a GP, and our conversation then turned to the rising prices of tickets to see the Golden State Warriors. Suffice it to say, inflation and venture investing aren’t often talked about at the same time.

GPs look at the long game, of course. And if interest rates were to rise, that might make venture capital more affordable than other forms of financing for entrepreneurs, thus boosting demand for VC rounds from start-ups.

Well, it’s not just an ‘if’ anymore. The US Federal Reserve is looking to tighten monetary policy at a much faster pace than observers thought it would just a month ago as a way to allay concerns over inflation. In a poll by Reuters, economists said inflation is the biggest threat to the US economy this year.

And now I’m hearing a few people in the venture community bring it up. Just this week, I’ve had conversations with GPs and LPs and, for the most part, they see valuations coming down as interest rates rise. That won’t slow investing, but it should spark more deployment.

One of the VCs I spoke with this week was Sarah Liu, who was promoted to partner at Fifth Wall. She noted that when the pandemic began in early 2020, the venture world slowed, but that it has sped up since the latter part of that year.

“I feel like we’re at another inflection point in the market,” she said. “We are seeing things start to potentially slow down a little bit again, as well. And as interest rates to are about to go up, I think that there’s some reconsideration as far as how we price rounds, how quickly we deploy capital and just thinking about where we are, as far as the market cycle goes.”

But she added: “The top start-ups will probably actually fare all right and continue to raise competitive rounds.”

Let me know what your thoughts are on inflation and its impact on VCs. You can email me on this or other topics at agoldfisher@buyoutsinsider.com.