99 Startups Monthly Newsletter - October 2024

After almost four years, this past September 18th, the Federal Reserve made a major interest rate cut in an attempt to stimulate the economy.

This rate cut will not only translate into a positive impact on borrowers and consumers but it will also impact some other sectors, including Venture Capital.

The startup ecosystem will see new opportunities that arise from:

1. Increased valuations. Startups in early stages are usually valued through the multiple valuation approach, which compares a startup’s metric to its peers. In later stages, there is an absolute measure to determine the fair market value which is called the Discounted Cash Flow Methodology. With positive cash flows projected far into the future, this model will discount them to the present with a discount rate, which in part is tied to the risk-free rate, which has been reduced by the Federal Reserve. This will result in higher discounted cash flows, and therefore, higher valuations.
2. Increased investor optimism. A lower discount rate results in more valuable cash flows, making their future potential more valuable today, and therefore boosting investor confidence in startups.
3. Stimulated Economic Activity. A lower interest rate environment will encourage consumer spending, which will benefit startups and will sell more.
4. Increased access to capital. Private investors including Venture Capital and Private Equity Firms will have more access to capital because borrowing costs will be lower, and it will be more likely for them to invest more. This also applies to startups, who will have more borrowing opportunities, leveraging investor’s confidence and resulting in more raised capital.
5. Increased M&A activity and IPOs. When borrowing costs drop, larger companies and private equity firms can finance acquisitions more easily, resulting in increased M&A activity. Also, smaller companies become more attractive targets due to their increased valuations. For the companies that have considered going public, the increased optimism combined with increased valuations will make it a more favorable time to plan for an IPO.

We have seen in the past years a decline in funding, which has not recovered nor has been close to recovering. We hope that with this rate cut it can rise again in the short-term.

While it is evident that there will be many short-term benefits, we should take care and consider possible long-term risks. We can recall before the COVID pandemic some of the effects of lower interest rates in the startup ecosystem. While it surged the investment activity, the subsequent rise in rates exposed the vulnerabilities of many startups that led them to close.

News about our portfolio companies:

• Belo, the app that lets you pay without incurring taxes in Brazil.

Great companies we have recently reviewed:

• MotAI: Uses data and AI solutions to make the motorcycle industry better.
• Frizit: LATAM’s cold-chain logistics for e-commerce.

Recommendations of the month:

• On the Edge: The Art of Risking Everything - Nate Silver: Nates us navigate through the decision-making process of the biggest risk takers, from poker players to crypto true believers and hedge fund managers, and how they approach life.
• Why do we have employee equity at all? | Startup Equity Matters - Beth Nevins, founder of Developa, teaches us how founders can effectively manage equity allocation, develop retention strategies, and cultivate a transparent company culture.
• Mastering Cap Table Management: A Startup's Guide To Success - Dasha Shunina.