Startup Wars: The Fed Awakens - use their force!

It’s been 10 years since the last Star Wars movie was released and it's exciting to see the franchise break all the box office records reaching $1bn in record time. But I’m actually more interested to see the Fed awaken after their “extraordinary 7 year period” of policy experimentation and figure out how to think about what it signals for building the next $Bn startup. In this article, I'll discuss how you can juggle the cost of capital and yet use the force of innovation to drive a successful strategy for your business, pointing you to a case study that led from bootstrapping to a $1.5bn outcome.

.25% ... why should you even care?

After a period of 78 months of economic expansion, it’s only a quarter of a point, borrowing costs are still incredibly low, and there’s been none of the damaging inflation originally feared. And as startups and VC investors all know:

• Innovation drives growth
• Growth drives valuation*
• Valuation drives returns

(*hint: this is one thing that might change!)

So why is this significant? Simple. It’s the signal, not the measure. Last time the Fed raised rates, they were raised more than 4% in just two years.

Source: WSJ

I’m no forecaster or economist, and I'm by no means the only one who sees this coming - see the Goldman Sachs forecast below:

No matter where rates go from here, my prediction is simple: the notion that cash is king is going to come back and the king will be back in town for a while. Even if I'm wrong, it’s an opportunity to re-evaluate your relationship with money.  Valuations are up for nothing other than re-evaluation.

[click to tweet]  Witness the markdowns of billion dollar companies like Snapchat, Dropbox, Zenefits, Gilt Groupe and others. As investors, we’ve witnessed more bad decisions made by people than you can imagine because they don’t value money. And why would you if it’s been free flowing?

"Nothing sedates rationality like large doses of effortless money." - Warren Buffett

I’ve not seen the new Star Wars movie yet, but I've seen the startup movie and it doesn't end well when you don't value cash [click to tweet]. By contrast I've seen many great entrepreneurs win the race (market) just by pacing themselves to cross the finish line. Read a great example here. 

Maybe it’s time to at least ask some basic questions:

• How much capital does your growth require?
• What will be your cost of capital over the lifetime of your venture?
• Can you afford to grow at all costs?
• When will growth not be the basis for valuation?
• What if factors beyond your control impact your growth?

So how could you re-evaluate? That depends on what stage you're at. Due to formatting limitations in LinkedIN I've offered some specific thoughts in the SlideShare below …

 Good economists are capable of arguing both sides of economic theory so I want to at least give a nod to that approach and be clear that it usually doesn’t make sense to worry about factors beyond your control such as:

• Global, social, and macro forces
• Consumer confidence
• Economic cycles which come and go

Think about it. Last year oil was at $110 a barrel and leading up to that all investors could seem to think about was alternate energy. Now at ~$35 a barrel, not so much. But did that cause Elon Musk to shelve Tesla's plans for cars and batteries? Indeed, I’d argue that great entrepreneurs are defined by how they either react to or use factors like these.

Just as necessity is the mother invention - disruption is the force of innovation [click to tweet]

Economic cycles can be part of the disruption that you can take advantage of or ride through. Great entrepreneurs think of what discontinuities they can predict, shifts they can take advantage of, trends they can ride, and disruptions they can create. What opportunities can you seize in the wake of such change?

Conclusion: With the interest rate hike, small as it is, there is a signal. Take the cue to look at how you value cash, your customers, how you do business with them and most importantly where you derive and build value. If you’re delivering real value to your customers, they will pay you for it. How do you know? Ask them. Test it. If you can hike your rates and they are getting true value, they’ll pay for it. That’s a rate hike you can control. It’s your business. Be an entrepreneur - build it with your values. (And please share what you value in the comments below.)

Read here for the story of a great entrepreneur who did just this and defined money not just by value but as a value in his culture and bootstrapped his business to a $1.5Bn outcome. 

At Underscore VC, Michael and his team partner with daring entrepreneurs to invest in founders and build from inception to market leaders. As a former entrepreneur turned VC, Michael has backed and built teams that have created billions of dollars of value focusing on large, market-changing technologies such as Cloud Computing, IoT and Big Data as well as disruptive business models such as Open Source and SaaS. Current representative investments include Acquia, Cazena, Demandware (NYSE:DWRE), Mautic and Salsify.

Follow Michael on LinkedIn, Twitter @mjskok, his website, and in his Harvard Innovation Lab class, Startup Secrets. Follow Underscore VC on the web and Twitter @underscore.vc.