Lots of mature companies use leverage: if you have a million to spend, you can just ask the bank to give you another two million so you can do three times as much. [1]
If you do have three million sitting around, you still have to consider if you can invest it somewhere else for more money. Why do a low-return project if you get more from investing into bonds?
And of course VCs don't get their money out of thing air, they also have to compete with all other forms of investments for money. So if short term bonds become more attractive while capital is harder to get for potential investors that puts pressure on VCs, who will pass it on.
Of course the actual dynamics are complicated and could fill books. But in the end if you are loaning money you have to do better than the cost of capital, and if you have money your own profit margin still has to outcompete other potential investments.
It's still money and money is like sterile water. If the 0 risk interest rate is 4% and your little project will yield 1%, you are much better parking the money at the bank. Of course, it's a bit more complicated than that; and people like to do projects and build stuff.
But I have seen this in a construction company when interest rates were high (different country, not US). "Big Boss" was always "uncertain" about any new construction work and the bank paid him around 7% to park his money. Come the time when inflation started rising fast (that was 2018, pre-pandemic); and suddenly all that capital was deployed without an after-thought.
So yeah, these interest rates number have real effects.
VC $ works out the same. 18-24mo, with an even higher burn than a bank would accept, and the assumption that you can raise a 2X+ bigger round at the end of it to pay for the previous staff + next round of hires.
VC $ works the same as short-term bank loans? how? in any case, all of this interest rate "math" the parent wrote is only applicable to short-term loans. This is math for a shawarma stand, not a company that raised 300 mil of non-borrowed money.
The interesting difference, and current problem, is VCs expect raised funds to be spent as burn on hiring more people despite existing people already being paid from VC capital instead of revenue. And they expect that to keep happening: each next round will be bigger and cover even bigger payrolls. If the next round doesn't happen, layoffs, and if flat (ex: bc markups are down 3x), dilution & quitting by the best - either way, downward spiral that is hard to return from. The gamble is nothing breaks while this happens -- doubling down the bet.
With interest loans based on revenue, it's fine to stop whenever bc you have revenue for (most of) payroll.
Operationally, that expectation is now worse than interest. In the good times, it was free money for free growth, but with fewer and marked down rounds, a killer. Some founders value efficiency, which avoids this issue, but in the last few years, VC boards certainly were encouraging inefficient growth, meaning bad times for such VC-dependent companies.
aren't these companies continually raising funds to stay in operation, which would mean they would be looking out as far as their next anticipated investment and those rates? Looking up CircleCI in particular on crunchbase it looks like they've raised an investment in all but 2 years of the last decade. Last one was two years ago and presumably they'll need more soon if they aren't profitable.
VC funds are not directly controlled by the federal interest rates but their ability to get _their_ investors to invest in the VC is affected. VC funds tend to get less investment when the return on cash becomes much higher. If the VCs cant get enough funding then they are going to turn around to their investments and either whip them to make more money or start giving worse terms to companies looking to raise another round
If you do have three million sitting around, you still have to consider if you can invest it somewhere else for more money. Why do a low-return project if you get more from investing into bonds?
And of course VCs don't get their money out of thing air, they also have to compete with all other forms of investments for money. So if short term bonds become more attractive while capital is harder to get for potential investors that puts pressure on VCs, who will pass it on.
Of course the actual dynamics are complicated and could fill books. But in the end if you are loaning money you have to do better than the cost of capital, and if you have money your own profit margin still has to outcompete other potential investments.
1: https://en.wikipedia.org/wiki/Capital_structure#Leverage