Should you invest in a business? If interest rates are zero, the answer is probably yes. When money in a savings account or a bond earns nothing, any reasonable business promising a non-zero returns starts to look good. If it sells electric cars and promises a 10x payday in a decade, all the better. Sure, the business may not make money until then, but neither will the savings account. Savings accounts are also boring. People will buy you drinks to hear about an electric car company, not a zero-interest savings account. So, you invest.
But when interest rates rise, the calculation changes. Now when someone knocks on the door promising a 10x payday in a decade, you look at the cheque from your bank, which reads: “Interest: $1,000”, and think about how easy that was. Maybe you say thanks, but I’d rather receive cheques from my bank which read “Interest: $1,000”. People buy you less drinks, but you can now afford to buy your own.
In a world of zero interest rates, investors call founders. At 4% or 5% interest rates, founders call investors and sometimes the call goes to voice mail. When investors do pick up, they offer far less money, with far more strings attached. Unfortunately this happens just when businesses most need money. Higher interest rates mean fewer jobs and less spending. Bad for business.
Last week, MilkRun, an Australian business that delivers groceries by bicycle, said it would close. Here’s founder Dany Milham in an email to staff, reported by the Australian Financial Review:
“Since we announced our structural changes in February, economic and capital market conditions have continued to deteriorate, and while the business has continued to perform well, we feel strongly that this is the right decision in the current environment.”
MilkRun, which was recently losing money on each order, had spent months shopping around for more funding. Last year they raised a record haul with help from giant US fund Tiger Global Management. But investors aren’t picking up the phone anymore! Here’s one, quoted in a separate story:
Investors are wary of funding companies that don’t have a very clear commercialisation plan. We need to be clear about how that business is going to make money and generate revenue.
When the bank sends meaty interest cheques each month, investors start to ask hard questions, like: “Do you make money?”, “Will you ever make money?”, “Will you make me more money than my bank?”