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This is very counterintuitive. Startups are valued based on discounting the future cash flows of when they (may) get big. Some of that is risk, some is the und

This is very counterintuitive. Startups are valued based on discounting the future cash flows of when they (may) get big. Some of that is risk, some is the underlying risk-free. Let’s say the govt rate is 6% and the risk is 6%. If you’re discounting cash flows from 10 years out (when the company is full sized) then every future dollar is 1/(1.12^10) dollars today. If the riskfree rate is 2% then that future dollar is worth 1/(1.08^10) - a lot more! Since startups have no cash flows today, their value is all a risk adjusted bet in future cash. Another intuition is when you need funds, it’s best to get them when money is cheap. (The lower the interest rate, the less you have to pay later for money today) Note - this isn’t precise, and there are exceptions, but generally I’ve thought that startups do well with low rates.

CompelTechnic 8y ago
Although the article keeps everything in the abstract, I think an example should compare the interest rates different businesses can get. Say, when rates are low, an established business can get credit at 3%, and a startup at 6%. When rates are high, an established business can get rates at 6% and a startup at 9%. In this low-rate environment, the established business can take on 2x the leverage of the startup while paying the same interest, but in the high-rate environment only 1.5x. Low rates encourage all firms to use credit, but the countervailing competitiveness of large/stable firms diminishes the ability of startups to take advantage of it. This is all speculative on my part.
- mathattack 8y ago
  You’re partially correct. Large firms are less risky so they have easier access to credit. Smaller firms have a higher percentage of their value tied up in the future, so they get a bigger future value than the startup. (Safeway’s profits today will be within a few X of their profits in 2029. Slack’s could be 50X.)
- charlesdm 8y ago
  The question often isn't the interest rate. Any large multinational company can pay 1, 3 or 6% on debt. It's the amount of money firms can borrow. Banks are throwing money around at the moment, for free.

CompelTechnic 8y ago

Although the article keeps everything in the abstract, I think an example should compare the interest rates different businesses can get. Say, when rates are low, an established business can get credit at 3%, and a startup at 6%. When rates are high, an established business can get rates at 6% and a startup at 9%. In this low-rate environment, the established business can take on 2x the leverage of the startup while paying the same interest, but in the high-rate environment only 1.5x. Low rates encourage all firms to use credit, but the countervailing competitiveness of large/stable firms diminishes the ability of startups to take advantage of it. This is all speculative on my part.

mathattack 8y ago
You’re partially correct. Large firms are less risky so they have easier access to credit. Smaller firms have a higher percentage of their value tied up in the future, so they get a bigger future value than the startup. (Safeway’s profits today will be within a few X of their profits in 2029. Slack’s could be 50X.)
charlesdm 8y ago
The question often isn't the interest rate. Any large multinational company can pay 1, 3 or 6% on debt. It's the amount of money firms can borrow. Banks are throwing money around at the moment, for free.