The "Zero Interest Rate Phenomenon" is a sham.
Suddenly, the startup ecosystem is plagued by selective amnesia. It’s embracing the facile, reductionist narrative that cheap money justifies leaders spending recklessly.
There's a narrative that’s been circulating around the venture backed startup community over the past year or so. It goes something like this: For about 15 years, interest rates were zero or near zero. This made money cheap to borrow and it made it tough for investors to find high growth places to put it. So investors stashed their money in higher risk, higher reward vehicles like venture capital funds for startups -- and startups were incented to take that money because it was so cheap. Now that money isn't cheap anymore, the party's over.
For anybody who remembers subprime mortgages circa 2007, this should ring a bell. Leading up to that crisis, banks made it way too easy for average folks to take out mortgages well beyond their means. Not everybody participated. But a huge chunk of the population either exploited or fell victim to the phenomenon.
It was easy at the time to blame foreclosure problems on the banks. And it's easy now to blame some of the economic hardship in tech on interest rates. But to be a startup owner or operator at scale is not the same as being an everyday citizen… At least, it shouldn’t be.
Lately, my LinkedIn feed has been absolutely inundated with nonsense about zero interest rate phenomena.
Over-engineered all the things?
✨ Zero interest rate phenomenon.
Hired way more heads than necessary?
✨ Zero interest rate phenomenon.
Acquired customers at a huge loss figuring they'd monetize later?
✨ . . .
Suddenly, the startup ecosystem is plagued by selective amnesia. It’s embracing the facile, reductionist narrative that cheap money justifies leaders spending recklessly.
And hardly anybody is questioning it.
Let's be clear. The type of waste we've witnessed at tech startups for the past 15 years absolutely could not have occurred without cheap money. But cheap money in and of itself is not dangerous. Leaders who take more of it than they need and spend it irresponsibly? They're dangerous.
I've done so much work in the startup ecosystem over the zero interest period. Some of the startups were super lean. They kept expenses low. They only grew when it made sense. They pushed back on receiving big checks. Some of them didn't. Some of them took big checks because VCs insisted or simply because it was too tempting. Then, they had to find ways to justify the spend. So they overhired and over engineered. Over, and over, and over...
Of course, it's largely the startup owners and operators in that latter group who are now ‘educating’ the masses on zero interest rate phenomena. But maybe if there's anything we've learned here, it’s that austerity should be how startups work by default. Not only when interest rates are above zero.