InCred shows expensive money no hurdle for top business ideas, execution teams

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₹500 crore in funding. This is a testament to the enduring allure of sound business models and strong execution capabilities, even as venture capital has become a whole lot more expensive and scarce than in the prolonged period of near zero policy rates in the US, and more mature startups fail to get additional funding, thanks to an overvaluation overhang. The US Fed began raising its policy rates in March 2022, in response to rising inflation, amid expectations that the rate rising practice would continue for months on end.

This expectation of ever-rising rates and uncertainty over how high the rates would go and when they would stabilize and start coming down hit the supply of venture capital arising from the US, the biggest source of venture funds in the world. According to an EY briefing paper, in the four quarters to Q2 2023, US-based venture funds invested $145.6 billion in 9,758 deals, whereas, in the previous four quarters, they had invested $317.1 billion in 14,935 deals. The invested amount had come down by 54%, the number of deals, by 35%, and the average amount invested per deal by 30%.

In an era of easy money, valuations tended to be high, and the hurdle rate for receiving additional doses of capital, low. When the risk-free rate of return climbs, valuations of assets fall, as the discount rate applicable to the expected stream of incomes goes up. As policy rates climb, the earlier rounds of capital infused in a startup would appear to have produced excessive valuation of the startup in question, making it difficult to sustain capital infusion at that valuation of the company.