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The key path
- Capital was extremely cheap in 2020-2021, but inflation forced the Fed to hike faster in just one year. VCS moved from “scale fast, fix later” to demanding clear paths to profitability and free cash flow.
- Money moves in cycles, and founders who forget that risk build their businesses on shaky ground.
- Build flexibility, diversify funding sources, be transparent about how you are adapting to interest rate realities and understand the importance of timing when it comes to investor sentiment.
Back in 2020 and 2021, capital was almost free. The Fed cut rates to near zero to keep the economy afloat during the pandemic. Venture firms and banks were giving money faster than founders could build pitch decks. If you had an idea and a slide and a half of information on TAM, you could get a meeting—sometimes even a check.
But inflation changed everything. By mid-2022, it has hit 9.1%—the highest in four decades.
The Fed had to slam the brakes, raising rates above 5% for essentially nothing over the course of a year. That whiplash left startups stranded in the middle. A friend of mine was planning to roll over a $2 million line of credit at 3%. Overnight, the rate more than doubled. That “just in case” line suddenly turned into a cash-burning liability.
Lesson: Money is never permanently cheap. It goes in cycles – and founders who forget the risk that creates their business on shaky ground.
Related: 4 Ways to Protect Your Business from Inflation
Is the Fed behind the curve?
People like to debate whether the Fed is “behind the curve.” In plain English, this means: Did they wait too long to act on inflation, and are they now preparing for it by staying tighter longer?
In 2021, the Fed described inflation as “transitional”. It wasn’t. When they conceded it, aggressive surges were the only option. Fast forward to today: Inflation has cooled to about 2.8 percent, but borrowing costs are still high. Some argue that growth is offset by Fed risks. Others say they can’t afford to ease too soon because another energy shock or supply chain shortfall could send prices soaring again.
For founders, it’s not just policy chatter. It shapes the value of every loan, every investor decision and every valuation conversation.
Business glasses
When I was raising funds for my first venture, I remember the effects of rates on investor psychology. In 2016, when money was relatively cheap, VCs were willing to ignore messy unit economics. “Scale fast, fix later” was common advice. But in 2023, when I was supporting a different project, the same pitch would have died on arrival. Suddenly, every investor wanted to know: how quickly to profit? What is your path to free cash flow?
Interest rates affect the hidden background against which this conversation takes place. They determine whether risk capital flows freely or moves cautiously. For marketers, understanding that background is just as important as completing your product roadmap.
The numbers tell the story:
Global venture capital funding fell 17% from Q1 2025 to $109 billion in Q2 2025.
Surveys in 2025 still show that access to affordable financing is one of the top three headaches for American startups.
There are real people behind these statistics: Sass’s founder halted expansion because capital became too expensive, an e-commerce startup forced to hit profitability two years ahead of plan, a hardware company that had to cut a creative revenue-sharing deal with suppliers instead of taking on debt.
RELATED: 5 Financial Steps to Take Despite High Interest Rates
Challenges now
These challenges force founders to revise their playbook:
Cost of Capital: Loans, lines of credit and even convertible notes are far more expensive.
Low price: Higher rates mean that investors are more concerned about future earnings, which drags down prices.
The New Investor Mindset: Growth for growth’s sake no longer sells. There is profit.
Long Fundraising Cycle: Deals take longer, and closing cash takes patience.
Advice for entrepreneurs
So, how should founders navigate the current interest rate landscape?
Increased flexibility: Don’t rely on the Fed to save you from cheap money. Assuming today’s rates, your financing structure will remain intact. If they fall, you get the upside.
Diversify funding sources: Explore revenue-based financing, customer payments or strategic partnerships. These alternatives can reduce reliance on expensive debt or weak equity.
Interact with the macro context: Investors know the environment is tough. Be transparent about how you are adapting to interest rate realities. It indicates awareness and strategic foresight.
Time Matters: If you’re not in dire need of capital, waiting for a few rounds can change the playing field. Rates may not go down, but even small cuts can dampen investor sentiment.
In short. , founders need to be students of both microeconomics (their business model) and macroeconomics (the Fed’s decisions). Neglecting one side leaves you vulnerable.
Related: Why Entrepreneurs Shouldn’t Worry About Interest Rate Changes
Long game
Are we in for a new smooth-running cycle, or will the Fed keep its foot on the brake longer? No one knows for sure. But one truth endures: cycles are inevitable. What matters is how well you position your business to survive tough times and thrive when things ease again.
I’ve been through both ends of the spectrum – the joy of cheap capital and the sting of expensive debt. Each cycle reshaped how I think about building a company. If there’s one takeaway, it’s this: Interest rates aren’t just a backdrop to your business story. They are an active character, shaping the choices you make, the risks you take, and the results you achieve.
Traders do not have fixed feed policy. But they have to decide how prepared they are for the consequences. And preparation, more than prediction, determines who makes it to the next cycle.
The key path
- Capital was extremely cheap in 2020-2021, but inflation forced the Fed to hike faster in just one year. VCS moved from “scale fast, fix later” to demanding clear paths to profitability and free cash flow.
- Money moves in cycles, and founders who forget that risk build their businesses on shaky ground.
- Build flexibility, diversify funding sources, be transparent about how you are adapting to interest rate realities and understand the importance of timing when it comes to investor sentiment.
Back in 2020 and 2021, capital was almost free. The Fed cut rates to near zero to keep the economy afloat during the pandemic. Venture firms and banks were giving money faster than founders could build pitch decks. If you had an idea and a slide and a half of information on TAM, you could get a meeting—sometimes even a check.
But inflation changed everything. By mid-2022, it has hit 9.1%—the highest in four decades.
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