Venture Capital

Interest rate worries? Tech VCs are handling it


Markets might fret over when the U.S. Federal Reserve will finally hike interest rates, but venture capitalists are divided over whether there is any cause to worry.

Despite speculation to the contrary, the Fed on Thursday kept rates at the historic low levels at which they have remained for the last nine years. These low rates have kept borrowing cheap, attributing to a boom in funding for start-ups as investors hunt for high-yielding assets and hedge funds, for example, pour money into high-growth technology start-ups.

The result is a surge in the number of start-ups worth $1 billion or more. The number of $1 billion-plus tech start-ups, known as "unicorns," has surge to 124 today from four in 2009, a 3000 percent increase, according to Credit Suisse. Some, like Xiaomi or Uber, gaining valuations in the range of $45 billion to $50 billion dollars.

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Several tech investors have warned that the low rate environment could have caused a bubble, with investments coming back to haunt people once the Fed starts hiking.

"When rates start to normalize in a few years, people will come to regret the prices they paid for assets when money seemed virtually free," Fabrice Grinda, a past investor in Chinese e-commerce giant Alibaba, wrote in a blog post in May.

"It's not a coincidence that the Internet bubble burst after the Fed increased the effective Feds Fund Rate by 1.91 percent between 1999 and 2000," he warned.

But that view is not shared by the whole investing community. Some of Europe's biggest venture capitalists told CNBC that investors were investing in companies that had much stronger fundamentals than in 2000—and that this was more important than upcoming interest rate hikes.

"I don't mean to disregard it (interest rate movements), but if you are focused on building sustainable operations, then whether interest rates are one percent or three percent, it shouldn't affect the company," Michael Treskow, principal at venture capital firm Accel Partners, told CNBC by phone.

Rob Kniaz, a venture capitalist partner at London's Hoxton Ventures, concurred.

"In general with these tech companies there is such a strong fundamental underlying business model, they are real businesses and transforming the lives of people, I think all these companies being able to get cash cheap they are still good businesses," he told CNBC by phone in a separate interview.

When the music stops

But it won't be plain sailing for all companies if interest rates go up, according to Kniaz, who said he would be worried about those companies currently "burning cash" that have struggled.

"If the music pauses they are in danger," he said.

Alex Macpherson, CEO of early-stage venture capitalist fund Octopus Ventures, said that a rise in interest rates would not affect smaller start-ups, but ones with big valuations might take a knock.

"At the top-end it has an effect because if the stock market is affected, the appetite for investment into high-growth business can wane. So valuations at point of IPO, or what a business will pay for a private company, comes down," Macpherson told CNBC by phone.