A Bird In The Hand Is Worth Two In The Bush
“A bird in the hand is worth two in the bush” - Aesop ~600 B.C
Warren Buffett has often referred to this fable as describing the core of investing.
I think its important for founders to grasp that statement.
Especially in light of the current macroeconomic environment.
“Why is funding drying up?”
“Why can’t we just easily raise more money at 2021 valuations?”
“Wait, why are all these VCs asking me what our burn rate is???”
“Actually, what is a burn rate???” (Ok, I can’t help with this one :D)
The TL;DR of it is: Currently, there are other places money can go to generate high returns @ low levels of risk.
This is because both short and long term interest rates have gone up with the Federal Reserve fighting inflation.
What this means is that the risk-free interest rate, THE benchmark rate for investors..
IE: Loans investors give to the US through things like T-Bills, T-Notes, and T-Bonds..
Has gotten a LOT higher compared to 2020-2022.
You can take zero risk, keep the bird in your hand (ie: cash), and currently get ~4-5%+ on your $$ by loaning to the US.
Meaning if blue chip companies want to raise debt..
They’ll obviously have to offer an interest rate slightly higher then the risk-free rate.
And so on for less established companies.
(IE: why would an investor loan or invest in your company and take on more risk..
if you are offering the same return they could get loaning to the US?
You surely don’t control the printing press (: )
For companies, what this means is capital is WAY more expensive then it used to be.
For investors, what this means is you don’t have to chase after birds in the bush (ie: risky assets like stocks) taking on large risk, to get good returns.
So ultimately, what we’ve seen as a result, is investors reallocating from risk capital -> conservative capital.
And with the Federal Reserve set to raise interest rates again, this seems set to continue for a while.
And if you read all this and said:
“Gee Jesse, this sounds like its not great for startups, or for innovation in general, we’re the riskiest businesses of them all!
Startups would have to offer much higher returns then we did in the past for investors to justify investing in us!"
I would say “Correct! :(”
ULTIMATELY MEANING: for startups -
Its extremely important to focus on being lean + efficient + profitable to avoid, if at all possible, raising capital at the moment.
As risk capital is quite scarce and quite expensive.