Tech Industry is Facing Less Money and More Fear

The Federal Reserve announced in November 2021 that in response to inflation, it would raise interest rates. There is no end in sight, either - the Fed has indicated it will continue to hike rates until enough people are unemployed for them to get back to work. The fact that the Fed is taking Mr. Burns-steeping-fingers style of monetary policy is nothing more than a coincidence to me.

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In the wake of the 2008 financial crisis, the Federal Reserve has kept interest rates low pretty much since that time, which is a big deal as far as interest rates are concerned. In recent years, borrowing money has become more expensive than it has been in over a decade. This means that many investors aren't being forced to invest in stocks to earn a return - they can instead choose to invest in bonds or treasuries for their returns. This has some implications for the tech industry, which boomed in the low-interest rate environment and is now changing some things.

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There are a number of reasons why we're going through some changes right now, and it's not just the interest rates. Almost all technology companies are heavily dependent on advertising - and ad budgets are shrinking due to the fact that no one seems to be able to figure out what exactly is going on with the economy right now. There is no doubt that low-interest rates played a crucial role in shaping the industry over the past decade and still do today.

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Low-interest rates contributed to the VC-driven tech boom

While interest rates were low, venture capitalists were able to raise money in a relatively simple manner due to the low-interest rates. Companies such as SoftBank and Andreessen Horowitz were able to amass huge amounts of money. 

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As a result, companies such as Uber were able to bleed cash as part of their strategy to drive their competitors out of the market. In the era of easy money, this strategy, called blitzscaling, was made possible by the availability of cheap capital. WeWork's investment in a company that makes wave pools, along with Adam Neumann's tequila-soaked, hot-boxed tenure at the company, was both products of this era.

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Due to the low-interest rates at the time, WeWork was able to successfully masquerade as a company in the tech industry because a lot of people had the mandate to invest in technology. Car service? It isn't, it has an app. It isn't a website; it is an app. Mattress company? It's not; direct-to-consumer sales make it tech! Food subscription service? In fact, it's tech because it advertises on Instagram, isn't it?

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A Stanford lecturer in management at the Stanford Graduate School of Business explains that venture capitalists expect to get a three-times return on their investment portfolios. In other words, if you have a billion-dollar fund, you have to return $3 billion from that fund. As most startups fail, a couple of them must succeed to give the VC company a bonanza exit, as most startups fail. Now that's much more difficult to do!

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As a consequence of this, it is likely that VCs will be riding the management of companies to spend less money. Blitzscaling may be out of the question at this point. Itay Goldstein, a professor of finance at Wharton University, says there will probably be some startups that fail, but he stresses that not every startup will fail. “As soon as investors stop putting money into startups, then all startups will have a hard time surviving,” he says. “During this period, you're likely to see some companies going out of business, some funds closing, and so forth. My hope is that it won't be as bad as many people fear, but I do think you'll see some of this downtown."

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When corporate debt becomes expensive, what happens?

Netflix, Tesla, and Dell were able to take out massive amounts of debt because borrowing was so cheap at that time. In its fourth-quarter earnings report, Netflix announced that it had $14 billion in gross debt; however, it made sure to reassure its investors that this was a fixed rate so that the company wouldn't have to unexpectedly pay back even more money in the future.

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This debt allowed Netflix to supercharge its streaming strategy, pumping out original content and pivoting its business from DVDs in the mail to original shows in order to launch its streaming strategy. The reason why Netflix had to borrow money was that it could not afford to pay its business expenses and new content when it borrowed money to enter the streaming wars. In 2021, the company decided that it would no longer take on any more debt as a consequence of the company's strategy, which allowed it to race out ahead while Hollywood lagged behind.

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As of right now, Netflix is concentrating on maximizing its revenue, which explains why there are now ad-funded versions of Netflix's subscription service as the company tries to maximize its revenue. Charles Kane, a senior lecturer at MIT Sloan, explains that Netflix has put a clampdown on password sharing because it desperately needs more free cash flow, and as a result, it has cracked down on password sharing.

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Consumers' future with high-interest rates

What does this mean for you, the average consumer, in terms of your purchasing decisions? You will probably notice that other companies will also be trying to maximize their profits, just like Netflix is doing - and you'll probably start to notice that as well. This may lead to the appearance of more interstitial ads or it may lead to a decrease in the quality of audio or video. There may be a lot of weird little pop-ups that try to grab your attention in the form of money grabs in the future. 

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Many businesses were born during this period of low-interest rates, and they may be in for a difficult adjustment as a result. Cryptocurrencies, for example, were a reaction to 2008 and have never existed in a normal interest-rate environment as they were a reaction to the crisis of 2008. With the fact that investors have a wider choice of returns now than ever before, will many of them be interested in investing in cryptocurrency? Where will the creator economy go from here, where people built businesses based on YouTube advertisements or Instagram sponsorships - where will that industry go from here? 

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The value of these things is determined by how valuable they really are, Siegel says. In the past, cryptocurrency was often used as a way to engage in rampant speculation among people. During a podcast episode for New Models, Julian Wadsworth, a cultural critic who also goes by the name Lil Internet, described his "sincere auto-fictional" experience of cryptocurrency trading in a podcast. He described a concept called "pumponomics" in which the details did not matter as much as the emotion behind them. The question now starts to arise as to what else cryptocurrency can be used for, as fewer people are interested in speculating about it.

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In much the same way as the entire tech industry at large, the creator economy is heavily reliant on ad rates to maintain its viability. As a result of the decline in ad rates, some of your favorite creators may request subscription-type revenue more frequently as a result of this. There is a possibility that some people will leave the creator economy altogether due to this. A change in advertising budgets may also benefit creators, since they are likely to be cheaper in comparison to traditional television ads, for instance, since they are likely to be more economical. 

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There is no reason to believe that the change in the economy would destroy the tech industry - Apple, Google, and Amazon were all born in periods when interest rates were normal. However, it is likely that things will change for the people who work there as a result of this change. VC money is becoming less and less available to startups, which makes them less attractive to work for. In addition, if the Fed gets its wish and more people become unemployed, there may be less of a market for gadgets once consumer spending tightens up - particularly if the Fed gets its wish and more people lose their jobs. 

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Meanwhile, venture capitalists have begun promoting the idea that artificial intelligence will be able to replace people and do their jobs for less money. In the new economy, cost reductions are all the rage, and it is possible that some companies will even feel the same way. After I spent time on the phone with CVS Pharmacy's auto-refill policy, I believe I know how it will go: a worse customer experience; fewer cost savings than companies had hoped; and a lot of broken dreams for the customers. You don't need to worry about the future being unevenly distributed; just ask CNET: it's already crashed after the hype, and it's about to crash again.