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I find your lack of faith disturbing

I do not want this morning column to become Old Man Shouts at Stocks; that’s not its goal. To prevent that from happening, we’re flipping the script today.

The Exchange explores startups, markets and money.

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Instead of talking about what the public markets are doing and how their moves may impact startup valuations, we’re going to ask when VCs will hit the brakes.

When will the venture crew slow down?

It has long been the consensus view that cheap money thanks to low global interest rates helped pump more money than ever before into the startup market. This resulted in the assembly of larger, more rapid venture capital funds, and larger, more rapid startup funding events.

The result of both was that startups got expensive as hell to buy into during their growth curve.

Not everyone is thrilled. Venture capitalists are hardly celebrating paying 75x, 150x, or even greater multiples for shares in nascent startups. But the game was set by rules external to the players, meaning that the venture crew has merely responded to in-market incentives in recent years.

The question before us — and it’s perhaps the most important question in startup land for the next few years — is what happens next. The incentives that venture capitalists followed for the last decade or so are finally changing, with the price of money expected to rise sharply this year (due to tightening monetary policy generally). This has led to the anticipated result — falling valuations for riskier stocks like richly valued technology shares.

What this means in practice is that there is an inverse relationship between the price of money (where interest rates are set by key central banks, like the U.S. Federal Reserve) and the value of startup exit prices.

This is simple to understand: Startups are priced first on hope (seed-stage), then momentum (Series A through C), and later by exit comps (late-stage). The startup exits that truly matter to venture funds tend to be post-late-stage, so we care most about how upstart tech companies are valued by their public market analogs. This means that more expensive money makes bonds and other, comparatively safer investments more valuable as startups lose in-market pricing power. So, up goes the price of money, down goes the exit value of startups.

This should impact earlier-stage startup prices in time, but we’ve tread that ground before.

All that in hand, when will venture capitalists tap the brakes? From where I sit today, the answer is clearly not yet. This is for two reasons: