By Julian Hattem - 03/24/15 06:00 AM EDT
The Federal Reserve’s expected move to raise interest rates for the first time in years is likely to send ripples across the economy, but the fast-growing tech sector isn’t bracing for a new crisis.
Despite concerns about a new economic bubble in Silicon Valley, financial analysts and bankers say tech startups have little to fear from the Fed’s plan — as long it remains cautious.
There could be some shake-up in the tech sector, due in part to broader trends in the economy and the strengthening value of the dollar.
But tech companies tend to outperform other firms when interest rates rise, Zino noted. In their early stages, hot young startups are also largely dependent on venture capitalists who take a narrower view of the market and aren’t likely to be swayed by measured policy prescriptions at the 101-year-old central bank.
As long as there isn’t a massive swing in the rates, the companies will likely be okay.
“We know what the cycles look like and it’s not going to impact our ability to lend or appetite to lend,” said Bob Blee, the head of corporate finance at Silicon Valley Bank.
Last week, the Federal Reserve gave its clearest signal yet that it plans to raise raises, which remain near zero, for the first time since the economic crisis began in 2007.
In its new policy statement, the bank dropped language saying it would be “patient” when it comes to raising interest rates, an omission that sent a signal to the financial world that a hike could be imminent.
Markets rallied after Fed Chair Janet Yellen’s press conference, where she tried to lower expectations of an interest rate increase. A hike won’t come at the Fed’s April meeting, she said, pushing the action back until its June meeting at the earliest.
“Just because we removed the word ‘patient’ from the statement does not mean we are going to be impatient,” she said.
Venture capitalists that provide the largest foundation for many new tech firms are largely shrugging their shoulders.
Investors “undoubtedly pay attention to macroeconomic trends, including interest rates,” said Ben Veghte, National Venture Capital Association spokesman. “But as a general practice, the Federal Reserve doesn’t impact their investment decisions.”
If they see an attractive startup to mentor and invest in, they are going to pursue that opportunity regardless of what Janet Yellen says at a congressional hearing or what the [Federal Open Market Committee] says in its statements,” Veghte added.
Yellen has previously raised concerns about the tech world, which has long battled the impression that the multibillion-dollar valuations of “unicorn” companies like WhatsApp, Snapchat and Square are unsustainable.
“Valuation metrics in some sectors do appear substantially stretched — particularly those for smaller firms in the social media and biotechnology industries,” the Fed chair said last summer. The technocratic rhetoric sent stocks of major tech companies tumbling.
Last week, Yellen declined to say whether those same sectors were experiencing a bubble. She maintained that “overall measures of equity valuations are on the high side but not outside of historical ranges.”
But despite the warnings, most of the financial world is unconcerned that the market is at anything close to the dot-com bubble of 15 years ago.
Even if there were a bubble, “it is not really related to overall macro-economic conditions,” said Robert Atkinson, the president of the Information Technology and Innovation Foundation, in an email. “Therefore, an interest rate hike is not needed to wring out any irrational exuberance in tech.”
However, a rate hike would be “extremely bad” for the economy as a whole, he said, in no small part because it would increase the value of the U.S. dollar. That could hurt tech firms.
“As a globally traded sector, tech would be hurt more by an interest rate hike than non-traded industries because of [the] effect on the dollar,” he said.
More expensive loans that pushed down spending might also have some effect on the tech world, industry watchers said.
But Wall Street has been planning for the possibility of a rate hike for years. If anyone takes a hit, it won’t likely be the companies that are revolutionizing everything from buying a cup of coffee to finding a place to stay.
“This part of the industry — the innovation economy, you can call it — has been the source of the majority of growth in the economy,” said Blee, the Silicon Valley Bank executive.
“Until that changes, you’re just going to have — whether it’s equity or debt or other sources of capital, [investments] are just going to keep flowing in.”