Higher, Longer: Rates, Inflation, and the Venture Diet

Higher for longer is no longer a forecast. It is the ground we are standing on. Five percent Treasuries and stickier inflation are quietly repricing every venture book, and the question for allocators is where capital still compounds inside the new regime. History gives us a usable answer.

The 1980s, revisited

The closest usable U.S. comparison is the early 1980s: inflation had surged above 14% in 1980, rates rose sharply, recession followed, and the Federal Reserve chose to cure inflation with the monetary equivalent of a sledgehammer. Policy teams are different and new wisdoms offer real guidance, but low rates and no inflation will not define the next decade, and free money for the duration will not be wind at our back.

Venture was smaller then, less institutionalized, and decidedly less likely to describe a dog-walking app as “critical infrastructure.” Still, the historical return pattern is revealing. Early-1980s VC vintages generated positive nominal returns but generally failed to beat the public markets enough to compensate investors for a decade of illiquidity, capital calls, and quarterly letters explaining why the exit is “strategically delayed.”

The verdict is not that venture failed. Early vintages in a higher-inflation, high-rate transition earned returns that were, how shall we put it,

Later vintages improved as inflation fell, entry valuations reset, and the exit environment recovered. Of course, the economy was different, AI is genuinely new, and America sits in a different place internationally.

Duration gets a bill

Inflation is irritating. Higher rates are expensive. Together, they are particularly rude to businesses whose economic payoff is scheduled for a distant and unspecified future. That is because venture’s favorite asset is time. A founder wants time to build product, recruit talent, acquire customers, burn cash, adjust the strategy, raise another round, and eventually explain that profitability is a social construct. In a zero-rate world, investors were happy to indulge the journey. In a 5% Treasury world, every extra year becomes an explicit cost.

Higher discount rates punish distant cash flows more severely than near-term ones. That is why the damage typically appears first in long-duration public technology equities, then in late-stage venture valuations, then in the cheerful PowerPoint math supporting the next private round. In 2022, the rate shock hit late-stage venture especially hard as public comparables fell and IPO markets closed their doors with the enthusiasm of a Manhattan co-op board.

Not all venture suffers equally

Forget software versus hardware. The category matters less than the shape of the business, and three questions decide how a company fares as rates rise:

Hardware is the obvious rate-sensitive suspect, it needs more money earlier, for tooling, production, inventory, and certification. But software does not automatically win. A mediocre SaaS company with 120% net revenue retention only in a spreadsheet is more exposed than a robotics company with a defense contract, a hard technical moat, and a customer who is not going anywhere.

Fintech versus cyber

Fintech is often a disguised macro trade. If the model depends on consumer borrowing, merchant volumes, low-cost warehouse funding, rapid credit expansion, or a capital-markets window remaining open, inflation and higher rates can hit it from several directions at once. The borrower gets weaker, the cost of capital rises, and the valuation multiple heads south, all before lunch.

Cybersecurity, by contrast, sells insurance against catastrophe.

A CFO can defer a nice-to-have. A security upgrade after a ransomware incident is harder to defer, because the board, regulators, customers, and insurers all develop very strong opinions. It is not immune, tool sprawl and long sales cycles are real, but in a selective spending environment, cyber has a better claim than most to must-have status.

The new venture diet

The next five years may reward a less glamorous form of venture discipline:

›  Fund the company that can reach a hard technical or commercial milestone with a finite amount of capital.

›  Prefer contracted revenue, strong retention, gross-margin expansion, and pricing power over a heroic total-addressable-market slide.

›  Underwrite follow-on rounds as uncertain, not inevitable.

›  Treat time to meaningful cash flow as a valuation variable, not an operating footnote.

›  Save the largest multiples for businesses that can plausibly become scarce strategic assets.

The best venture vintages often emerge from adversity, but not because adversity is charming. They emerge because fewer investors overpay, fewer companies survive on narrative alone, and capital goes to businesses that can demonstrate something increasingly radical: