The office communications app Slack is less than two years old, but the company behind it recently raised an incredible $160 million dollars in a deal that valued the company at $2.8 billion. In an interview with the New York Times's Farhad Manjoo, Slack CEO Stewart Butterfield argued that this might be the best time in world history to raise money for a startup:
I’ve been in this industry for 20 years. This is the best time to raise money ever. It might be the best time for any kind of business in any industry to raise money for all of history, like since the time of the ancient Egyptians. It’s certainly the best time for late-stage start-ups to raise money from venture capitalists since this dynamic has been around.
Why do investors have a seemingly insatiable appetite for technology companies like Slack? In trying to answer this question, I think a lot of people focus too much on characteristics of the technology sector itself. Silicon Valley companies are pioneering a lot of important innovations right now, but the same thing was true 10, 20, 30, and 40 years ago.
Rather, I think the increasingly favorable environment for fundraising in Silicon Valley is a reflection of broader macroeconomic trends. Inflation-adjusted interest rates have been declining for decades, a sign that businesses are finding it more and more difficult to invest available capital in things like factories or research and development in ways that will produce high returns.
Silicon Valley is one of the few remaining bright spots. The worse the returns on other investments get, the more willing investors become to take big risks in pursuit of higher returns.
It's certainly possible that this will prove to be a bubble that pops in the next few years. But it's also possible that this is just the new normal. If interest rates stay low, any industry that shows a potential for rapid growth could be flooded with cash from investors desperate for higher returns.