The Impact of Interest Rates on Angels
By William Demers, originally published on February 8th, 2022.
It has been almost two years since interest rates dropped to 0.00–0.25% in response to the severe economic impact caused by COVID-19. Since then, the Federal Open Market Committee (FOMC) has kept its target interest rate (AKA the Federal Funds Rate) low to incentivize spending. While the Federal Funds Rate does not actually set the real interest rates, it does establish a range that interest rates fall between (by setting the interest rate banks use for overnight loans). Today, the Fed is expected to raise interest rates as soon as March or May; a decision that will ideally combat rising rent, wages, and prices.
As a college-age consumer myself, I first wondered if higher interest rates would really change my spending behavior. Given my educational experience in the field of angel investing, I then considered if interest rate hikes would impact the spending of early-stage angel investors. After all, if interest rates grew, wouldn’t wealthier individuals be incentivized to spend less? To answer this question, I turned to the popular private-equity database, Pitchbook, where I could find accurate data on early-stage angel, pre-seed, and seed deals in the United States.
I aggregated over 270k industry-agnostic deals from the last 20 years to analyze changes in deal count from year to year. Despite drastic fluctuations in interest rates caused by both the Great Recession and the pandemic, the growth of early venture deals is seemingly exponential (see graphs below). Compared to the average annual real interest rate over the same years, the two metrics appear to have little to no correlation.
Interest rates saw the largest drop (5.02% to 0.16%) in between 2007 and 2009. The interest rate was cut due to high unemployment and low spending, but angel funding did not slow down. The number of angel deals actually increased 37.3% from 2008 to 2009. Comparing that trend to 2020, where interest rates were slashed again, the number of early-stage investments decreased by roughly 9%. Then, in 2021, deal count bounced back, growing 9.73%.
I also think it is important to note that the total number of investments have been increasing overtime. From 2007 to 2009 there were 3,478 deals, while from 2020 to 2021 there were 19,461 deals (460% increase). This growth within the private equity space has occurred alongside fluctuating economic conditions and interest rates. Based on past trends, the interest rate on its own does not seem to have an effect on angel activity, but it still remains an important indicator of economic health.
Thank you for reading this insight written by William Demers, the Director of External Relations of the Mel Rines Angel Investment Fund. To learn more about The Fund, please visit https://www.rinesfund.com/
William is a junior from Dover, NH pursuing a dual major in Business Administration and Justice Studies. William spent the summer as a Business Development intern with Riff Analytics, an A.I. EdTech startup out of Boston. There, he worked with the company’s founder to define a market and build a prospective sales pipeline. William hopes to have a successful semester in the Fund and to continue to expand his knowledge and relationships both within the Fund and the New England VC ecosystem as a whole.