My reasoning is this: A company goes public to raise capital at the price of giving up a certain amount of power and control to the shareholders. Now, if someone founds a company and can borrow risk capital from banks at low interest rates, it seems to me that this founder might prefer to let the company grow somewhat longer under his control before going public than in case of high interest rates on risk capital. This, however, means that after the IPO there is less growth left for the investors.

If that effect exists, it would imply that the current "cheap money" policy of many central banks does actually have a negative impact on the expected growth in value of (some) newly issued shares.

Certain (semi-)recent IPOs seem to confirm this reasoning but of course I might be horribly biased in this observation. For example, Beyond Meat and Oatly both went public at a point where their products could already be bought worldwide at large supermarket or restaurant chains.

On the other hand, there are companies which go public without even having a (fully working) product, like Nikola. But some of these companies seem to be "fake", which explains why they don't find a cheap way of raising capital without going public, even under the current circumstances. I would not count such fake companies, which temporarily exploit some short-time hype or trend, as valid counterexamples to the above reasoning.

But perhaps the reasoning is still totally wrong?

1 Answer 1


Companies can raise money in two ways (and a gazillion of mix forms like convertible bonds, etc which can be expressed as a combination of the two options)

  1. Through equity. Convince a venture capitalist to invest in your company or issue new shares.
  2. Through debt.

Note that there is a certain asymmetry in the way these two ways pay out for the investor. Investing in equity, the pay out is basically unlimited. For debt investment at best you get your money back plus the promised interest.
Note also that this choice does not only apply to new companies but also to any established one. Any reasonable manager will try to optimize their cost for new capital by chosing the cheaper option, e.g. by paying for an acquisition in shares instead of cash.

How does this relate to growth perspective? Cheap interest now makes it easier to finance growth through debt. However, if interest rates rise, it will be more difficult to continue debt finance growth. Going too deep into debt is asking for trouble at some time in the future. Therefore, even if interest rates are cheap, at some point it will be hard to find someone willing to lend you money. Debt investors do not profit from strong growth. At best case they are getting their money back which can be quite uncertain for unprofitable growth companies. Therefore the company will pay a high risk premium and therefore high interest rates, even if the general level of interest rates is low. This is where equity comes into play. It is riskier but if the expected growth materializes, the pay off can be huge. This pretty much sums up the high expectation, "world domination or bust" type of IPOs.

So why would a rather established company go public? This is the IPOs dirty little secret. IPOs are not only there to raise capital for the company. They are also used to cash out early investors and the founders. Life as a millionaire/billionaire is so much easier if your net worth is in a public company. If you need money, you simply sell some shares. Or get a line of credit on your shares.

To summarize: raising interest rates are always bad for a company's growth perspective. The more growth focues the valuation is, the more it will be affected (because future cash flows are discounted). But this is not limited to new companies

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