Why Startup Investors Are Going to Look Mighty Smart in 2020

One of the intangible "perks" of being a startup investor is, normally, you don't have to worry about the Fed's every move, or parse every word Chairman Powell says.

That's because the startup field is remarkably resilient and not usually correlated with the stock market; the Fed just doesn't have much impact on it.

But the times being what they are, there's a first time for everything...

The Fed just gave us startup players some of the best news in, well, ever.

If you're in startups and angel investing, a huge opportunity has just fallen into your lap.

And if, for whatever reason, you're not, this is the perfect time to get started.

I'll fill you in...

Here's What's Happening Now - and Why It's Great News

It's no exaggeration to say startups just got some of their best news of the year, from the U.S. Federal Reserve, no less.

In late August, the Fed announced a major policy shift that will allow inflation rates to go above their usual 2% target, all without raising interest rates.

So interest rates will remain low for the foreseeable future... especially as employment numbers continue to creep higher, as we saw this week.

This has immediate, practical effects on money: It will be cheaper and easier to borrow, and ultimately easier to spend.

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When people are encouraged to spend their money, it impacts labor markets - including the startup landscape - in a fundamental way.

Here's exactly what that means for you...

No. 1: Startup Investing Will Become Even More Popular

Because lower interest rates lead to "cheaper" money, it's about to become that much easier, that much more attractive, for angel investors and venture capitalists to invest in startups.

Some investors choose to invest in startups using leveraged - or borrowed - funds to increase the potential return of their investment. That's not always the smart move, but this strategy can be particularly advantageous when interest rates are lower and money is therefore cheaper and easier to borrow.

Lower interest rates encourage this type of investing because the opportunity cost and the required rates of return are very low. That means investors are now in a better position to see larger gains than ever before... and even more investors are likely to flood the startup market.

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As we come to my next point, you'll see why that's a very good thing for those of us who got to the table earlier...

No. 2: Startup Valuations Can't Help but Skyrocket

Naturally, with more money "available," more people want to invest. But there's only so many places to invest. At some point, a company will have to limit the amount of people on its cap table.

That's Economics 101 - simple supply and demand.

Picture a bakery: There's a fresh, delicious, piping hot apple pie in the window. Everyone on the street outside is crazy about this pie and wants to buy a slice, but there are only so many cuts the baker can reasonably make. Ultimately, those few slices are going to go for more... and more... and more... money.

Startups aren't a bit different. The next benefit is a little more subtle, but no less powerful...

No. 3: Founders Will Have Even More "Value-Add" Resources

Now, the more investors a startup has, the more support and "value-add" it receives.

These value-adds can be tough to quantify; they vary based on each investor's unique connections, skills, and expertise, but they can be virtually anything that helps a company grow and succeed.

And when more people invest in startups, it means founders will have a larger pool of resources to pull from for guidance.

That's why the smartest founders choose to sell percentages of their own equity in exchange for more investors who can provide that crucial value-add in other areas of their business.

And, maybe best of all...

No. 4: Exit Opportunities Will Multiply

There are multiple ways to exit a startup investment with profits - IPOs, mergers, acquisitions, even private offerings.

I think the Fed's new policy shift could really boost the number of acquisitions we see. Because lower interest rates lead to lower borrowing costs, we may very well see more leveraged buyouts of smaller startups in the future.

Larger private and public companies may be more willing to borrow money to buy value-add startups that can fuel their own company's growth.

In short... cheaper money will lead to more acquisitions and more opportunities for investors to exit with a pile of money.

So this is one time startup and angel investors can thank the Fed. I'm positive that this policy shift will drive even more capital into the labor markets, creating more successful startups and ultimately, more profit opportunities for folks like you.

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