There will be a startup death starting in 2022 due to higher central bank interest rates. The reasoning for this death or clean out in other wording will be that there will be much harder for startups to find financial funding.
Many startups have not had sound viable business models which yields black profit numbers but have instead run on red minus numbers year after year. Due to very low interest rates it has been too easy to start new companies. Thus many startups have been started without viable business ideas. The startups have been funded by venture capital, venture capital have calculated on future discounted cash flow when valuing the investments. Now that central banks are raising interest rates to fight inflation the higher interest rate will effect venture capital firms calculations. Venture capital uses future discounted cash flow. Now central banks artifically altered the interest rates by quantive easing which forced interest rates lower than the natural market yield.
To apply the method, all future cash flows are estimated and discounted by using cost of capital to give their present values (PVs). The sum of all future cash flows, both incoming and outgoing, is the net present value (NPV), which is taken as the value of the cash flows in question;[](https://en.wikipedia.org/wiki/Discounted_cash_flow#cite_note-1) see below.”
According to the investopedia article four values are among other used to value startups:
* Market Multiple
* Discounted Cash Flow (DCF)
* Valuation by Stage.
These artificial low interest rates has been used by venture capital to calculate the value of startups. The issue is that the startup value used in the calculations was altered by central banks and thus the valuation of startups has been over valued. Reasoning being even if venture capital firms do not loan from central banks, they still need to finance their startup assets from the market or previous exits.
The altered value will have the effect that it will be much harder for venture capital firms to exit from the startups with profit since the stock value will be lower and different.
Since many startups are running on red numbers and will find it harder to finance operations through new rounds of finance. Startups will have to cut costs for example by lowering staff count. However lowering staff count will in many instances not be enough to turn the business models from red numbers to profit black numbers. Remember that the discounted cost of capital was wrong. Thus any startup that need to finance any capital goods in order to run their operations will have their valuations wrong. Even if the startup is doing pure services it will still effect future earning calculations.
The startup market multiple value will also be affected since future discounted cash flow with other higher interest parameters will effect discounted cash flow which will change market valuation. The primary parameter is Discounted cash flow but the secondary parameter is market multiple.