Slack CEO perfectly sums up how the Fed's zero interest rate helped his $2.8 billion startup

Slack CEO Stewart Butterfield


Slack CEO Stewart Butterfield

It took less than two years for Slack CEO Stewart Butterfield to take his messaging app startup to a whopping $2.8 billion valuation.

A lot of the rise in valuation has to do with Slack's exceptional product and growing user base, but even Butterfield himself admits that some of it was due to the Fed's near-zero interest rates that lasted the past seven years.
"There's been a 5 or 7 year run where capital has been going to alternative investment categories," Butterfield said in an interview with Bloomberg on Thursday.
"Of that, a lot of it's been going to VCs, so the VC funds are getting bigger, and the dynamics of VCs haven't changed, so the check size has to get bigger, which pushes the valuations up."

"We've been a beneficiary of that," Butterfield added.

In other words, investors have been seeking riskier investment opportunities, like venture capital, because risk-free, bank savings have been yielding almost nothing in interest payments. Also, because money is so cheap to borrow or lend, investors have been taking out cash and pouring it into basically anything but banks to generate higher returns.

That means a lot of the money in venture capital has been chasing the same popular startups, driving up demand and eventually the overall valuation. Or they may have gone to startups that normally would have drawn a much lower valuation, as the money supply was abundant. As Union Square Ventures founder Fred Wilson once said, "Valuations are at extreme levels because you cannot get a decent return on your money doing anything else."

But on Thursday, the Fed finally increased the interest rates by 25 basis points, to 0.25% to 0.50%, and implied that there could be several more rate hikes in 2016.Generally, once the Fed raises interest rates to tighten the money supply, a lot of money starts heading in the opposite direction, like the safer bank savings or CD accounts - meaning venture capital could potentially dry up in the coming months.

Butterfield, however, said these changes will have minimal impact on his company. Slack has already raised $340 million, and the company's in a position where it doesn't have to raise any more money.

"It's largely irrelevant," he said. "It's not going to change anything we're doing."

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