Startup bubble fueled by Fed cheap money policy finally burst in 2023

As the last decade came to an end, it was easy for a young engineer to hop on a Bird scooter and ride it to a nearby WeWork office, home to the hottest new crypto startup.

Then came Covid. Electric scooters and coworking spaces were no longer important, but there was a sudden need for tools to enable remote collaboration. Money started flowing into entertainment and education apps that consumers could tap while in lockdown. And while trading crypto.

In both periods, money was cheap and plentiful. The Federal Reserve’s near-zero interest rate policy had been in effect since after the 2008 financial crisis, and Covid stimulus efforts added fuel to the fire, incentivizing investors to take risks, betting on the next big innovation. And crypto.

This year, it all unwound. With the Fed lifting its benchmark rate to the highest in 22 years and persistent inflation leading consumers to pull back and businesses to focus on efficiency, the cheap money bubble burst. Venture investors continued retreating from record levels of financing reached in 2021, forcing cash-burning startups to straighten out or go bust. For many companies, there was no workable solution.

WeWork and Bird filed for bankruptcy. High-valued Covid plays like videoconferencing startup Hopin and social audio company Clubhouse faded into oblivion. And crypto entrepreneur Sam Bankman-Fried, founder of failed crypto exchange FTX, was convicted of fraud charges that could put him behind bars for life.

Last week, Trevor Milton, founder of automaker Nikola, was sentenced to four years in prison for fraud. His company had raised bundles of cash and rocketed past a $30 billion valuation on the promise of bringing hydrogen-powered vehicles to the mass market. December also saw the demise of Hyperloop One, which reeled in hundreds of millions of dollars to build tubular transportation that would shoot passengers and cargo at airline speeds in low-pressure environments.

There is surely more pain to come in 2024, as cash continues to dry up for unsustainable businesses. But venture capitalists like Jeff Richards of GGV Capital see an end in sight, recognizing that the zero interest rate policy (ZIRP) days are squarely in the past and good companies are performing.

“Prediction: 2024 is the year we finally bury the class of ’21 ZIRP ‘unicorns’ and start talking about a new crop of great companies,” Richards wrote in a post on X, formerly Twitter, on Dec. 25. “Never overvalued,…