Rock-bottom rates were the secret engine fueling $1 billion start-ups and virtual attempts to conquer the physical world. But in 2023, reality bites.
Many tech companies are seeing their fortunes reverse and their dreams dim Big companies are shedding employees, cutting back, watching their financial valuations shrivel — even as the larger economy chugs along with a low unemployment rate and a 3.2 percent annualized growth rate in the third quarter.
One largely unacknowledged explanation: An unprecedented era of rock-bottom interest rates has abruptly ended. Money is no longer virtually free.
For over a decade, investors desperate for returns sent their money to Silicon Valley, which pumped it into a wide range of start-ups that might not have received a nod in less heady times. Extreme valuations made it easy to issue stock or take on loans to expand aggressively or to offer sweet deals to potential customers that quickly boosted market share.
Even the biggest tech companies are affected. Amazon was willing to lose money for years to acquire new customers. It's taking a different approach these days, losing 18,000 office workers and shutting down operations that aren't financially viable.
In the third quarter of 2021, Carvana delivered 110,000 cars to customers, 74% more than in 2020. The goal: two million cars a year, then, even faster than the company grew, it fell apart. When used car sales increased more than 25 percent in the first year of the pandemic, that created a supply problem as it needed many more vehicles.
Carvana acquired an auto auction company for $2.2 billion and borrowed more at a higher interest rate. And he paid customers handsomely for the cars, but as the pandemic hit and interest rates began to rise, sales slowed.
The market expects two more rate hikes from the Federal Reserve this year, to at least 5 percent. In real estate, that's a problem for anyone hoping for a quick turnaround.
In 2019, Zillow estimated that it would soon have $20 billion in revenue from selling 5,000 homes a month. Zillow's idea was to use artificial intelligence software to make a chaotic housing market more efficient, predictable, and profitable.
The era of easy money was well established when Amazon decided that it had mastered e-commerce enough to take on the physical world. The company's idea was for the stores to function as extensions of its online operation. Reader reviews would guide the potential buyer.
Being an internet showroom is expensive. Amazon had to hire booksellers and lease storefronts in popular areas. And letting glowing reviews be one of the selection criteria meant stockpiling self-published titles.
Amazon likes to try new things and that costs money. It took on another $10 billion of long-term debt in the first nine months of the year at a higher interest rate than it was paying two years ago. The retailer closed 68 stores last March, including not only bookstores but also pop-ups and so-called four-star stores.
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