The interest rate is one of the most critical factors for the economy. During the last two years, the US Federal Reserve interest rate increased by around 450 BPS (basis points) in one and a half years, one of the most aggressive increases in history to fight back the rising inflation.
When interest rates are low, businesses invest aggressively in new ventures, people buy more, and software development focuses more on delivering things fast and just then looking if something sticks. The cost of iteration is lower than rigorous analysing & planning. More aggressive & faster competitors can beat you, which is your primary concern. As a leader, you focus on being agile & growing userbase.
When interest rates are high, businesses are doing what they can to have positive cash flow, people are saving cash, and software development focuses on ensuring each iteration will bring revenue or cut costs. You focus on efficiently using limited resources. More smart & resourceful competitors can beat you, which is your primary concern. As a leader, you focus on being lean & growing revenue.
To put everything in balance is good, to put everything in harmony is better”Victor Hugo
When I read „Lean Startup” by Eric Ries in 2011, I felt like Francis Fukuyama in 1992 when announcing the „end of the history„. We finally have a flawless recipe for creating new businesses. However, a year later, in 2012, Facebook bought Instagram, which at the time didn’t have a viable monetisation strategy.
It didn’t make much sense from a „lean” perspective, but it starts to tell a story when looking at FED interest rates. As a result of a crash in 2008 between 2009 and 2015, there was an unparalleled macroeconomic push toward aggressive growth thanks to low-interest rates. The biggest beneficiary was tech, which took a deep dive into shipping products and looking if something sticks. „Lean Startup” was a product of its time, an aftermatch of an economic crash. Today build complex experiments is less than optimal, if you can buy Facebook Ads check the target group reaction in 15 minutes?
It’s the economy, stupid”Bill Clinton
Even if things weren’t great in 2012, when Facebook bought their competitor, FED interest rates perspectives were as great as ever. Credit could not be cheaper. Those who understood the economy used this timing to buy & invest through cheap credit. In startups, default is being aggressive, not afraid, so in the end, Facebook’s bet won big time, and thanks to that investment, Meta is still relevant in 2024.
This chain of events led me to believe that in 2024, because of recently increased and still high-interest rates, we will have a reverse scenario to that from 15 years ago. Until there is a drastic shift, as interest rates work with significant delay, there will be more frugality & caution ahead of us, which will slowly creep into the daily lives of people, corporations and governments. This time, it looks like the market winners will be those focused more on value (performing core business) and less on growth compared to those from the last decade.
As a leader in the software space, this means changing priority to fight back wastefulness. Experts expect high-interest rates to be around for a while, so unless the US has a recession, this is not looking like something that will pass over. Re-learning how to manage your team in a leaner way (core concepts are evident if you worked in an Agile environment and listed on this Wiki page) in this new era will be crucial.