---
title: "Will We See a Better Exit Market Next Year?"
description: "Explore how Fed rate cuts impact startup exits: New data shows 10-65% increase in venture-backed M\u0026A activity when rates drop. Key insights for founders \u0026 VCs."
categories: ["exits","data analysis"]
keywords: ["Theory Ventures","Tomasz Tunguz","venture capital","startup exits","M\u0026A activity","Fed rate cuts","monetary policy","cost of capital"]
ai_summary: "Fed rate cuts may boost startup exit activity by 10-65%, offering insights for founders and VCs on market trends."
date: 2024-09-20
lastmod: 2026-07-23
canonical_url: https://www.tomtunguz.com/rates-and-exits/
author: "Tomasz Tunguz"
---

The Fed cut rates by 50 basis points this week. A mantra circulating in Silicon Valley has echoed that the tepid exit markets will revive as a result of a laxer monetary policy.

The last ten years' data suggest the relationship is real & non-linear.<sup>1</sup>

![image](https://res.cloudinary.com/dzawgnnlr/image/upload/itaezfpbuulmcd2mnmz1.png)

When the Fed cuts rates - negative changes in the Fed Funds Rate (FFR) - US venture backed software exit activity increases by between 10% and 65%. If the FFR increases, M&A activity remains stable. The correlation explains about 25% of the variance, but it's clear from the blue line, the relationship is non-linear.

Rates are [convex](https://en.wikipedia.org/wiki/Bond_convexity) : a cut from 5% to 4.5% has less impact on the cost of capital than a cut from 1% to 0.5%. The same is true for exits. 

The relationship between deal value & FFR also has some correlation but it's weaker at -0.36 correlation. Looking at the squiggly blue line in the middle of the chart, the perils of overfitting are clear. But there is a U-shaped pattern. When rates move meaningfully positive or negative, deal activity increases. 

![image](https://res.cloudinary.com/dzawgnnlr/image/upload/zvfvrqvhwyqzsqaujaqe.png)
Why?

Rate decreases reduce the cost of capital spurring acquisition. Rate increases might heighten the imbalance between those with cash who can afford to buy & startups with limited balance sheets who must sell. So the right hand side of the chart may be "forced" M&A.

There is nuance much that isn't captured here : 
- impact on valuation multiples. Most likely, lower rates increase valuations & vice-versa since capital is less expensive with lower rates.
- the data set is limited to about a decade during which rates were constant for half & then fluctuated wildly.
- the non-linearity of the data isn't captured by Pearson correlation.

But there is some evidence within the data that laxer monetary policy will increase exit activity in the subsequent twelve months.



---
<sup>1</sup>I'm using PitchBook US venture backed software exit data & running Spearman correlations on data from 2010-2020 on the subsequent year's change in the relevant field. The blue line is a [loess](https://en.wikipedia.org/wiki/Local_regression) curve.