ZIRP: An explainer for fellow acronym haters

Over the past few days, there has been a renewed conversation around the concept of ZIRP. Depending on who you ask, this stands for ‘zero interest rate policy’ or ‘phenomena’. But the fundamental concept remains the same — the deliberate stimulation of economic growth.

And it had a significant effect on the startup ecosystem, both in the US and Australia. But now that we’re in a very different economic climate, we’re seeing a reversal. Money isn’t cheap anymore and the perks of working for a tech startup aren’t as robust as they once were.

I’ve been known to be a hater of business acronyms and jargon, but in this case, I’ll make an exception and delve into the world of ZIRP.

What is ZIRP?

Zero Interest Rate Policy/Phenomena (ZIRP) is a macroeconomic concept that has seeped deeply into the operational and cultural fabric of the tech industry over the past decade — from fledgling startups to global tech giants.

Originating from central banking, particularly in Japan during the 1990s to combat economic stagnation, ZIRP was adopted as a policy where central banks set nominal interest rates at or near 0% to stimulate economic growth by encouraging borrowing and spending.

The US Federal Reserve and other central banks embraced similar policies following the 2008 financial crisis. The Federal Reserve cut rates to 0.25% — a figure that lasted seven years. Here in Australia, the Reserve Bank slashed rates from 7.25% in 2008 to 3% in Q2 of 2009.

This drastic change created a ripple effect felt across global markets and sectors, including the startup ecosystem.

The effect of ZIRP on startups and tech companies

The tech industry leveraged ZIRP to fuel an unprecedented expansion era. Low borrowing costs under ZIRP allowed startups to secure funding more easily. Venture capitalists, flush with cash and in search of higher returns in a low-interest-rate environment, eagerly poured money into tech ventures, betting on the next big thing. This influx of easy capital enabled startups to prioritise growth over profitability.

For big tech companies, ZIRP meant access to cheap debt, facilitating aggressive expansion, acquisitions, and stock buybacks. Companies like Apple, Google, and Amazon could borrow billions at negligible rates, investing in new technologies, expanding their global footprint, and consolidating market dominance.

Additionally, the software industry benefited immensely from the concept of “zero marginal cost,” which refers to the negligible cost of producing digital products or software as a service (SaaS).

This unique aspect of the software business model, where the initial development incurs most costs but additional copies can be produced at virtually no cost, resulted in an outsized returns to effort and investment ratio.

The era of ZIRP coincided with this technological shift, enabling tech companies to scale rapidly without the corresponding increase in costs.

The era of cheap money also gave rise to the culture of lavish employee perks within the tech industry. In a bid to attract top talent, companies offered everything from free lunches and on-site wellness programs to unlimited vacation policies and hefty equity packages. These perks, once seen as extravagant, became standard in an industry battling for talent.

And this wasn’t just reserved for big tech. Startups also developed a penchant for fancy perks, and stylish or trendy offices (think foosball tables and beer pong) designed to attract and retain talent.

What changed?

The landscape of the tech industry and startup ecosystem has shifted dramatically. The ZIRP era is firmly over. The transition from an environment of almost free money to one where capital is more expensive and harder to come by marks a significant change, affecting everything from funding availability to the lavish perks once used to attract talent.

As central banks around the world begin to increase interest rates in an effort to combat inflation and stabilise economies, the repercussions are felt deeply within the startup and tech sectors.

The cost of borrowing has surged, leading to a more cautious approach from venture capitalists and investors. The once abundant flow of easy capital has slowed in recent years, including a 54% decline in Australia in 2023. This means that startups can no longer rely on the same strategies that worked during the ZIRP era.

The most prominent in recent memory is Milkrun. The instant-deliver startup raised $88 million in the space of a few months during 2021 and early 2022.

Fifteen months later the startup closed its doors after failing to become profitable and unable to raise more cash in a drastically different funding environment.

In startup land, the emphasis has now moved away from aggressive growth and expansion towards sustainable business models, efficient operations, and a clear path to profitability. Most startups now have to prove their worth and potential for long-term success in a more competitive and scrutinised market.

Of course, this isn’t always the case. Questions were certainly raised recently over Kiki — the all-male-led subletting startup that raised US$4.5 million in seed funding in August, only to hard pivot into a ‘girls only’ social club in January.

According to one of the founders at the time, this was with the support of primary investor Blackbird. This resulted in industry backlash as well as conversations around disproportionate funding scrutiny between women-led vs male-led startups.

The cultural fabric of the tech industry is also evolving. The extravagant employee perks and benefits that defined the ZIRP era are being scaled back as companies look to cut costs and prioritise financial health over flashy incentives.

While this doesn’t mean the end of innovative workplace cultures, it does signify a shift towards more sustainable and cost-effective ways to attract and retain talent.

The post-Covid era also has to be taken into account, as many employees value more flexible work arrangements over ‘cool’ offices and the promise of a free meal and snacks.

Will things shift again in the future? It’s entirely possible. But for now, between the continued economic turmoil and preference for robust WFH options, it looks like ZIRP will be taking a back seat for a while.