Capital Is No Longer Neutral: Valuation in a Higher-for-Longer World

For more than a decade, valuation lived in a world of abundance. Capital was cheap, liquidity was plentiful, and discount rates felt almost theoretical. In that environment, capital was largely neutral. It didn’t meaningfully differentiate between strong businesses and merely fast-growing ones. Growth was rewarded. Duration was celebrated. Profitability could wait.

That world has changed.

In today’s higher-for-longer interest rate environment, capital has a cost again. And that single shift has quietly but fundamentally altered how businesses are valued.

Higher rates don’t just change the discount rate in a model. They reshape investor behavior, risk tolerance, capital allocation priorities, and ultimately the definition of what constitutes a “good” business.

One of the most common mistakes we now see in valuations is treating higher rates as a mechanical adjustment. Increase WACC by a few hundred basis points, rerun the DCF, and move on. In reality, the impact runs much deeper.

When capital is expensive, investors become far more sensitive to timing. Cash flows that arrive five or seven years out are no longer abstract projections; they are heavily discounted promises. Businesses with long paths to profitability face an implicit penalty, while those generating cash today suddenly look far more attractive than they did just a few years ago.

This is why valuation conversations have shifted from growth narratives to cash discipline. Investors now spend more time interrogating unit economics, working capital cycles, and reinvestment efficiency than debating terminal multiples. They want to understand not just how big a business can become, but how it funds itself along the way.

The higher-for-longer environment also exposes weak capital structures. Companies that relied on frequent fundraising rounds to bridge losses are finding that optionality has diminished. Valuations now reflect not just operating performance, but financing risk. A business with solid revenues but limited runway may command a lower valuation than a smaller but cash-resilient peer.

Importantly, this shift affects private and public markets alike. While public market repricing happens quickly, private markets absorb these changes more slowly. But the direction is the same: capital efficiency is no longer optional.

From a valuation perspective, this means assumptions must be re-earned. Revenue growth needs to be tied to credible sales capacity. Margin expansion must be grounded in operational reality. Terminal values require far more justification than they once did.

At Epoch Ventures, we increasingly advise founders and investors to treat valuation as a capital allocation exercise rather than a pricing exercise. The question is no longer “What multiple can the market support?” but “What return does this business truly offer given its risk and cash profile?”

In a higher-for-longer world, capital is no longer neutral. It is selective, impatient, and demanding. Valuations that fail to reflect this reality may still look attractive on paper, but they are unlikely to survive real investor scrutiny.