I get the theory there but it's never seemed realistic to me. What VC would actually change their mind about pulling the trigger on an equity by because of a fractional point change in the risk free rate? It just doesn't make sense.

It's not the individual VC that changes their mind. The LP that funds the VC has to work harder for returns when money is cheap. They're incentivized to put more money into potentially higher-yielding investments (or even just keep the same asset allocation, but a bigger pool = more money going into VC at the same allocation). That in turn means they're incentivized to fund more marginal VC firms, and then it's the marginal VC firms that fund the marginal startups.

Good VCs usually maintain the same investing standards in good times and bad. But during boom times, there are more VCs, and many of the newcomers aren't particularly good at it.

That's my point: a change from 3 to 3.25% in the prime rate doesn't suddenly make CoolApprfy into a good vs a bad investment. The need to earn higher returns on cash doesn't make CoolApprfy more likely to go big and pay a return; reality doesn't work like that. If you're investing in CoolApprfy to "win back" some income streams, you're doing it for the (very) wrong reasons.

My point is that there's a wide variety of beliefs as to whether CoolApprfy is a good company. To get funded, CoolApprfy only needs to identify one person who believes it is.

When money is cheap, it is much more likely that they will be able to find someone controlling money who believes it is. When money is expensive, the intersection of [people who have money] x [people who believe CoolApprfy is a good company] is much smaller. For companies that are actually good companies, this intersection will likely (although not always; good companies fail to get funded in challenging fundraising climates all the time) still be non-zero. For companies that are bad companies, it's much more likely they will be unable to find anyone who believes they are good companies.

Markets are made up as individuals, but they don't behave like individuals. An effect does not have to be observable on the individual level for it to be observable in the behavior of the market as a whole.

That would still suggest that the set of "VC investments that depend on Fed policy" is the same as the set of "VC investments that will sputter out anyway" (module the fortuitous luck factor).

Are you saying that a change in interest rates doesn't have an effect on funding decisions? Because it seems like fractional interest rate changes would have (at least) a fractional effect on risk perception.

Plus, are you accounting for tax benefits and other ancillary forces?

Not on the kind of long-tail high-risk investments VCs make, no.