Ask HN: What should founders do to protect against inflation?
As of Oct 2021, the inflation rate is 6.2% and it can get worse. In this unusual environment, what should founders do to protect their personal savings and startup cash from the inflation while also maintaining liquidity?
53 comments
The best thing you can do is ignore all of the inflation talk and focus on building your business. If your startup plans are put at risk by a couple extra percent of inflation, you have bigger problems.
If you're selling a product or service, don't forget that the price of your product or service will also rise with inflation. Unless you have a strange business that requires multi-year inventory storage and low margins, inflation isn't really a big deal. Raise prices when the time comes.
> As of Oct 2021, the inflation rate is 6.2%
The CPI inflation rate is based on consumer spending and reflects a basket of things like housing, gas, transportation, milk, eggs, groceries, and so on. It's not really relevant for your startup.
You need to look at your biggest expenditures. For a pre-traction software startup, this is basically employee compensation. There's not much you can do about this number changing, other than to be such a great place to work that employees don't necessarily mind falling behind the curve as compensation rises everywhere. Or just do the right thing and pay people market rate and get good work in return.
> what should founders do to protect their personal savings and startup cash from the inflation while also maintaining liquidity?
Personal savings and startup cash are two entirely different topics.
Personal savings: Standard mix of stocks and maybe bonds/CD ladders. People seem to forget that stocks tend to rise with inflation, but it's how investors have been floating above inflation for centuries. Do not buy into the hype about either gold or cryptocurrencies being the only way to hedge against inflation. It's not true.
Startup funds: Cash is fine. You shouldn't be planning on hoarding this for many years anyway, so don't put it at risk in order to chase higher returns.
If you're selling a product or service, don't forget that the price of your product or service will also rise with inflation. Unless you have a strange business that requires multi-year inventory storage and low margins, inflation isn't really a big deal. Raise prices when the time comes.
> As of Oct 2021, the inflation rate is 6.2%
The CPI inflation rate is based on consumer spending and reflects a basket of things like housing, gas, transportation, milk, eggs, groceries, and so on. It's not really relevant for your startup.
You need to look at your biggest expenditures. For a pre-traction software startup, this is basically employee compensation. There's not much you can do about this number changing, other than to be such a great place to work that employees don't necessarily mind falling behind the curve as compensation rises everywhere. Or just do the right thing and pay people market rate and get good work in return.
> what should founders do to protect their personal savings and startup cash from the inflation while also maintaining liquidity?
Personal savings and startup cash are two entirely different topics.
Personal savings: Standard mix of stocks and maybe bonds/CD ladders. People seem to forget that stocks tend to rise with inflation, but it's how investors have been floating above inflation for centuries. Do not buy into the hype about either gold or cryptocurrencies being the only way to hedge against inflation. It's not true.
Startup funds: Cash is fine. You shouldn't be planning on hoarding this for many years anyway, so don't put it at risk in order to chase higher returns.
This is dead-on, but just to add to this, none of your investors are investing in your company for a 7 percent yearly return. The SPX will almost guarantee those. They want grossly outsized returns that are large enough for inflation to be a mere speedbump. Inflation shouldn't even enter the conversation.
> This is dead-on, but just to add to this, none of your investors are investing in your company for a 7 percent yearly return.
Great point.
Also remember that your investors are investing specifically in your business, not giving you the money to re-invest in something else.
If you take investment money from someone to run a business then turn around and flip it into stocks or Bitcoin or something, you're going to have a serious problem if the value goes down. You might even have a problem if the value goes up. Investors don't take kindly to someone losing their money on something that wasn't agreed upon.
Great point.
Also remember that your investors are investing specifically in your business, not giving you the money to re-invest in something else.
If you take investment money from someone to run a business then turn around and flip it into stocks or Bitcoin or something, you're going to have a serious problem if the value goes down. You might even have a problem if the value goes up. Investors don't take kindly to someone losing their money on something that wasn't agreed upon.
Inflation does enter the conversation for investors. Risk-free real rate is -450bps, equity risk premium is historically 200-300bps so implied return for SPX is -150bps.
One of the arguments is that things like tech will protect value because they have pricing power/growth or something similar, but this hasn't worked if you are starting from high valuations because inflation tends to change the cost of equity quite significantly, as the original calculation showed (to be clear, the point is that the price for bonds and/or equity is very wrong)...valuations are very high, a financial shock when you starting from a valuation that implies equities have no risk will be severe.
I am not saying that anyone should do or not do any specific thing but inflation, if it persists, will impact everyone because the effect of inflation is not limited to prices rising. For example, inflation might not impact you but a risk-free rate of 10% might.
One of the arguments is that things like tech will protect value because they have pricing power/growth or something similar, but this hasn't worked if you are starting from high valuations because inflation tends to change the cost of equity quite significantly, as the original calculation showed (to be clear, the point is that the price for bonds and/or equity is very wrong)...valuations are very high, a financial shock when you starting from a valuation that implies equities have no risk will be severe.
I am not saying that anyone should do or not do any specific thing but inflation, if it persists, will impact everyone because the effect of inflation is not limited to prices rising. For example, inflation might not impact you but a risk-free rate of 10% might.
> The SPX will almost guarantee those
Interest new use of the word "almost"
Interest new use of the word "almost"
Hardly new.
> But your father doesn't want to invest, say, ten thousand dollars in it, though I can almost guarantee that he'll get five times that sum back.
Tom Swift and His Giant Cannon 1913
https://www.gutenberg.org/files/1361/1361-h/1361-h.htm
> But your father doesn't want to invest, say, ten thousand dollars in it, though I can almost guarantee that he'll get five times that sum back.
Tom Swift and His Giant Cannon 1913
https://www.gutenberg.org/files/1361/1361-h/1361-h.htm
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> The best thing you can do is ignore all of the inflation talk and focus on building your business.
Yeah the only inflation founder's need to worry about it is the valuations. Some will raise an A at 100x revenue but if B-Public multiples collapse in the future ... they are in a tough spot.
Yeah the only inflation founder's need to worry about it is the valuations. Some will raise an A at 100x revenue but if B-Public multiples collapse in the future ... they are in a tough spot.
> personal savings
Buy I-bonds and TIPS. The more inflation there is, the more money these instruments make. They are literally the "bet on inflation" play.
The problem, in the past 10 years, is that inflation has been historically low. So TIPS and I-bonds were a bad play. Turns out that this year, they were a good play.
> startup cash
Buy futures in the commodities that affect your business. If you need a bunch of orange-juice, then buy orange-juice futures.
If the price of orange-juice rises in the future, you sell your orange-juice futures (which now have gone up with the price of orange-juice), and use all your extra money to buy the orange-juice you need to keep your business running.
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Both problems have been solved decades, even centuries ago. That's why we have a futures market / commodities market.
The opposite also is a problem: in a deflationary market (ex: Price of Lumber falls), you want to sell futures before the price falls.
A lumber mill will sell futures while the price is high, knowing that they can make all the lumber people want, and hoping that speculators will give them money. Locking in good prices for the items you manufacture is the entire point of the futures market.
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Futures market is also gamed by warehouses / storage. For example, if oil prices are in contango (oil today is more expensive than oil tomorrow in the futures market), the oil-suppliers will sell off their oil-reserves today (lowering the price of oil today, making room for cheaper oil tomorrow).
If oil prices are in backwardation (ie: oil today is cheaper than oil tomorrow), the oil-suppliers will buy up oil-reserves (increasing the price of oil today, filling up their warehouses in preparation for the more expensive oil prices tomorrow).
Buy I-bonds and TIPS. The more inflation there is, the more money these instruments make. They are literally the "bet on inflation" play.
The problem, in the past 10 years, is that inflation has been historically low. So TIPS and I-bonds were a bad play. Turns out that this year, they were a good play.
> startup cash
Buy futures in the commodities that affect your business. If you need a bunch of orange-juice, then buy orange-juice futures.
If the price of orange-juice rises in the future, you sell your orange-juice futures (which now have gone up with the price of orange-juice), and use all your extra money to buy the orange-juice you need to keep your business running.
---------
Both problems have been solved decades, even centuries ago. That's why we have a futures market / commodities market.
The opposite also is a problem: in a deflationary market (ex: Price of Lumber falls), you want to sell futures before the price falls.
A lumber mill will sell futures while the price is high, knowing that they can make all the lumber people want, and hoping that speculators will give them money. Locking in good prices for the items you manufacture is the entire point of the futures market.
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Futures market is also gamed by warehouses / storage. For example, if oil prices are in contango (oil today is more expensive than oil tomorrow in the futures market), the oil-suppliers will sell off their oil-reserves today (lowering the price of oil today, making room for cheaper oil tomorrow).
If oil prices are in backwardation (ie: oil today is cheaper than oil tomorrow), the oil-suppliers will buy up oil-reserves (increasing the price of oil today, filling up their warehouses in preparation for the more expensive oil prices tomorrow).
I think VOO is the real TIPS, at least if you live in a highly desirable part of the US.
Not really. Everyone gets stuck thinking about 2008 (where VOO acted a lot like inflation), but 1999 is an example where the stock-market crashes, but inflation remained steady.
In 1999, VOO would have crashed, but inflation would have remained steady, so TIPS would have done well.
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If you want to "bet on CPI inflation", its hard to beat TIPS. Its literally indexed against CPI, and is the most direct investment into the biggest inflation statistic.
VOO would sometimes track inflation, but other times (such as 1999), it would not.
In 1999, VOO would have crashed, but inflation would have remained steady, so TIPS would have done well.
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If you want to "bet on CPI inflation", its hard to beat TIPS. Its literally indexed against CPI, and is the most direct investment into the biggest inflation statistic.
VOO would sometimes track inflation, but other times (such as 1999), it would not.
My comment was tongue in cheek that official CPI figures are not very relevant for someone saving for future expenses in higher cost of living areas, such as land, daycare, education, and healthcare.
A TIPS investment does little to mitigate your prospective house going up a few hundred thousand dollars.
A TIPS investment does little to mitigate your prospective house going up a few hundred thousand dollars.
Is there a way of buy futures on servers?
If an inflation rate of 6.2% is meaningfully different to your business than 3.2% inflation rate, you're doomed.
You shouldn't be spending even a single cycle thinking about the inflation rate with regard to your startup's liquidity.
You shouldn't be spending even a single cycle thinking about the inflation rate with regard to your startup's liquidity.
Make sure you have not boxed yourself in by your pricing. Don't set a model that doesn't allow you to increase charges in line with inflation
I live in a country with fairly high inflation. It's fine. Nothing bad will happen. Inflation rate is purposely engineered to maximize employment. You're supposed to invest those savings in high risk things.
A healthy startup grows 20x its size every year. Founders are the people who are well ahead of inflation. What founders should really do is raise money now and just make sure employees have decent raises.
A healthy startup grows 20x its size every year. Founders are the people who are well ahead of inflation. What founders should really do is raise money now and just make sure employees have decent raises.
What comes to mind is speed up your program of work, ie spend your money as quickly as you responsibly can (easy to say I know, but the point is that speed and scaling should be a bigger part of your agenda if inflation is a concern). Anecdotally I feel like I have seen companies doing fundraising rounds very close together recently, inflation may be a reason. Investors will have the same concern and look for places that can deploy their cash fast.
Interestingly, I've talked to a few startup founders recently who were feeling good about having lots of money in the bank and not needing to fundraise for a while. This is probably still a common mentality, and may be more prudent. But if you can responsibly spend asap, you will get more bang for your buck
Interestingly, I've talked to a few startup founders recently who were feeling good about having lots of money in the bank and not needing to fundraise for a while. This is probably still a common mentality, and may be more prudent. But if you can responsibly spend asap, you will get more bang for your buck
Don't let customers lock you into multi-year pricing deals that aren't inflation-adjusted. It might seem strange to ask that future payments be inflation-adjusted, but that's just because we (anyone under 40 or 50 years old) does not remember high inflation from their adult life. But this is exactly what people do when there is inflation risk, currency exchange risk, etc.
A payment you receive next year could worth be 5 to 10 percent less, and a payment two years from now will be worth even less. It's like the power of compound interest, but as a sword, not a shield.
Conversely, try to lock in pricing with suppliers if you can!
A payment you receive next year could worth be 5 to 10 percent less, and a payment two years from now will be worth even less. It's like the power of compound interest, but as a sword, not a shield.
Conversely, try to lock in pricing with suppliers if you can!
At the rates startups should be growing, customer pricing lockins are rounding error. You want to have many times more customers moving forward. If this year’s customers are getting a 10-% discount a few years from now, either that’s a < 1-2% revenue hit for your startup, or you’re going out of business anyway.
Regarding the start up, it highly depends what you are doing. Lets say it is work intensive. Then hire now more people, since wages might go up. Lets say you it is rather commodity intensive. Then guess it is better to buy the stuff that you might need later. Especially you even could hedge with option contracts. So basically I don't see any risk. If you are selling stuff, try to keep the contracts short or adjustable.
Regarding the personal savings. I'm in the same boat. No idea how to hedge, since it seems that everything is quite expensive. So even with high inflation doesn't always imply that the stock markets will go up. Same is true for real estate. It just implies that your real dollar value will go down. I don't see a real hedge, just diversification.
Regarding the personal savings. I'm in the same boat. No idea how to hedge, since it seems that everything is quite expensive. So even with high inflation doesn't always imply that the stock markets will go up. Same is true for real estate. It just implies that your real dollar value will go down. I don't see a real hedge, just diversification.
> Lets say it is work intensive. Then hire now more people, since wages might go up
And this is exactly why you should interview at another company every year
And this is exactly why you should interview at another company every year
One of the best hedges has been index puts. They are the bet that no-one wants, and they get cheaper and more effective as things get crazier. Vol has gone through the roof again so I wouldn't advocate holding them but if Vix gets down to high-teens, that can be a very effective hedge. Some single-stock puts are clearly ludicrous too, I don't have the funds to put on this trade properly but there are tons of stocks out there that are clearly going to collapse if things get dicey. And there are quite a few unfashionable companies on mid single digit P/E that are going to do well in that scenario too (which I do own).
For diversification, I would try to diversify geographically if you want to retain a 100% equities allocation. US is overvalued, lots of markets outside the US are cheap.
For diversification, I would try to diversify geographically if you want to retain a 100% equities allocation. US is overvalued, lots of markets outside the US are cheap.
Put your prices up to make sure you are making enough money.
Inflation rates only measure the cheapest of something, they never measure the change in quality so dont be scared to put your prices up. The worst that can happen is you cant sell a product because customers dont need said product/service and/or dont feel there is value for money, but economists would say thats the markets speaking. It depends on whether you want to work for pittance or not. Good gamblers know when to leave the table.
Inflation rates only measure the cheapest of something, they never measure the change in quality so dont be scared to put your prices up. The worst that can happen is you cant sell a product because customers dont need said product/service and/or dont feel there is value for money, but economists would say thats the markets speaking. It depends on whether you want to work for pittance or not. Good gamblers know when to leave the table.
Grow faster than inflation. Spend cash on items that don't depreciate at the rate of inflation. Exit before you run out of cash. Make sure pricing is set appropriately and has opportunity to increase in the future. Consider "introductory" pricing instead of "lifetime" pricing. And on the flip side, try to lock in pricing now for things you buy that might change in the future. So, buy lifetime licenses where it makes sense, but don't sell them.
The interest rates on credit are very favorable when considering inflation. Entities with significant medium to long term debt can be attractive right now.
On a personal note, if you have a mortgage at 3% and inflation is 6%, then you are generating value and free to use the money you do have for stuff like investment properties or securities.
On a personal note, if you have a mortgage at 3% and inflation is 6%, then you are generating value and free to use the money you do have for stuff like investment properties or securities.
It depends on what terms you are getting but it is important to be clear that this is a bet on the Fed not raising rates, and I would argue that you should own linkers if you want to do this bet instead.
Everything makes perfect sense when the risk-free rate is -5%. If the Fed does hike late and the risk-free rate has to move to 5% then your debt will start looking like a noose.
Everything makes perfect sense when the risk-free rate is -5%. If the Fed does hike late and the risk-free rate has to move to 5% then your debt will start looking like a noose.
Yeah, things can change. As a startup, I would hope the time horizon would be short enough that acquisition or profitability happens first.
Many here have pointed out that the difference between 6.2% and normal inflation is not meaningful for businesses. And that makes sense.
I'm curious what if anything companies/founders could do in the event of actual hyperinflation?
I'm curious what if anything companies/founders could do in the event of actual hyperinflation?
In practice, what they do is feed the hyperinflation, by raising prices too frequently, because there's hyperinflation, which causes... more hyperinflation. The whole reason anybody needs a wheelbarrow full of cash to buy a loaf of bread is because the price is spiraling out of control. And, it spirals out of control because all the sellers of goods get caught up in the fever of rising prices.
The only thing that ends hyperinflation is a return to rationality, which is generally brought about by some sort of market crash. In 1994, Brazil used a different tactic, though: they scrapped their old, inflating currency, and created a new one, which they simply told the people was stable and not hyperinflating[0]. What it really was was a profound demonstration of the fact that microeconomics is really a strange branch of applied psychology.
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[0]: https://en.wikipedia.org/wiki/Plano_Real
The only thing that ends hyperinflation is a return to rationality, which is generally brought about by some sort of market crash. In 1994, Brazil used a different tactic, though: they scrapped their old, inflating currency, and created a new one, which they simply told the people was stable and not hyperinflating[0]. What it really was was a profound demonstration of the fact that microeconomics is really a strange branch of applied psychology.
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[0]: https://en.wikipedia.org/wiki/Plano_Real
That makes sense, and is very interesting to read about.
My question was actually more about the practical / ops side of this. What would large companies (especially large corps like Apple or Facebook) do with their stockpiles of cash on hand?
My question was actually more about the practical / ops side of this. What would large companies (especially large corps like Apple or Facebook) do with their stockpiles of cash on hand?
Interest/Inflation rates have been higher in the past. Aren't startups generally interested in a 1 year timeframe? It would be easy to burn a few percent in transaction fees if you're not careful.
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The inflation rate varies a lot by sector and industry. Hopefully you have a startup that has a compelling product where you can raise prices when and if you have to.
I highly recommend "The Hyperinflation Survival Guide: Strategies for American Businesses Hardcover" by Gerald Swanson
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you should just hire an Argentinian who knows how to use its force in its favour. Inflation Aikido
6.2% is merely 3% above average, not much in the scheme of things
With the minor detail that the US government can't afford to service it's debt at those rates anymore.
(Not your startup's problem, however)
(Not your startup's problem, however)
Operate on a bitcoin standard
Inflation is a vital part of our economy.
Its how 'growth' remains 'sustainable'.
(both of those words doin' ALLL the work in Consumer Capitalism)
Hyperinflation is NOT happening right now.
Stop watching Fox.
PS: There is absolutely a ridiculous housing bubble right now. AGAIN. Worry about that.
Its how 'growth' remains 'sustainable'.
(both of those words doin' ALLL the work in Consumer Capitalism)
Hyperinflation is NOT happening right now.
Stop watching Fox.
PS: There is absolutely a ridiculous housing bubble right now. AGAIN. Worry about that.
At our current rate it’s only slightly over 100% inflation for the next year. Really it’s no big deal.
Are you assuming that the “October measure” of 6.2% is a per-month figure (meaning 12 of them would be +106% compounded [1.062^12-1])?
That’s not how it works. The 6.2% is an annualized figure.
(If the one year outlook were for inflation to be >100% in the US, people would be flipping out; BTC would be $200K+; markets would sell off 40+%; Treasuries would be selling at a yield well over 75%)
That’s not how it works. The 6.2% is an annualized figure.
(If the one year outlook were for inflation to be >100% in the US, people would be flipping out; BTC would be $200K+; markets would sell off 40+%; Treasuries would be selling at a yield well over 75%)
It’s month over month actually.
> It’s month over month actually.
No, it’s not.
From BLS: https://www.bls.gov/news.release/pdf/cpi.pdf
First paragraph:
The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.9 percent in October on a seasonally adjusted basis after rising 0.4 percent in September, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 6.2 percent before seasonal adjustment.
No, it’s not.
From BLS: https://www.bls.gov/news.release/pdf/cpi.pdf
First paragraph:
The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.9 percent in October on a seasonally adjusted basis after rising 0.4 percent in September, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 6.2 percent before seasonal adjustment.
Deleting this as it seems to be completely misunderstood.
These seem strange to me since I read OP's question as being specific to a founder who has raised money. If I was an investor and a founder took my money to hold in gold bars or Bitcoin instead of engineer headcount or whatever else the business needed to be built by, I would find a way to get it back ASAP.
Well you'd adapt it to your situation. All of this wouldn't apply to everyone item for item.