Our startup raised – would you care about inflation?

Question

Hi everyone, our early stage startup just raised a first round, currently for 12-18 months of runway. Like the US, inflation is hitting Europe with ~7.5% p.a., salary expectations in job interviews with newly grads are already up 15-20% compared to last year.After a long time of bootstrapping, "just spend faster" is not a viable option to prevent inflation from shrinking that pile of cash we're sitting on &ndash; we're both culturally and operationally not yet ready to open the floodgates: hiring the right people and building the team takes time, and we also haven't figured out which sales channels are the right ones to scale. Our business is highly cyclical, so we need certain periods of the year to figure stuff out while improving product and ramping up capacity in the mean time.How do you fellow founders manage this situation? Do your companies hold assets to hedge inflation risks? Do you think about putting clauses into contracts with investors to adjust future payments to inflation? Are there any good reads on cash management for startups in general?

MatteoFrigo · Accepted Answer

Unless you have a different agreement with your investors, you should stay in cash (say, government bills of less than 3 months maturity) or at most very short term government bonds matched to your liabilities (e.g. a 1 year bill if you are pretty sure you won't need the cash for one year).
The last thing you want to do is tell investors that you lost money investing the cash that they gave you. For example, US treasury inflation-protected securities maturing on 4/2023 pay CPI inflation minus 3%. Say you buy these securities thinking that it is a good idea to protect yourself against unexpected inflation, and then inflation moderates down to 0% in the next year. How are you going to explain to your investors that you lost 3% of their money?
Beware that, in the 2008 crisis, even some money-market funds lost money. The US money market funds have since been regulated so that they won't lose money in the same way, but I am sure more ways exist. Stay in government bills, insured bank deposits, and money-market funds that invest in government securities only. The extra 0.01% yield is not worth the risk.
The trust of your investors is more precious than the cash they gave you. If in 12-18 months things look good you won't have a problem raising more cash.

formerkrogemp · Answer

I'm assuming that you're in Europe? Now, I'm just a final year accounting student and not a founder, but I've been learning a little bit about client advisory services and virtual CFO offerings. I don't know if there is a European offering or version, but I would check in with an accounting firm that would offer treasury services for a fixed fee, usually a monthly fee. I'll comment again later with some reading recommendations.

formerkrogemp · Answer

First of all, congratulations on the raise. That's an awesome accomplishment. A lot of books on entrepreneurship seem to basic or general to help you at your stage of having secured funding but trying to figure out sales. I found a few books that might be helpful.
Entrepreneurial finance and accounting for high tech businesses by frank fabozzi (2016) 448 pages Seems to be a decent overview of the issue.
Traction: Get a Grip on Your Business by Gino Wick Man (2012) 271 pages. Seems to be recommended often enough on the accounting podcasts that it's worth mentioning.
The Great CEO within
LEAN analytics by Josh Wright
LEAN startup
The Startup Playbook: Founder-to-Founder Advice from Two Startup Veterans [2 ed.]
Startup Myths and Models: What You Won't Learn in Business School
HBR's 10 Must Reads on Entrepreneurship and Startups (featuring Bonus Article “Why the Lean Startup Changes Everything” by Steve Blank)
The Finance Playbook for Entrepreneurs
Entrepreneurial Finance, Third Edition: Finance and Business Strategies for the Serious Entrepreneur
Startup CFO
The 80/20 Rule
60 Minute CFO
Handbook of Inflation Indexed Bonds (1997, but much still applies today)
The Return of High Inflation: Risks, Myths, and Opportunities (2016)
Inflation Hacking (Inflation Investing Techniques to benefit from high inflation)
https://brianbalfour.com/essays/customer-acquisition
Best of luck. Inflation hedges include cyclical businesses like mining or Norsk Hydro, commodities, floating rate bonds possibly held to maturity, commercial paper, prepaid expenses, and low interest debt/leasing on assets necessary for your business.

brudgers · Answer

7.5% won't take you out of 12-18 months of runway unless it's just 12 months.
While prudence is warranted, that's probably the level of financial sophistication to apply because the line between success and failure is almost certainly less fine grained.
Good luck.

fuzzfactor · Answer

Inflation will shorten your runway.That's one of its main functions.Even if you overcome other disadvantages.Sometimes a single 7.5% mistake with your resources can be deadly, now that's built in.As a simple rule of thumb you will have to work more than 7.5% as effectively and do it in 92.5% of the time to improve your likeihood of meeting former expectations.Now with a cyclical business having not that many cycles behind you, that's not so simple.If it's a yearly cycle that 12-18 months could shrink to less than a year and that would mean you only really get one chance to make it or break it.

Our startup raised – would you care about inflation?

7.5% won't take you out of 12-18 months of runway unless it's just 12 months.While prudence is warranted, that's probably the level of financial sophistication to apply because the line between success and failure is almost certainly less fine grained.Good luck.

7.5% won't take you out of 12-18 months of runway unless it's just 12 months.
While prudence is warranted, that's probably the level of financial sophistication to apply because the line between success and failure is almost certainly less fine grained.
Good luck.