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? |
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%)
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.
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.
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.
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.
Interest new use of the word "almost"
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.
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).
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.
You shouldn't be spending even a single cycle thinking about the inflation rate with regard to your startup's liquidity.
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.
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
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!
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.
And this is exactly why you should interview at another company every year
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.
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.
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.
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.
I'm curious what if anything companies/founders could do in the event of actual hyperinflation?
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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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?
(Not your startup's problem, however)
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.
A TIPS investment does little to mitigate your prospective house going up a few hundred thousand dollars.
> 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