Archive for the ‘start-up’ Category

Another Reason To Launch Your Start-Up Now: Inflation

They say a recession is a good time to launch a startup. It seems a bit counter-intuitive at first, but on second thoughts it makes sense. For one, economic downturns don’t last forever, so by the time things pick up the startup will hopefully be off the ground and be ready to reap in the rewards of the better times ahead. Also historically, new paradigms in technology have been introduced during downturns – think Web 2.0 and the 2001-2003 malaise. Melissa Chang at The Industry Standard lists 5 great reasons why recessions are a good time to start a company.

Naturally, making it so that your venture makes it through the rough times and lasts until the going gets better is crucial. This is where inflation can throw a big monkey wrench in your startup’s financial planning.

When a startup launches with a pool of funds, right off the gate the funds are good for, say X months. Then inflation roars along, forcing that estimate to go down to X-1, X-2 months, etc. And inflation has been roaring along: it recently inched to a 17-year high in the US, an all-time record in the EU and Canada, and emerging economies like China and India have been breaking records of their own (here and here).

So if you have an idea and some money set aside, either from saving or pledges from friends and relatives, launch that startup and launch it now. Don’t wait, because in a few months from now that amount of money may not get you as far as it would today.

The extent to which the current inflationary environment affects different startups can vary. Launching a software-based startup can be done on a shoestring these days with the relatively inexpensive cost of hosting, basic hardware and various startup support services (like SimpleDB, EC2) etc.

The relatively low “price of entry” for a software startup shouldn’t cause complacency to the threat of inflation though. Often times the largest expense category of startups, especially smaller ones and micro ISVs, is the cost of living of the founding members, some outsourced work here and there (e.g. graphic design) and maybe some travel (maybe a bit more travel if you are launching an enterprise software startup, actually). Unfortunately the expenses associated with these categories have been rising much faster than many other items that the official inflation figure tracks.

Don’t expect much of a break when it comes to hiring help either – tech workers are still in high demand, their salaries in emerging economies like India have been catching up as this story from Bangalore indicates and even reputedly not-so-great economies like Germany have now an official shortage of engineers.

There is little sign of inflationary pressures dissipating any time soon. If anything, they might only get worse. Inflation-stoking events are everywhere, from government-sponsored bailouts of bankrupt institutions (Northern Rock in the UK, Bear Stearns in the US) to economy ‘stimulus’ packages (e.g. the one in Spain), from Central Banks worldwide pumping ‘liquidity’ into markets and keeping interest rates below inflation rates.

For example, in the US the Federal Reserve rate is 2.00% or 2.25% through its discount window. These rates are available for select privileged institutions (i.e. not you and me). With inflation officially at 5% and unofficially much higher, these select privileged institutions that get access to this sweet deal are effectively being *paid* to take the money. And thus money is created out of nothing and down the inflationary spiral we go.

A surprisingly large number of developed and developing countries in the world have their Central Bank rates close to or below inflation, so the difference here is mostly about the *extent* of the creative ways in which new money is pumped into the system.

The official response on inflation so far has been mostly “yeah, it’s bad, we know it, we are just gonna look at it some more and hope it goes away on its own. Hey, how ’bout another multi-billion dollar bailout?”.

Now, I am not an economist and maybe this is the correct course of action given the circumstances. What I do know though is that things are unlikely to change in the upcoming few months while my startup ramps up, and I am planning accordingly.

Inflation is real, inflation is here and ignoring it can be detrimental to the health of your startup, present or future. Plan now, act now.