The perfect time to take out a loan.
Why not. Take out a lot of debt. The startup will probally not make it, so go out with a bang.
Wealthy folks think like this. Play fast and lose with other people's money.
Ask HN: What should founders do to protect against inflation?
21–30 of 54 posts
Re: Ask HN: What should founders do to protect against inflation?
#22Grow 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.
Re: Ask HN: What should founders do to protect against inflation?
#23Deleting 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.
Re: Ask HN: What should founders do to protect against inflation?
#24The 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 margi…
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.
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.
Re: Ask HN: What should founders do to protect against inflation?
#25The 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.
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.
Re: Ask HN: What should founders do to protect against inflation?
#26I 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.
Re: Ask HN: What should founders do to protect against inflation?
#27Regarding 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 adjustabl…
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.
Re: Ask HN: What should founders do to protect against inflation?
#28The 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.
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.
Yeah, things can change. As a startup, I would hope the time horizon would be short enough that acquisition or profitability happens first.
Re: Ask HN: What should founders do to protect against inflation?
#29If 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.
Re: Ask HN: What should founders do to protect against inflation?
#30> 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).