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 – 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?
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.