Ask HN: How will inflation change fundraising? | Hacker News Reader

Ask HN: How will inflation change fundraising?

5 pointsolhausler9 comments

Raising large equity rounds may no longer work in inflationary times as inflation will consume part of the funds, which will dilute shareholders of earlier rounds more than normal. New investors may appreciate the extra participation they gain and not want to change, but when inflation raises high enough, the current fundraising model will collapse. What can we do?

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Y Combinator started with $10k investments, now $120k because inflation. But lately it is becoming a little high, compared to China and so on.

IMO, later stage VCs give money more for ammunition and scale up and down with the economy. It's seed funding that's most affected.

I remember the $10k investment, and I always found it too low. I doubt they raised to $120k because of inflation (though I agree some part of it may be because of that).

They did cite inflation as the reason it was raised, but likely it was too low.

Well, a raise from $10k to $120k being inflation-based sounds a bit odd as an argument, and I remember this was in pre-Covid times where inflation was close to zero.

With interest rates being low, the return on equities is still attractive.

Is there even any significant amount of inflation occurring…?

Not yet, but you can anticipate that it will. Think of the trillions of dollars being distributed to people by governments as Covid help. If you distribute funds derived from QE to people during a lockdown, everybody will start buying like crazy once the lockdown is gone, which will certainly cause significant inflation. Besides, inflation is in the US government's best interest, as it will lower external debt and therefore decrease US dependency.

The causes of inflation are, of course, complex, and there is currently no inflation formula. However its fair to say that the distribution of money does not cause inflation.

Equally lots of people getting govt money does not cause inflation. Even less so since a) its not life-changing amounts and b) it's mostly replacing lost incomes from elsewhere.

The movement of money (aka this thing we call The Economy) is the direct goal of the distribution. We Want people to spend the money - it is precisely why its being distributed.

Again, while inflation is complex, it's fundamentally caused by an imbalance of supply and demand. Ie an oversupply of money coupled with an under supply of what people want to spend that money on.

This happens locally all the time, an over supply of VC money into SF leads to a housing shortage, which causes massive rent inflation.

The US economy (ie the balance of goods and money supply) at a national level is based on consumer consumption of cheap goods. Cheap food (locally produced) and cheap consumer goods (mostly imported - much of it from China) coupled with cheap energy (local / imported). In the US on thing matters - the consumer price - the ultimate _cost_ is not considered.

The current issue for inflation is not the over-supply of money. Its the costs of things like Trade wars, tariffs, and the like. Those costs translate into higher prices at the till (driving up prices to make US products competitive is the exact goal of tarrifs).

Ultimately some inflation would be a good thing. A lot of it is bad.

But I don't think you need to worry. Govt cheques to poor people, will ultimately end up swelling the coffers of VC accounts - which in turn will lead to more money for them to distribute.

Put another way, inflation affects all investments - especially cash - if anything it just increases the appetite for a big score.

Yes, all those funds will finally end up in VC coffers, and exactly this I find worrying, when looking at it from the startup's side. Let me make an example with numbers: In a normal world, during a funding round a startup receives for example $10MM for 20% of their stock. They typically calculate with 2 years to spend the funds plus 18 months runway. Not calculating the extra money the startup must raise to be on the safe side, if the $10MM is worth a lot less at the end of a cycle because of inflation, part of the stock they sold went into "funding inflation". As the startup can only do so many rounds until founders are fully diluted, at some point, inflation will dilute founders so much that they may walk away, for the bad of both sides. IMHO, like so many things, the current investment model only works well when inflation is low.

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