# Inflation, Startups and VCs (Part 1)

By [Continuations](https://continuations.com) · 2009-06-23

inflation, deflation, startups, vc, venture capital

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I wrote last September about the competing views around [deflation versus inflation](http://continuations.com/post/51709160/inflation-vs-deflation).  Interestingly, about 9 months later we still seem don’t seem to have real clarity on the subject.  Over that time we have approached deflation but there has also been a ton of government intervention, which has prompted op-eds [predicting future inflation](http://online.wsj.com/article/SB124458888993599879.html) and even a new fund run by Mark Spitznagel (a long time collaborator of “[Black Swan](http://www.amazon.com/Black-Swan-Impact-Highly-Improbable/dp/1400063515)” author [Nassim Taleb](http://en.wikipedia.org/wiki/Nassim_Nicholas_Taleb)) [to bet on inflation](http://online.wsj.com/article/SB124380234786770027.html).  On the other hand have been responding blog posts like [this one by Paul Krugman](http://krugman.blogs.nytimes.com/2009/06/13/way-off-base/) and op-ed pieces like [this one by Alan Blinder](http://www.nytimes.com/2009/06/21/business/economy/21view.html) arguing that inflation is not a threat.  In a second post I will dissect the arguments a bit, but first why should startups and VCs care at all?

It is hard to remember when we last had meaningful inflation (in the [late seventies and early eighties](http://en.wikipedia.org/wiki/File:US_Historical_Inflation.svg)) and so most entrepreneurs and VCs active today (myself included) don’t have a good sense of the implications.  Generally, it turns out to be much harder to run a business during inflation especially when the business is equity-financed such as VC-backed startup or a VC fund.  Expenses tend to inflate faster than revenues – especially true of course for pre-revenue startups.  The amount of venture funding in your bank (or the size of your fund) on the other hand are fixed.  In 1980 when inflation peaked at nearly 15% that would have been a serious consideration.  Even at say 10% annual inflation, a $100 million fund is not really a $100 million fund at all considering that the money is put to work over a 5+ year-period.

Deflation, btw, is not pretty either but it tends to harm existing businesses more than startups.  So as a startup or a VC you should care about whether we might face a return of inflation.  In Part 2 of this post, I will describe why I am (cautiously) optimistic that we don’t need to lose sleep here but also should not dismiss the potential entirely.

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*Originally published on [Continuations](https://continuations.com/inflation,-startups-and-vcs-part-1)*