New day, another rate hike. Several bigwigs at the Fed have announced that they will whatever is needed to tame inflation. Wall Street is invariably in the red, and startup shops tout tighter capital availability and lower valuations.
But what is the actual relationship between interest rates, seed capital and valuations?
Following Modern Monetary Theory (MMT), the Fed raises interest rates to “cool the economy” and prevent inflation from rising further.
Despite the focus on interest rates, the second aspect—inflation and subsequent government response—will have the most significant implications for founders and the public.
If your customers benefit from inflation, then there’s a good chance your company will too.
Inflation affects your customers, suppliers and capital
The startup literature on the impact of inflation on startups focuses on cost reduction, reaching positive by default, burn control and delay in hiring. But some of these measures, while useful during recessions, are too general to be useful. Instead, the better way to prepare for inflation is to understand how price increases affect your business.
Every business has three main components: customers, suppliers (including employees), and capital. How does inflation affect each of these factors?