Here’s why inflation can be both good and bad news for entrepreneurs and angel investors…
In an inflationary economy there are always winners and unfortunately losers, so what is the likely outlook for business angels and entrepreneurs should RPI and CPI continue climbing?
Let’s first look at the impact for business angels. Being individuals of high net worth they will have the opposite problem to your typical entrepreneur starting out. They will have a lot of money sitting there which needs to be put to work. Some will choose to invest in start-up businesses sometimes for altruistic reasons but more often than not for profit.
Now this was all well and good when the times were good, but now the signs are that unless the Bank of England puts the brakes on through a base rate increase we will soon be in for a spell of runaway inflation, which hasn’t been seen since the bad old days of the 70s and 80s. Business angels will need to react to this gathering storm by being prepared for the worst.
The worst case scenario is that the value of cash will continue to erode as inflationary forces continue to push up the value of goods and services.
Now more than ever a well-balanced portfolio which includes investment in equities and even a proportion in gold is a good idea as a hedge against inflation, but just as importantly some of that cash should also continue to be placed in start-ups particularly those businesses with a high turnovers and low margins. History shows that some of the world’s most successful companies started up in recessions – take Microsoft for example.
This will explain the new investment boom in Internet start-ups. Everyday in the US and the UK we hear news of the latest £multi-million investment in this sector. There is even talk of a bubble, but this shows no sign of popping just yet.
But this is the good news for business angels. The bad news is, the businesses they invest in will also be caught up in the inflationary spiral when it comes to purchasing goods and services. As a business angel the money you invest in the company will also be eroding in terms of its capital every year in this inflationary cycle so you will need to carefully consider your funding structures rather than loading too much debt on your company to begin with.
Your mentoring skills will also be important in guiding companies through choppy waters as businesses are buffeted by rising costs. Bootstrapping is now even more important so choose those companies who demonstrate this capability within their business plans.
The problem with this inflationary cycle is that it has come hot on the heels of a major financial crisis. Entrepreneurs are already dealing with the aftermath of the downturn and the second dip into recession we have already experienced, while others are taking risks to take advantage of the next upswing. With banks twitchy many more entrepreneurs will be looking to business angels to help grow their businesses.
To keep those businesses angels interested, entrepreneurs will need to show commitment to keeping their costs down while showing a credible projections for growth in their business plans. Turnover will need to be faster and you will need to be acutely aware of cashflow, including those late payers to avoid your startup being crushed under a the burden of high prices.
So is there any good news for start-up entrepreneurs?
Well as we’ve already established now is as good a time as any to start a business, take the earlier example of Microsoft as your inspiration. Also while taking on debt should be avoided unless absolutely necessary now is probably a good time to consider a loan in the absence of other available options. Your loan will decline in value over time as inflation begins to eat away at it.
Both entrepreneur and business angel are in the same boat when it comes to inflation, but with a little caution there is no reason why inflation should keep either awake at night.
Tags: Angel investors, Bootstrapping, bubble, business angels, business plans, CPI, entrepreneurs, funding, funding structures, high net worth, inflation, inflationary economy, inflationary forces, RPI, start-up entrepreneurs