The Big Squeeze: Can We Talk about Inflation and it’s Impact on Early Stage Companies?
Unless you are outrageously wealthy—or younger than 20—inflation has significantly changed how you live, borrow, and spend since 2021.
We hear a lot about inflation and its impact on us as consumers, but we don’t talk much about the impact of inflation on early stage companies, despite how it’s changed almost everything about starting and building a business.
I didn’t see it in the agenda at any major conferences last year. Haven’t read much on the startup blogs. Not a topic at receptions or meetups, where chit chat about the more “mundane” aspects of our lives as founders and investors is commonplace.
I don’t think the lack of conversation is because inflation doesn’t impact early stage companies. It most certainly does. I see it every day as founders in our portfolio grapple with their spend plans and resource allocation. I think it’s because there aren’t obvious or easy fixes. There’s not much to say except, “this sucks.”
Take just the obvious stuff:
-Salaries have risen 40-60%.
-Airfare increased by 48% in a single year.
-Basic components of operating are now major cost drivers, siphoning resources away from experimentation and growth.
-Cash constraints facing large enterprises have trickled down to the startups who sell to them. Today, it's not uncommon for enterprise orgs with hundreds of millions of dollars in revenue to ask small companies for 90 day terms. Worse? Some stats show that 30+% of them are taking more than 90 to pay.
But the impact goes deeper than line item increases on the P&L or chasing down checks: Inflation has made some common startup "fundamentals" laughably impractical, if not actually dangerous.
Inflation Takes the Fun out of Fundamentals
Inflation has eviscerated some ‘pantry staples’ of entrepreneurial advice. Take hiring for sales.
For years, investors and mentors advised early stage companies to hire more than one person for a role and a few months later, keep whoever works out best. It was a reasonable strategy given how people can look good on paper but underperform in real life.
Today, with the rising cost of compensation, that little 6 month experiment might cost $150K more than it did a few years ago. That’s a lot of cheese, and many companies can’t tolerate that risk.
Ditto with founder compensation. Investors and advisors have long insisted on artificially low founder salaries as a way to keep founders motivated to push for a good exit, ostensibly to align compensation with that of investors.
Put aside the wisdom, fairness or effectiveness of this. The reality is that founder compensation, already meager by any standard, has not risen with inflation.
Founders are racking up personal debt, barely able to pay their rent, let alone create any kind of financial stability. All of this is contributing to founder burnout and poor leadership environments.
It’s especially punishing for founders who can’t supplement their income with savings or contributions from family or domestic partners. These days, entrepreneurship heavily favors those who have, or at least start with, some personal wealth.
Impacts on Experimentation
In our portfolio there’s a huge emphasis on experimentation as a way to make better decisions and reduce the risk of investing into things that don’t produce results.
For example, before investing heavily in scaling a strategy, we often ask: ‘What’s a small, simple version of this idea that we can test first?’
This approach not only reduces risk but also sparks creativity. The insights you gain from these smaller tests lead to smarter, more impactful scaling decisions based on real data.
Inflation has increased the importance of experimentation while also making it more difficult!
Even smaller simpler experiments may cost more than they did two years ago.
The cost of failing has gotten so much higher that it’s easy to see why some founders feel like they can’t afford to experiment anymore.
Innovation vs Efficiency
With the rising cost of everything, there is a real and necessary pressure to focus on operational efficiency at much earlier stages of company development, always doing more with less just to stay default alive.
Some of the best founders I’ve ever worked with were not good at operational efficiency early on. Some never got great at it. And that was okay.
Instead, they were good at adapting, good at innovating to meet customer needs. Good at thinking about what’s just over the horizon, and not just about what’s right in view.
Five years ago, I didn't need every founder to be awesome at operational efficiency. Sure, being capital efficient mattered. Not burning money in a barrel. But when hitting a trade show might cost you 15K, the little things really start to matter.
Today, founders are under pressure to innovate, evolve, and capture market share, while also counting beans on every expense and focusing on getting maximum value out of every move you make.
That’s a tall order.
And with funding becoming more competitive and ‘hail mary’ hard to come by, there’s just less room for error when it comes to cash flow management.
Bright Spots?
f you thought you could get a whole blog post without someone mentioning AI, you thought wrong. For many reasons, but certainly as a response to inflation, every company needs an AI strategy to survive.
If you are not using AI to automate, expand, and replace higher cost labor, you are going to lose to someone who does.
I’ve got a buddy with a visual data company that is just beginning to interact with customers. A few months ago, they created a Growth Engineer large learning model.
It took a few minutes to create, and certainly it has gotten better with training over time, but now this AI is a critical resource to their business.
Their ‘AI Growth Engineer’ completes market research with valid source citations, translates technical product features into business benefits, crafts messaging for demand generation campaigns, and supports the human sales team in mapping critical client pain points with shockingly concise narratives.
Projects that used to take a few days are now being completed in less than an hour. He estimates that the AI team member currently contributes at the rate of 2 FTEs and is getting better every day. That’s hundreds of thousands of dollars not being spent.
I usually try to end every blog on a happy note. I can’t really do that this time. But I can say that in spending more time and talking with our founders about their capital strategy, spending plan and putting that into the context with their operational goals, we have found creative solutions and avoided some cash cliff pitfalls.
This is also an area where a good capital mentor adds a lot of value, someone who understands how you might think about financing different parts of your business beyond whatever mechanisms you were using today. Ditto for someone who can help you look for inefficiencies in your financial model, where you may be over spending or not appropriately characterizing the ROI for certain activities.
It’s hard to say what will happen to inflation. But it is unlikely that the cost of everything will suddenly go back to that of yesteryear. At a minimum, it’s good that we talk more about the impacts of inflation on early stage companies, if only to be on the lookout for ways to lighten the load.
RevUp Capital Managing Partner Melissa Withers is a bullish advocate for innovating the ways in which new companies are funded and supported. Beyond building new economic models for early stage investing, Melissa is also committed to directing more entrepreneurial funding to those underserved and overlooked by traditional VC.
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RevUp Capital invests in B2B and B2C companies that are revenue-driven and ready to double down on growth. We deploy cash and capacity to help companies grow from $1-3M to $10-30M, quickly and efficiently, using a revenue-based model. Companies enter our portfolio with $500K-$3M in revenue, a strong growth rate, and a team that’s ready to scale. Our typical investment range is $300K-$500K.
We invest into a company's market-facing activity using a cash and capacity model. We pair our cash investment with dedicated support from the RevUp Growth Platform: a powerful resource to build a data-driven growth engine, delivered by people who get the work done. Rather than take equity, companies return investment through a small percentage of revenue over time. More at www.revupfund.com