Losing a Month of Runway to Inflation
8% annual inflation for a startup means losing a month of runway every year.
Purchasing power erosion of this scale may entice founders with significant cash positions to explore riskier ways of generating yield.
In the mid-2000s, many startups invested their excess cash reserves in instruments called Auction Rate Securities. ARS produced a steady stream of interest payments, like savings accounts, with a higher return.
In February 2008, the ARS market seized. Startups seeking to sell their ARSs to fund burn were out of luck : no one would buy them. Runways shortened dramatically due to the market’s illiquidity.
The Global Financial Crisis followed. Lehman declared bankruptcy. VC investment fell 40%, nearly halving another source of oxygen.
Eventually, the SEC investigated the four investment banks, who sold ARSs & compelled them to repurchase these securities at face value.
Because of the massive fundraising waves of the last few years, many companies find themselves with significant cash balances pondering whether to chase yield to stave off inflation.
Investing millions at higher returns might offset the cost of a few employees or lengthen the lifespan of a company by a month or two or three.
While those benefits may be attractive, especially in an environment where inflation may erode runway, investment liquidity remains the critical consideration.
The point of raising venture capital is to have money when the company needs it. When ratifying a treasury management plan, it’s wise to keep at least 12-24 months’ of runway on hand just in case.