13% inflation? It's still a great time to build a startup

This week Monzo’s co-founder and first CEO Tom Blomfield revealed some interesting nuggets for startup watchers detailing the early days of founding one of the UK’s most successful fintech businesses in 2015. 

The biggest single interest rate by the Bank of England in 27 years, also occurred today, adding to the very, very long list of financial, political, social and environmental woes weighing on sentiment. Inflationary pressures in the United Kingdom as well as the rest of Europe are the most intense in a generation with real incomes certain to fall. 

Given the circumstances, might we expect to be reading similar stories nearly a decade from now about startups that truly shook up established industries and went on to be worth billions of pounds? 

Now, understandably, might not feel like the right time to pursue a startup, particularly one focused on finance, banking and money. 

Founding companies, of course, is a highly personal endeavour with everyone’s own circumstances or other reasons dictating to varying degrees factors that might mean otherwise.

Perhaps though, right now despite uncertain times for venture capital funding which is often seen as the lifeblood for startups, it is the perfect time to build a new company from scratch. 

Let’s take a look at three core reasons.

Great companies are formed in a recession

While nobody has a crystal ball, a very large number of economic experts are expecting further economic pain. The Bank of England today notes a near doubling in wholesale gas prices since May fueling more inflation. The culprit, unsurprisingly, is Russia’s restriction of gas supplies to Europe. There is every reason to expect further curbs from Russia. 

This will feed through to retail energy prices, says the BoE, further exacerbating the fall in people’s real incomes. The UK’s CPI inflation is therefore expected to rise more than forecast a few months ago from 9.4 per cent in June to just over 13 per cent in 2022 Q4 with a further expectation that inflation will remain high throughout the whole of next year.

The tech-centricity of today’s financial pain in markets suggests a similar set of circumstances to the 2000-2002 dot com crash and recession that will characterise this down period, which could last for a year or so at least.

While the dot-com crash saw thousands of internet companies fall, it also saw the birth or growth of dozens of companies that thrive today. 

For example, Amazon and Google were founded in 1997 and 1998, respectively and today are among the world’s largest companies. Salesforce was founded just months before the tech bubble burst in 1999 and now has a market capitalisation of $189bn as well as c.75,000 employees. Paypal was infact founded during the downturn in October of 2002. At a market cap of $110bn, following substantial share price falls this year, its 20th of operating, it can easily still claim to be perhaps the world’s most valuable fintech success story.  

Talent

The obvious caveat is that funding is becoming harder to come by. This has so far mainly been focused on the growth stage of the fintech venture capital - where there have been some notable down rounds - but pressure on earlier stage rounds may well increase. 

Nonetheless, searching for talent during recessionary periods from larger startups is becoming easier.

Layoffs in fintech and tech more broadly have become a common reaction in companies where they are hanging on to their employees hiring freezes are occurring.

While hard to quantify, anecdotally I have found conversations with earlier stage founders have in contrast centred on their ambitious plans to scale their hiring and in particular a focus on poaching top tech talent from companies where the outlook is less certain.

It’s the product, stupid

For more mature fintech startups, those who have closed Series A rounds and more let’s say, the pressure is on to justify valuations and stay solvent. This must come from revenue generation as well as some cost-cutting. 

For younger companies, particularly those at an early or pre-product stage this reality provides a huge opportunity to focus squarely on building fantastic products that consumers and businesses need. 

Exceptional products that help people access better, cheaper and consumer-friendly financial services stand a very good chance of getting funded further down when the economy turns back to growth. 

Not least this true when the need is greatest. With living standards being substantially lowered and the pressures on businesses increasing, particularly owing to higher utility prices, fintech companies have a huge opportunity to help.

Will we see another Monzo come out of the current economic mess? History would suggest yes, and it will be more than one.