Inflation. CPI index. Core inflation.
Inflation is a market reality, no matter which term you use. And that reality will impact any fintech startup’s growth trajectory. As an investor, inflation is just one of many considerations in constructing an investment thesis, fundraising for a new fund or creating value in an existing fund.
I do not view inflation as a binary gating metric answering the question of whether to invest. Instead, I see it as a metric that exists on a spectrum, informing how to invest. This is true for equity investments as well as debt investments.
In today’s business landscape, inflation may be creating new opportunities within the fintech market.
High Inflation Is A Catalyst For Financial Wellness Startups
Let’s start with high inflation but, first, I want to clarify I’m not talking about the bond market. I’m not talking about equity markets. I’m certainly not talking about the pressure building up on corporate balance sheets.
I want to talk about what happens at the individual level in order to keep this succinct and avoid drafting a novel.
During high inflation periods, the individual is going to feel pressure. The individual is going to feel stretched.
For simplicity, I am going to assume individual incomes may not keep up with inflation during high inflation periods.
Common sense also tells us the expense line items of an individual are going to increase. The price of goods and services used by the individual are going to increase.
The individual’s gross margins and net margins are going to decrease. Individuals will have less cash on hand. Individuals will likely also start seeing a reduction in their savings. The segment of the population living paycheck to paycheck will likely increase.
Deflation Creates Opportunities For Interest-Yielding Products
Let’s switch to the other extreme: a deflationary environment.
Common sense tells us the individual will feel more flush with cash, as the prices for goods and services are decreasing. In some geographies and cultures, the share of the wallet dedicated to savings increases. In other societies, consumer debt will increase.
However, there are still pressures.
Individuals with a propensity to save will seek a higher yield on their cash, while other consumers will need debt management and possibly debt relief.
There also remains a possibly reduced but still present segment of individuals who will still be living paycheck to paycheck.
How To Find Secret Opportunities
Inflationary cycles unlock new opportunities to be helpful and alleviate compounding stressors.
In the fintech space, doors open to invest in an entire segment of startups who are addressing the pressures felt by individuals.
The question is not whether to invest – the answer to that question has limited utility. The question that precedes these “secret” opportunities is how to invest.
What needs arise when inflation is high? Emergency relief, housing insecurity, food insecurity, alternative sources of proteins, extending the life of owned or financed assets and debt counseling and restructuring – to name a few.
During deflation, there is a need for fractionalization of investment products as well as education products around the responsible use of debt.
This is why inflation is just one – dare I say, minor – factor I consider in my investment rubric.
Necessity Creates Opportunity
In evaluating whether there is a “secret” opportunity, the main question I ask is: Does this investment opportunity alleviate pressure resulting in better outcomes.
Pressure is another word for an unmet need. Necessity is the mother of invention. Invention creates opportunity. According to the transitive property, necessity is opportunity.
As such, investors and fund managers alike can see hard economic circumstances as the perfect time to view the glass as half-full and identify under-appreciated, overlooked startups with long-lasting potential.
There’s never been a better time to be a fintech optimist.