Inflation hit 9% this week – its highest level in 40 years. At the same time, consumer confidence has plunged to the lowest level since records began in 1974. In the public markets, tech stocks have taken a beating. So, what does this mean for entrepreneurs?

It is likely to be a very tough time to raise finance. Economic evidence, which I blogged about a couple of years ago, suggests that risky (but innovative) startups find it particularly hard to raise finance when the market cools.

If you’re concerned about what it means for your business, I recommend looking at a recent email sent out by startup accelerator Y-Combinator. It’s full of useful advice and insights from people with a track-record of building great companies. They advise cutting costs and extending runway to get to default alive: a term which means “based on current expenses, growth rate, and cash on hand – the business is on the right trajectory to reach profitability before running out of money.” They even suggest raising money from investors at existing terms if it’s necessary to get to ‘default alive’.

Y-Combinator warns that the poor performance of tech stocks will mean that VC will find it harder to raise money and that limited partners will demand more discipline. Even top-tier VCs will invest less and reduced competition will make it much harder to raise funds. Additionally, VCs will look to prioritise their best performing companies, as a result, exacerbating the problem for unfunded businesses.

But there’s an opportunity too. Many startups will not plan well and extend their runway. Their mistakes can be your gain.

Invest, Train, and Innovate
As Westminster once again debated the merits of a windfall tax on North Sea Oil and Gas, Chancellor Rishi Sunak spoke at the CBI’s annual dinner covering rising energy costs, interest rates, and his plan to get businesses to train, innovate, and invest more.

The Chancellor’s options to address the crisis are limited. As he noted in his speech:

“We need to be careful… at a time of severe supply restrictions, an unconstrained fiscal stimulus does risk making the problem worse. By pushing up prices still further. Embedding high inflation expectations. And creating a vicious cycle of even higher interest rates and more pain for tens of millions of mortgage holders and small businesses.”

This means policies such as a cut to the headline rate of VAT, as suggested by some this week, are likely off the table. He will instead continue to focus on protecting the least well-off through targeted support and easing the supply constraints.

On this front, he signalled the Autumn Budget will include tax reforms designed to increase the incentive to train more employees, invest more in capital goods, and do more R&D.

We’ve recommended a range of policies on all three fronts. We pushed for a more general training levy in our report Management Matters, called for R&D tax credit modernisation in our Startup Manifesto with Coadec, and have consistently pushed for more generous capital allowances.

And we’ll keep pushing for more pro-enterprise tax reforms because as the Chancellor rightly stated in the intro to his speech: “Change doesn’t happen behind a desk in Whitehall. Not even the Chancellor’s desk. It comes from all of you. When your businesses invest, things get built. When you train someone, they excel. When you invent new products and services that people want to buy, you change the world.”