Jan 032011

Macroeconomics for Startups

Macroeconomics for Startups

I’m not an economist.  I don’t play one on TV.  In fact, I only took one Econ class at Princeton (taught by Ben Bernanke, no less), and I barely passed it.  In any case, while I’m not an economist, I do read The Economist, religiously at that, and I’ve been reading so much about macroeconomic policies and news the past 18 months that I feel like I finally have a decent rudimentary grip on the subject.  But still, the subject doesn’t always translate as well to the average entrepreneur as microeconomics does – most business people have good intuitive understandings of supply, demand, and pricing.  But who knows what monetary policy is and why they should care?

So here’s my quick & dirty cut at Macroeconomics for Startups.  What do some of the buzzwords you read about in the news mean to you?

· Productivity Gains – This is something frequently cited as critical to developed economies like ours in the US.  Here’s my basic example over the past 10 years.  When I left my job at MovieFone in 1999, there were approximately eight administrative assistants in a company of 200 people – one for each senior person.  Today, Return Path has less than one administrative assistant in a company of the same size.  We all have access to more tools to self-manage productivity than we used to.  Cloud computing is another great example here of how companies are doing more with less. We have tons of software applications we use at Return Path, none of which require internal system administration, from Salesforce.com for CRM to Intacct for accounting. Ten years ago, each would have required dedicated hardware and operational maintenance.

· Fiscal Policy vs. Monetary Policy –  Fiscal Policy is manipulating the economy through government taxing and spending.  Monetary Policy is manipulating the economy by controlling interest rates and money supply.  For a small company that has revenue and accounts receivable, you probably are more inclined to Monetary Policy as it has more to do with your ability to access debt capital from banks through credit lines.  But if you’re in an industry where government grants or support is critical, Fiscal Policy can mean more to you in the short run.  Of course, if you’re losing money as many startups are, business tax credits and the like aren’t so relevant.

· Inflation – As my high school econ teacher defined it, “too many dollars chasing too few goods.”  Inflation may seem like a neutral thing for a business – your costs may be going up, but your revenue should be going up as well, right?  And we can inflate our way out of debt by simply devaluing our currency, right?  The main problem with inflation is that too much of it discourages investment and savings, which has negative long term consequences.  To you, rapid inflation would mean that the money you raise today is worth a lot less in a year or two.  That said, inflation is certainly better than Deflation, which can paralyze an economy.  Think about it like this – if you’re in a deflationary environment, why would you spend money today if you think prices will be lower tomorrow?

· Strong Dollar, Weak Dollar – Sounds like one of those things that’s politically explosive…of course we all want a strong dollar, right?  Why have a mental image of Uncle Sam that’s anything other than muscular?  And yes, it’s a lot more fun to travel to Europe when a latte costs you $4, not $8.  But the reality is that a strong dollar doesn’t necessarily serve all our interests well.  For a startup, sure, you can buy an offshore development team in India for less money than a development team in Silicon Valley, and for a more established company it makes it much cheaper to try and expand to Europe and Asia.  But an artificially strong dollar means that few people outside the US can afford to buy your product or service.  This is related to…

· Trade Surplus/Deficit and Exchange Rates – The net of a given country’s exports minus imports, and how much one currency is worth in terms of the other.  There’s been much talk lately about whether and how much China is manipulating its currency and holding it down, and if so, what impact that has on the global economy.  Why should you care?  If China is articifically keeping the value of the yuan down, it just means that the Chinese people can’t afford to buy as much stuff from other countries – and that other countries have an artificial incentive to buy things from China.  If the Chinese government allowed the yuan to appreciate more, the exchange rate vs. the dollar would rise, and your product or service would find itself with a lot more likely buyers in the sea of 1.3B people that is China.

I’m sure there are other terms of note and startup applications, but these are a handful that leap to mind.

  • http://returnpath.net Neil Schwartzman

    Productivity gains are fascinating to have watched over the course of my
    career, from my workplace (at the university, we had 3 secretaries, then
    one administrative assistant, and two secretaries, then a department
    administrator, administrative assistant, and a secretary) to banks, where
    there used to be a ton of tellers, now there are usually more ATMs than
    there are tellers on duty, supermarkets where self-serve check-oput is
    becoming the norm ….

    Computers, or more accurately computing has advanced productivity
    amazingly since in the past 25 years. Not that it is without precedence.
    Look at the reaction of many of the victorian writers to technological
    advances such as the printing press and the steam engine. They too
    typically bemoan the job loss of unskilled labour to mechanized
    replacements, and in a far more articulate, albeit lugubrious fashion than
    we have seen over the course of the computing industrial revolution
    (Carlyle and John Stuart Mill were two of my favourites; I've always
    preferred prose to fiction).

    Strong Dollar, Weak Dollar: yeah. The x-border 1.6 Bn has shrunk over the
    years, and your reading of the economist will indicate obama & harper are
    set to meet shortly to address this. Note sure how they address this : USD
    $1 = 0.99328 &lt ;http://www.xe.com/currencycharts?from=USD&to=CAD> but it
    sure has hurt our manufacturing in the rust belt (OEM & makers of
    automobiles in Southern Ontario), and tourism in Quebec & Ontario.

    Viz China: I had a cunning plan years ago to bring Canadian musicians to
    China (they are nuts for anything sung in English) but the plan was
    stymied by the huge buying power a dollar has there. I once had a fine
    french dinner in the middle of China for $25 which drove the point home.
    Initial exploration indicated that the Chinese wouldn't pay squat, apart
    from airfare, hotels, and food for people to travel there, making the
    notion very unattractive. I've had a few friends try tours there over the
    years, they generally do it for a free trip to China, which ends up being
    a real drag due to substandard musical and audio reinforcement equipment
    being provided.

    Bottom line: china has a long long way to go before two-way trade with the
    west will make much sense. The Chinese will always take advantage of that
    fact, and let western companies slash their prices so Chinese people can
    purchase goods and services offered. Watch for the phrase 'Chinese people
    think' for signs of how nationalistic and protectionist they are there.

    BTW: I *hate* buzzwords. They are misused shorthand more often than not,
    for misunderstood notions.